WAFD INC 10-K

Item 8. Financial Statements and Supplementary Data Index to financial statements and financial statement schedules: Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 64 Financial statements and supplementary data: Consolidated Statements of Financial Condition 66 Consolidated Statements of Operations 67 Consolidated Statements of Comprehensive Income 68 Consolidated Statements of Shareholders' Equity 69 Consolidated Statements of Cash Flows 70 Notes to Consolidated Financial Statements 72 63 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Washington Federal, Inc. Seattle, Washington Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Washington Federal, Inc. and subsidiaries (the “Company”) as of September 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 18, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses - Refer to Notes A and E to the financial statements Critical Audit Matter Description Estimates of expected credit losses on loans under the current expected credit loss (“CECL”) methodology required under Financial Accounting Standards Board ("FASB") Accounting Standards Codification No. 326, Financial Instruments - Credit Losses ("ASC 326") are based on relevant information about current conditions, past events, and reasonable and supportable forward-looking forecasts regarding collectability of the reported amounts. In order to estimate the allowance for loan losses ("ALL"), the Company used either a cohort or weighted average remaining maturities (“WARM”) methodology to determine the historical loss rate, by loan portfolio class, then considered whether qualitative adjustments to those historical loss rates were warranted. As of September 30, 2022, the ALL was $172,808,000. Significant management judgments are required in determining whether, and to what extent, qualitative adjustments for each portfolio loan class are required. These adjustments are made after considering the conditions over the period from which historical loss experience was based and 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 64 environment or other management factors, not captured in the historical loss rates and 2) reasonable and supportable forecasts of future economic conditions and collateral values. Given the significance of the ALL, reliance on historical loss rates and the management judgments required for quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts, performing audit procedures to evaluate the ALL requires a high degree of auditor judgment and increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the ALL, included the following, among others: • We tested the effectiveness of management’s controls over (1) key assumptions and judgments, (2) the CECL estimation model for loan portfolios, (3) the qualitative adjustments determined by management including the reasonable and supportable forecast adjustment selected by management, (4) and disclosures. • We evaluated the appropriateness of the Company’s accounting policies, assumptions, and elections involved in the application of the CECL methodology. • We tested the underlying data and mathematical accuracy of the cohort and WARM methodologies used to determine the loan portfolio class historical loss rates. • We evaluated the reasonableness and conceptual soundness of the methodologies, as applied in the CECL estimation models, including key assumptions and judgments in estimating expected credit losses. • We evaluated the accuracy and completeness of the Company’s disclosures in accordance with ASC 326. • Specific to the qualitative adjustments made to the historical loss rates: • We assessed the appropriateness of the framework for the qualitative adjustments. • We performed analysis to evaluate the relevance of each of the reasonable and supportable forecast assumptions to historic losses. • We evaluated management’s reasonable and supportable forecast of economic variables by comparing forecasts to relevant external market data. • We assessed management’s determination whether, and to what extent, a qualitative adjustment was warranted to certain loan portfolio classes to account for specific risk characteristics or current conditions that differ from the period over which the historical loss rate was determined. /s/ Deloitte & Touche LLP Seattle, Washington November 18, 2022 We have served as the Company’s auditor since at least 1982; however, an earlier year could not be reliably determined. 65 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, 2022 September 30, 2021 (In thousands, except share data) ASSETS Cash and cash equivalents $ 683,965 $ 2,090,809 Available-for-sale securities, at fair value 2,051,037 2,138,259 Held-to-maturity securities, at amortized cost 463,299 366,025 Loans receivable, net of allowance for loan losses of $ 172,808 and $ 171,300 16,113,564 13,833,570 Interest receivable 63,872 50,636 Premises and equipment, net 243,062 255,152 Real estate owned 6,667 8,204 FHLB & FRB stock 95,073 102,863 Bank owned life insurance 237,931 233,263 Intangible assets, including goodwill of $ 303,457 and $ 303,457 309,009 310,019 Federal and state income tax assets, net — 3,877 Other assets 504,652 257,897 $ 20,772,131 $ 19,650,574 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Customer accounts Transaction deposit accounts $ 12,691,527 $ 12,108,025 Time deposit accounts 3,338,043 3,434,087 16,029,570 15,542,112 FHLB advances 2,125,000 1,720,000 Advance payments by borrowers for taxes and insurance 50,051 47,016 Federal and state income tax liabilities, net 3,306 — Accrued expenses and other liabilities 289,944 215,382 18,497,871 17,524,510 Commitments and contingencies (see Note M) Shareholders’ equity Preferred stock, $ 1.00 par value, 5,000,000 shares authorized; 300,000 and 300,000 shares issued; 300,000 and 300,000 shares outstanding 300,000 300,000 Common stock, $ 1.00 par value, 300,000,000 shares authorized; 136,270,886 and 135,993,254 shares issued; 65,330,126 and 65,145,268 shares outstanding 136,271 135,993 Paid-in capital 1,686,975 1,678,622 Accumulated other comprehensive income (loss), net of taxes 52,481 69,785 Treasury stock, at cost; 70,940,760 and 70,847,986 shares ( 1,590,207 ) ( 1,586,947 ) Retained earnings 1,688,740 1,528,611 2,274,260 2,126,064 $ 20,772,131 $ 19,650,574 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 66 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended September 30, 2022 2021 2020 (In thousands, except share data) INTEREST INCOME Loans receivable $ 601,592 $ 537,660 $ 545,708 Mortgage-backed securities 26,332 24,708 49,312 Investment securities and cash equivalents 38,435 29,242 26,245 666,359 591,610 621,265 INTEREST EXPENSE Customer accounts 43,041 42,313 100,312 FHLB advances 28,729 44,188 51,445 71,770 86,501 151,757 Net interest income 594,589 505,109 469,508 Provision (release) for credit losses 3,000 500 21,750 Net interest income after provision (release) 591,589 504,609 447,758 OTHER INCOME Gain (loss) on sale of investment securities 99 14 15,028 Gain (loss) on termination of hedging derivatives — 14,110 — Prepayment penalty on long-term debt — ( 13,788 ) ( 13,809 ) Loan fee income 7,168 6,899 7,293 Deposit fee income 25,942 24,686 23,691 Other income 33,163 28,640 54,757 66,372 60,561 86,960 OTHER EXPENSE Compensation and benefits 193,917 176,106 147,596 Occupancy 42,499 39,610 39,570 FDIC insurance premiums 9,531 14,368 10,939 Product delivery 19,536 18,505 17,010 Information technology 47,202 42,737 52,902 Other expense 45,890 41,133 47,541 358,575 332,459 315,558 Gain (loss) on real estate owned, net 651 427 26 Income before income taxes 300,037 233,138 219,186 Income tax expense 63,707 49,523 45,748 Net income 236,330 183,615 173,438 Dividends on preferred stock 14,625 10,034 — Net income available to common shareholders $ 221,705 $ 173,581 $ 173,438 PER SHARE DATA Basic earnings per common share $ 3.40 $ 2.39 $ 2.26 Diluted earnings per common share 3.39 2.39 2.26 Dividends paid on common stock per share 0.95 0.91 0.87 Basic weighted average number of common shares outstanding 65,287,650 72,529,188 76,721,969 Diluted weighted average number of common shares outstanding 65,404,110 72,565,920 76,731,464 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended September 30, 2022 2021 2020 (In thousands) Net income $ 236,330 $ 183,615 $ 173,438 Other comprehensive income (loss), net of tax: Net unrealized gain (loss) during the period on available-for-sale debt securities, net of tax of $ 36,908 , $( 2,020 ) and $( 6,220 ) ( 123,077 ) 6,762 20,528 Reclassification adjustment of net (gain) loss included in net income during the period from sale of available-for-sale securities, net of tax of $( 23 ), $( 3 ) and $ 3,456 76 11 ( 11,572 ) Net unrealized gain (loss) from investment securities, net of reclassification adjustment ( 123,001 ) 6,773 8,956 Net unrealized gain (loss) during the period on borrowing cash flow hedges, net of tax of $( 31,805 ), $( 17,003 ) and $ 2,204 105,697 56,924 ( 7,295 ) Reclassification adjustment of net (gain) loss included in net income during the period from hedging derivatives, net of tax of $ — , $ 3,245 and $ 0 — ( 10,865 ) — Net unrealized gain (loss) in cash flow hedging instruments, net of reclassification adjustment 105,697 46,059 ( 7,295 ) Other comprehensive income (loss) ( 17,304 ) 52,832 1,661 Comprehensive income $ 219,026 $ 236,447 $ 175,099 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 68 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) Preferred Stock Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Balance at September 30, 2019 $ — $ 135,540 $ 1,672,417 $ 1,335,909 $ 15,292 $ ( 1,126,163 ) $ 2,032,995 Adjustment pursuant to adoption of ASU 2016-13 — — — ( 21,945 ) — — ( 21,945 ) Net income — — — 173,438 — — 173,438 Other comprehensive income (loss) — — — — 1,661 — 1,661 Dividends on common stock ($ 0.87 per share) — — — ( 66,496 ) — — ( 66,496 ) Proceeds from stock-based awards — 8 136 — — — 144 Stock-based compensation expense — 179 6,290 — — — 6,469 Treasury stock purchased — — — — — ( 112,133 ) ( 112,133 ) Balance at September 30, 2020 — 135,727 1,678,843 1,420,906 16,953 ( 1,238,296 ) 2,014,133 Net income — — — 183,615 — — 183,615 Other comprehensive income (loss) — — — 52,832 — 52,832 Issuance of preferred stock, net 300,000 — ( 6,675 ) — — — 293,325 Dividends on common stock ($ 0.91 per share) — — — ( 65,876 ) — — ( 65,876 ) Dividends on preferred stock ($ 33.45 per share) — — — ( 10,034 ) — — ( 10,034 ) Proceeds from stock-based awards — 20 319 — — — 339 Stock-based compensation expense — 246 6,135 — — — 6,381 Treasury stock purchased — — — — — ( 348,651 ) ( 348,651 ) Balance at September 30, 2021 300,000 135,993 1,678,622 1,528,611 69,785 ( 1,586,947 ) 2,126,064 Net income — — — 236,330 — — 236,330 Other comprehensive income (loss) — — — — ( 17,304 ) — ( 17,304 ) Dividends on common stock ($ 0.95 per share) — — — ( 61,576 ) — — ( 61,576 ) Dividends on preferred stock ($ 48.75 per share) — — — ( 14,625 ) — — ( 14,625 ) Proceeds from stock-based awards — 65 1,758 — — — 1,823 Stock-based compensation expense — 213 6,595 — — — 6,808 Treasury stock purchased — — — — — ( 3,260 ) ( 3,260 ) Balance at September 30, 2022 $ 300,000 $ 136,271 $ 1,686,975 $ 1,688,740 $ 52,481 $ ( 1,590,207 ) $ 2,274,260 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 69 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 2022 2021 2020 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 236,330 $ 183,615 $ 173,438 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, accretion and other, net 64,050 33,914 39,912 Stock-based compensation expense 6,808 6,381 6,469 Provision (release) for credit losses 3,000 500 21,750 Loss (gain) on sale of investment securities ( 99 ) ( 14 ) ( 15,028 ) Prepayment penalty on early extinguishment of debt — 13,788 13,809 Gain on early termination of long term borrowing hedge — ( 14,110 ) — Gain on settlements of bank owned life insurance ( 1,385 ) — — Impairment loss on premises and equipment — 944 6,431 Net realized (gain) loss on sales of premises, equipment and real estate owned 655 ( 593 ) ( 31,990 ) Decrease (increase) in accrued interest receivable ( 13,236 ) 3,163 ( 4,942 ) Decrease (increase) in federal and state income tax receivable 3,877 1,831 ( 5,708 ) Decrease (increase) in cash surrender value of bank owned life insurance ( 5,549 ) ( 5,514 ) ( 5,673 ) Decrease (increase) in other assets ( 100,146 ) 155,599 ( 146,893 ) Increase (decrease) in federal and state income tax liabilities 8,386 ( 15,781 ) 890 Increase (decrease) in accrued expenses and other liabilities 65,774 ( 49,269 ) 114,135 Net cash provided (used) by operating activities 268,465 314,454 166,600 CASH FLOWS FROM INVESTING ACTIVITIES Origination of loans and principal repayments, net ( 1,748,955 ) ( 556,274 ) ( 902,481 ) Loans purchased ( 576,697 ) ( 488,147 ) ( 15,456 ) FHLB & FRB stock purchase ( 293,800 ) ( 296,073 ) ( 435,200 ) FHLB & FRB stock redeemed 301,590 335,200 417,200 Available-for-sale securities purchased ( 587,942 ) ( 530,227 ) ( 1,064,815 ) Principal payments and maturities of available-for-sale securities 510,156 646,532 493,402 Proceeds from sales of available-for-sale investment securities 5,020 1,499 204,351 Held-to-maturity securities purchased ( 195,357 ) — — Principal payments and maturities of held-to-maturity securities 95,326 332,001 356,532 Proceeds from sales of real estate owned 6,978 3,340 5,022 Proceeds from settlements of bank owned life insurance 2,266 — — Net cash received (paid) in business combinations — ( 1,500 ) ( 2,810 ) Proceeds from sales of premises and equipment 41 3,376 55,213 Premises and equipment purchased and REO improvements ( 11,790 ) ( 29,472 ) ( 31,937 ) Net cash provided (used) by investing activities ( 2,493,164 ) ( 579,745 ) ( 920,979 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in customer accounts 487,458 1,762,488 1,788,860 Proceeds from borrowings 7,345,000 7,400,000 10,880,000 Repayments of borrowings ( 6,940,000 ) ( 8,393,788 ) ( 10,443,809 ) Proceeds from the early termination of long term borrowing hedge — 14,110 — Proceeds from stock-based awards 1,823 339 144 Proceeds from issuance of preferred stock, net — 293,325 — Dividends paid on common stock ( 61,576 ) ( 65,876 ) ( 66,496 ) Dividends paid on preferred stock ( 14,625 ) ( 6,378 ) — Treasury stock purchased ( 3,260 ) ( 348,651 ) ( 112,133 ) Increase (decrease) in advance payments by borrowers for taxes and insurance 3,035 ( 2,446 ) ( 8,368 ) Net cash provided (used) by financing activities 817,855 653,123 2,038,198 Increase (decrease) in cash and cash equivalents ( 1,406,844 ) 387,832 1,283,819 Cash and cash equivalents at beginning of year 2,090,809 1,702,977 419,158 Cash and cash equivalents at end of year $ 683,965 $ 2,090,809 $ 1,702,977 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 70 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 2022 2021 2020 (In thousands) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing activities Real estate acquired through foreclosure $ 73 $ 221 $ 1,765 Other personal property acquired through foreclosure 577 — 359 Non-cash financing activities Preferred stock dividend payable 3,656 3,656 Cash paid during the year for Interest 65,175 71,845 146,675 Income taxes 35,098 47,854 35,640 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company and nature of operations. Washington Federal Bank, a federally-insured Washington state chartered commercial 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 was formed as the Bank’s holding company in November, 1994. As used throughout this document, the terms “Washington Federal,” the “Company” or "we" or "us" and "our" refer to the Washington Federal, Inc. and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank. The Company is headquartered in Seattle, Washington. The Bank conducts its activities through a network of 201 bank branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico and Texas. Basis of presentation and use of estimates. The Company’s accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (U.S. GAAP). Inter-company balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, the Company makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting periods and related disclosures. The areas that require application of significant management judgments often result in the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Actual results could differ materially from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation. In certain instances, amounts in text are presented by rounding to the nearest thousand. The Company's fiscal year end is September 30. All references to 2022, 2021 and 2020 represent balances as of September 30, 2022, September 30, 2021, and September 30, 2020, or activity for the fiscal years then ended. Preferred stock. 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 1/40 th 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 Global Select Market 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. Cash and cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, overnight investments and repurchase agreements with an initial maturity of three months or less. Restricted cash balances - Based on the level of vault cash on hand, the Company was not required to maintain cash reserve balances with the Federal Reserve Bank as of September 30, 2022. As of September 30, 2022 and September 30, 2021, the Company held counterparty cash collateral of $ 284,400,000 and pledged cash collateral of $ 1,500,000 , respectively, related to derivative contracts. Equity securities - The Company records equity securities within Other assets in its Consolidated Statements of Financial Condition. These equity investments are accounted for under different methods. • Low-income housing tax credit investments are accounted for under the proportional amortization method in accordance with ASU 2014-1. • For other equity investments where the Company has significant influence, the Company applies the equity method of accounting, which adjusts the carrying value of the investment to recognize a proportionate share of the financial results of the investment entity, regardless of whether any distribution is made. Any adjustments to the fair value of these investments are recorded in Other income in the Consolidated Statements of Operations. • For other equity investments where neither ASU 2014-1 nor the equity method of accounting is applicable, the Company applies the fair value adjustment method of ASU 2016-1. Any adjustments to the fair value of these investments are recorded in Other income in the Consolidated Statements of Operations. Fair value is determined by reference to readily determinable market values if applicable. Equity investments that do not have readily determinable 72 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 fair values (non-marketable) are generally accounted for at cost minus impairment, if any, plus or minus changes resulting from observable transactions involving the same or similar investments from the same issuer, also referred to as the measurement alternative. Under the NAV expedient for fair value measurement, equity investments in qualified real estate funds can use the net asset value (NAV) determined by the fund as fair value for the investment. At September 30, 2022, equity investments held by the Company and recorded at NAV had a carrying amount of $ 41,476,000 and a remaining unfunded commitment of $ 7,511,000 . These NAV based investments cannot be transferred without consent and we do not have redemption rights. Equity investments measured at NAV are not classified in the fair value hierarchy. Debt securities, including mortgage-backed securities. The Company accounts for debt securities in two categories: held-to-maturity and available-for-sale. Premiums and discounts on debt securities are deferred and recognized into income over the contractual life of the asset using the effective interest method. Held-to-maturity securities are accounted for at amortized cost, but the Company must have both the positive intent and the ability to hold those securities to maturity. There are very limited circumstances under which securities in the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the securities in this category. Available-for-sale securities are accounted for at fair value. Gains and losses realized on the sale of these securities are accounted for based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported net of the related tax effect in the accumulated other comprehensive income component of shareholders' equity. Allowance for Credit Losses (Held-to-Maturity Debt Securities). For held-to-maturity (“HTM”) debt securities, the Company is required to utilize a CECL methodology to estimate expected credit losses. Substantially all of the Company’s HTM 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. Therefore, the Company did not record an allowance for credit losses for these securities. As September 30, 2022, the Company determined that the expected credit loss on its corporate and municipal bonds was immaterial, and therefore, an allowance for credit losses was not recorded. See Note C "Investment Securities" and Note F "Fair Value Measurements" for more information about HTM debt securities. Allowance for Credit Losses (Available-for-Sale Debt Securities). The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL methodology applied for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Under the new guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. Changes in the allowance for credit losses are recorded as a provision (or release) for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As of September 30, 2022, the Company determined that the unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note C "Investment Securities" and Note F "Fair Value Measurements" for more information about AFS debt securities. Loans receivable. Loans that are performing in accordance with their contractual terms are carried at the unpaid principal balance, net of premiums, discounts and net deferred loan fees. Net deferred loan fees include nonrefundable loan origination 73 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 fees less direct loan origination costs. Net deferred loan fees, premiums and discounts are amortized into interest income using either the interest method or straight-line method over the terms of the loans, adjusted for actual prepayments. In addition to fees and costs for originating loans, various other fees and charges related to existing loans may occur, including prepayment charges, late charges and assumption fees. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower. Contact is made after a payment is 30 days past its grace period. In most cases, deficiencies are cured promptly. If the delinquency is not cured within 90 days, the Bank may institute appropriate action to foreclose on the property. If foreclosed, the property is sold at a public sale and may be purchased by the Bank. Allowance for Credit Losses (Loans Receivable). The Company applies FASB ASU 2016-13, Financial Instruments - Credit Losses ("ASC 326"), so the allowance calculation is based on current expected credit loss methodology ("CECL"). The Company maintains an allowance for credit losses (“ACL”) for the expected credit losses of the loan portfolio as well as unfunded loan commitments. The amount of ACL is based on ongoing, quarterly assessments by management. The CECL methodology requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures) and replaces the incurred loss methodology’s threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred. See Note E "Allowance for Losses on Loans" for details. The ACL consists of the allowance for loan 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 for each loan type. 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 consider the conditions over the period from which historical loss experience was based and 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 and 2) reasonable and supportable forecast of future economic conditions and collateral values. 74 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 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. Troubled debt restructured loans ("TDRs"). The Company will consider modifying the interest rates and terms of a loan if it determines that a modification is a better alternative to foreclosure. Most TDRs are accruing and performing 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 bps for a specific term, usually six to 12 months. Interest-only payments may also be approved during the modification period. Principal forgiveness is generally not an available option for restructured loans. Before granting approval to modify a loan in a TDR, the borrower’s ability to repay is evaluated, including: current income levels and debt to income ratio, borrower’s credit score, payment history of the loan and updated evaluation of the secondary repayment source. The Company also modifies some loans that are not classified as TDRs as the modification is due to a restructuring where the effective interest rate on the debt is reduced to reflect a decrease in market interest rates. The Company's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. Non-accrual loans. Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Company does not accrue interest on loans 90 days or more past due. If payment is made on a loan so that the loan becomes less than 90 days past due, and the Company expects full collection of principal and interest, the loan is returned to full accrual status. Any interest ultimately collected is credited to income in the period of recovery. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet contractual obligations. If a consumer 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 management concludes that full repayment is probable based on internal evaluation, it will remain on accrual status following restructuring. If the restructured consumer loan does not perform, it is placed on 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. In some instances, after the required six consecutive payments are made, management will conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual status. Accrued interest receivable. The Company has made the following elections regarding accrued interest receivable ("AIR"): • Presenting accrued interest receivable balances separately from their underlying instruments within the consolidated statements of financial condition. • Excluding accrued interest receivable that is included in the amortized cost of financing receivables from related disclosure requirements. • Continuing our policy to write off accrued interest receivable by reversing interest income in cases where the Company does not reasonably expect to receive payment. • Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner. We believe accrued interest receivable recorded as of September 30, 2022 is collectible. 75 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Off-balance-sheet credit exposures. The only material off-balance-sheet credit exposures are loans in process and unused lines of credit. The reserve for unfunded commitments is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized through provision for credit losses in the consolidated statements of income. 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. See Note M "Commitments and Contingencies" for details. Client swap program hedges. Interest rate swap agreements are provided to certain clients who desire to convert their obligations from variable to fixed interest rates. Under these agreements, the Bank enters into a variable-rate loan agreement with a customer in addition to a swap agreement, and then enters into a corresponding swap agreement with a third party in order to offset its exposure on the customer swap agreement. As the interest rate swap agreements with the customers and third parties are not designated as accounting hedges under FASB ASC 815, the instruments are marked to market in earnings. The change in fair value of the offsetting swaps are included in other noninterest income and there is no impact on net income. There is fee income earned on the swaps that is included in loan fee income. Borrowings cash flow hedges. The Company has entered into interest rate swaps to convert a series of future short-term borrowings to fixed-rate payments. These interest rate swaps qualify as cash flow hedging instruments under ASC 815 so gains and losses are recorded in Other Comprehensive Income to the extent the hedge is effective. Gains and losses on the interest rate swaps are reclassified from OCI to earnings in the period the hedged transaction affects earnings and are included in the same income statement line item that the hedged transaction is recorded. Mortgage loan "last-of-layer" portfolio hedges. The Company has entered into interest rate swaps to hedge the portion of the respective closed portfolios of prepayable mortgage loans that are expected to remain at the end of the hedge term. These hedges qualify as last-of-layer hedges under ASC 815 and provide for matching of the recognition of the gains and losses on the interest rate swap and the related hedged item. Commercial loan fair value hedges. The Company has entered into interest rate swaps to hedge long term fixed rate commercial loans. These hedges qualify as fair value hedges under ASC 815 and provide for matching of the recognition of the gains and losses on the interest rate swap and the related hedged loan. Premises and equipment. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Costs for improvements are capitalized. Charges for ordinary maintenance and repairs are expensed to operations as incurred. Real estate owned. Real estate properties acquired through foreclosure of loans or through acquisitions are recorded initially at fair value less selling costs and are subsequently recorded at lower of cost or fair value. Costs for improvements are capitalized. Any gains (losses) and maintenance costs are recorded in Gain (loss) on real estate owned, net. Intangible assets. Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangibles, including core deposit intangibles, are acquired assets that lack physical substance but can be distinguished from goodwill. Goodwill is evaluated for impairment on an annual basis during the fourth quarter. Other intangible assets are amortized over their estimated lives and are subject to impairment testing when events or circumstances change. If circumstances indicate that the carrying value of the assets may not be recoverable, an impairment charge could be recorded. The Bank amortizes the core deposit intangibles over their estimated lives using an accelerated method. 76 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The table below provides detail regarding the Company's intangible assets. Goodwill Core Deposit and Other Intangibles Total (In thousands) Balance at September 30, 2020 $ 302,707 $ 7,199 $ 309,906 Additions 750 750 1,500 Amortization — ( 1,387 ) ( 1,387 ) Balance at September 30, 2021 303,457 6,562 310,019 Additions — — — Amortization — ( 1,010 ) ( 1,010 ) Balance at September 30, 2022 $ 303,457 $ 5,552 $ 309,009 The table below presents the estimated future amortization expense of core deposit and other intangibles for the next five years. Fiscal Year Expense (In thousands) 2023 $ 955 2024 921 2025 872 2026 829 2027 654 Income taxes. Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, a deferred tax asset or liability is determined based on the temporary differences between the financial statement and corresponding tax treatment of income, gains, losses, deductions or credits using enacted tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes includes current and deferred income tax expense based on net income adjusted for temporary and permanent differences such as depreciation, loan loss reserve, tax-exempt interest, and affordable housing tax credits. Reserves for uncertain tax positions, together with any related interest and penalties, if applicable, and amortization of affordable housing tax credit investments are recorded within income tax expense. Accounting for stock-based compensation. We recognize in the statement of operations the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees' requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. Stock options and restricted stock awards generally vest ratably over two to five years and are recognized as expense over that same period of time. The exercise price of each option equals the market price of the Company's common stock on the date of the grant, and the maximum term is ten years . Certain grants of restricted stock are subject to performance-based and market-based vesting as well as other approved vesting conditions and cliff vest based on those conditions. Compensation expense is recognized over the service period to the extent restricted stock awards are expected to vest. See Note P "Stock Award Plans" for additional information. Business segments. As the Company manages its business and operations on a consolidated basis, management has determined that there is one reportable business segment. Regulatory matters. The Bank was previously subject to a Consent Order from the OCC for its BSA program that was issued in February 2018 (the “BSA Consent Order”). The BSA Consent Order resulted in the Bank incurring significant expenses to 77 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 comply with it, including payment of a $ 2,500,000 civil money penalty. The OCC terminated the BSA Consent Order in December 2021. 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. Both HMDA Consent Orders remain in place. Subsequent events. On November 13, 2022, the Company announced that it had entered into a definitive merger agreement pursuant to which it will acquire Luther Burbank Corporation (NASDAQ: LBC, “Luther Burbank”) and its wholly-owned subsidiary, Luther Burbank Savings, in an all-stock transaction valued at approximately $ 654 million based upon the closing price of Washington Federal’s common stock on November 11, 2022. Upon closing of the transaction, which was unanimously approved by the boards of directors of each of Washington Federal and Luther Burbank, and is subject to shareholder and regulatory approval and other customary closing conditions, Luther Burbank shareholders will be entitled to receive 0.3353 shares of Washington Federal common stock for each share of Luther Burbank common stock they own. The transaction, which is anticipated to close as early as the second calendar quarter of 2023, will expand Washington Federal’s franchise into California. The Company has evaluated subsequent events for adjustment to or disclosure in the Company’s consolidated financial statements through the date of this report and has not identified any other recordable or disclosable events. NOTE B - NEW ACCOUNTING PRONOUNCEMENTS In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU provide temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The ASU primarily includes relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company has evaluated the regulatory requirements to cease the use of LIBOR and has put in place systems and capabilities for this purpose. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815) . The amendments in this ASU clarify the guidance on ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance establishes the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible and renames that method the "portfolio layer" method. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the amendments to have a material effect on our consolidated financial statements. In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) . The amendments in this ASU eliminate the guidance on troubled debt restructurings while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulties. The ASU also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the amendments to have a material effect on our consolidated financial statements. 78 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE C - INVESTMENT SECURITIES The tables below provide detail regarding the amortized cost and fair value of available-for-sale and held-to-maturity investment securities. September 30, 2022 Amortized Cost Gross Unrealized Fair Value Yield Gains Losses ($ in thousands) Available-for-sale securities U.S. government and agency securities due 1 to 5 years $ 40,403 $ — $ ( 1,049 ) $ 39,354 3.03 % Asset-backed securities 1 to 5 years 22,527 — ( 1,141 ) 21,386 3.27 5 to 10 years 82,962 4 ( 547 ) 82,419 3.53 Over 10 years 668,482 783 ( 6,069 ) 663,196 3.86 Corporate debt securities due Within 1 year 75,000 4 ( 200 ) 74,804 3.74 1 to 5 years 151,411 — ( 2,748 ) 148,663 3.59 5 to 10 years 114,414 — ( 24,124 ) 90,290 3.87 Municipal bonds due 5 to 10 years 5,751 — ( 361 ) 5,390 3.00 Over 10 years 29,871 400 ( 699 ) 29,572 5.85 Mortgage-backed securities Agency pass-through certificates 971,916 117 ( 76,070 ) 895,963 2.81 2,162,737 1,308 ( 113,008 ) 2,051,037 3.36 Held-to-maturity securities Mortgage-backed securities Agency pass-through certificates 463,299 22 ( 56,461 ) 406,860 2.88 463,299 22 ( 56,461 ) 406,860 2.88 $ 2,626,036 $ 1,330 $ ( 169,469 ) $ 2,457,897 3.28 % 79 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 September 30, 2021 Amortized Cost Gross Unrealized Fair Value Yield Gains Losses ($ in thousands) Available-for-sale securities U.S. government and agency securities due 1 to 5 years 47,339 240 — 47,579 0.44 % 5 to 10 years $ 14,064 $ 136 $ — $ 14,200 2.05 Asset-backed securities 1 to 5 years 19,730 — ( 434 ) 19,296 0.52 5 to 10 years 71,207 412 ( 97 ) 71,522 0.57 Over 10 years 973,892 14,069 ( 98 ) 987,863 0.94 Corporate debt securities due Within 1 year 225,928 7,860 — 233,788 1.57 1 to 5 years 86,802 1,345 — 88,147 4.64 5 to 10 years 28,804 249 — 29,053 1.95 Municipal bonds due Within 1 year 1,493 17 — 1,510 — 5 to 10 years 5,781 294 — 6,075 0.22 Over 10 years 29,909 2,490 — 32,399 5.85 Mortgage-backed securities Agency pass-through certificates 585,121 23,717 ( 2,011 ) 606,827 2.60 2,090,070 50,829 ( 2,640 ) 2,138,259 1.69 Held-to-maturity securities Mortgage-backed securities Agency pass-through certificates 366,025 13,522 — 379,547 3.17 366,025 13,522 — 379,547 3.17 $ 2,456,095 $ 64,351 $ ( 2,640 ) $ 2,517,806 1.89 % The Company purchased $ 587,942,000 of available-for-sale investment securities and $ 195,357,000 held-to-maturity investment securities during 2022. Sales of available-for-sale securities totaled $ 5,020,000 and there were no sales of held-to-maturity investment securities in 2022. Substantially all mortgage-backed securities have contractual due dates that exceed 25 years. The Company elected to exclude AIR from the amortized cost basis of debt securities disclosed throughout this footnote. For AFS securities, AIR totaled $ 5,694,000 and $ 3,459,000 as of September 30, 2022 and September 30, 2021, respectively. For HTM debt securities, AIR totaled $ 1,108,000 and $ 944,000 as of September 30, 2022 and September 30, 2021, respectively. AIR is included in the “ interest receivable ” line item on the Company’s consolidated statements of financial condition. The following tables show the gross unrealized losses and fair value of securities as of September 30, 2022 and September 30, 2021, by length of time that individual securities in each category have been in a continuous loss position. There were 223 and 31 securities with an unrealized loss as of September 30, 2022 and September 30, 2021, respectively. The decline in fair value since purchase is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be impaired. 80 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 September 30, 2022 Less than 12 months 12 months or more Total Unrealized Gross Losses Fair Value Unrealized Gross Losses Fair Value Unrealized Gross Losses Fair Value (In thousands) Available-for-sale securities Corporate debt securities $ ( 27,072 ) $ 288,753 $ — $ — $ ( 27,072 ) $ 288,753 Municipal bonds ( 1,061 ) 14,561 — — ( 1,061 ) 14,561 U.S. government and agency securities ( 1,049 ) 39,354 — — ( 1,049 ) 39,354 Asset-backed securities ( 6,374 ) 601,248 ( 1,383 ) 50,070 ( 7,757 ) 651,318 Mortgage-backed securities ( 63,738 ) 833,683 ( 12,331 ) 53,533 ( 76,069 ) 887,216 ( 99,294 ) 1,777,599 ( 13,714 ) 103,603 ( 113,008 ) 1,881,202 Held-to-maturity securities Mortgage-backed securities ( 56,461 ) 405,166 — — ( 56,461 ) 405,166 $ ( 155,755 ) $ 2,182,765 $ ( 13,714 ) $ 103,603 $ ( 169,469 ) $ 2,286,368 September 30, 2021 Less than 12 months 12 months or more Total Unrealized Gross Losses Fair Value Unrealized Gross Losses Fair Value Unrealized Gross Losses Fair Value (In thousands) Available-for-sale securities Asset-backed securities $ ( 15 ) $ 4,639 $ ( 614 ) $ 70,058 $ ( 629 ) $ 74,697 Mortgage-backed securities ( 1,569 ) 47,758 ( 442 ) 32,266 ( 2,011 ) 80,024 ( 1,584 ) 52,397 ( 1,056 ) 102,324 ( 2,640 ) 154,721 Held-to-maturity securities Mortgage-backed securities — — — — — — $ ( 1,584 ) $ 52,397 $ ( 1,056 ) $ 102,324 $ ( 2,640 ) $ 154,721 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. Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2022 or September 30, 2021. The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position have any credit loss impairment as of September 30, 2022 or September 30, 2021. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Available-for-sale debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. The issuers of the corporate debt securities and municipal bonds held are considered to be of high credit quality (rated AA or higher) and the decline in fair value is due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. 81 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE D - LOANS RECEIVABLE For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies" above. The Company's loans held for investment are divided into two portfolio segments, commercial loans and consumer loans, with each of those segments further split into loan classes for purposes of estimating the allowance for credit losses. The following table is a summary of loans receivable by loan portfolio segment and class. September 30, 2022 September 30, 2021 ($ in thousands) ($ in thousands) Gross loans by category Commercial loans Multi-family $ 2,645,801 13.7 % $ 2,291,477 14.0 % Commercial real estate 3,133,660 16.2 2,443,845 15.0 Commercial & industrial (1) 2,350,984 12.1 2,314,654 14.2 Construction 3,784,388 19.5 2,888,214 17.7 Land - acquisition & development 291,301 1.5 222,457 1.4 Total commercial loans 12,206,134 63.0 10,160,647 62.3 Consumer loans Single-family residential 5,771,862 29.8 4,951,627 30.4 Construction - custom 974,652 5.0 783,221 4.8 Land - consumer lot loans 153,240 0.8 149,956 0.9 HELOC 203,528 1.0 165,989 1.0 Consumer 75,543 0.4 87,892 0.5 Total consumer loans 7,178,825 37.0 6,138,685 37.7 Total gross loans 19,384,959 100 % 16,299,332 100 % Less: Allowance for loan losses 172,808 171,300 Loans in process 3,006,023 2,232,836 Net deferred fees, costs and discounts 92,564 61,626 Total loan contra accounts 3,271,395 2,465,762 Net loans $ 16,113,564 $ 13,833,570 (1) Includes $ 10,237,000 and $ 311,795,000 of SBA Payroll Protection Program loans as of September 30, 2022 and September 30, 2021, respectively. The Company elected to exclude AIR from the amortized cost basis of loans for disclosure purposes and from the calculations of estimated credit losses. As of September 30, 2022 and September 30, 2021, AIR for loans totaled $ 57,070,000 and $ 46,234,000 , respectively, and is included in the “ accrued interest receivable ” line item on the Company’s consolidated statements of financial condition. Loans in the amount of $ 8,224,951,000 and $ 5,930,015,000 at September 30, 2022 and September 30, 2021, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans. 82 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following summary breaks down the Company's fixed rate and adjustable rate loans by time to maturity or to rate adjustment. See Note G for details regarding fair value hedges of individual fixed rate commercial loans and also hedges of a specified portion of pools of prepayable fixed rate mortgage loans under the "last of layer" method. September 30, 2022 Fixed-Rate Adjustable-Rate Term To Maturity Loans % of Loans Term To Rate Adjustment Loans % of Loans (In thousands) (In thousands) Within 1 year $ 146,178 0.9 % Less than 1 year $ 4,930,819 30.3 % 1 to 3 years 459,554 2.8 1 to 3 years 474,147 2.9 3 to 5 years 979,946 6.0 3 to 5 years 415,388 2.6 5 to 10 years 2,232,082 13.7 5 to 10 years 108,678 0.7 10 to 20 years 1,171,724 7.2 10 to 20 years 4 — Over 20 years 5,367,852 33.0 Over 20 years — — $ 10,357,336 63.6 % $ 5,929,036 36.4 % The Company has granted loans to officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans, including unfunded commitments to lend, was $ 144,178,000 and $ 142,806,000 at September 30, 2022 and 2021, respectively. As of September 30, 2022, all of these loans were performing in accordance with contractual terms. The following table sets forth the amortized cost basis of loans receivable for non-accrual loans and loans 90 days or more past due and still accruing. September 30, 2022 September 30, 2021 (In thousands, except ratio data) Non-accrual Non-accrual with no ACL 90 days or more past due and accruing Non-accrual Non-accrual with no ACL 90 days or more past due and accruing Commercial loans Multi-family $ 5,912 $ — $ — $ 475 $ — $ — Commercial real estate 4,691 — — 8,038 — — Commercial & industrial 5,693 1,308 — 365 30 — Construction — — — 505 — — Land - acquisition & development — — — 2,340 — — Total commercial loans 16,296 1,308 — 11,723 30 — Consumer loans Single-family residential 17,450 — — 19,320 — — Construction - custom 435 — — — — — Land - consumer lot loans 84 — — 359 — — HELOC 233 — — 287 — — Consumer 36 — — 60 — — Total consumer loans 18,238 — — 20,026 — — Total loans $ 34,534 $ 1,308 $ — $ 31,749 $ 30 $ — % of total loans 0.21 % 0.23 % 83 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following tables break down loan delinquencies by loan portfolio segment and class. September 30, 2022 Days Delinquent Based on $ Amount of Loans % based on $ Loan type Loans Receivable (Amortized Cost) Current 30 60 90 Total Past Due ($ in thousands) Commercial loans Multi-Family $ 2,626,479 $ 2,626,479 $ — $ — $ — $ — — % Commercial Real Estate 3,111,112 3,110,056 538 450 68 1,056 0.03 Commercial & Industrial 2,343,403 2,336,791 — 919 5,693 6,612 0.28 Construction - Speculative 1,423,891 1,423,891 — — — — Land - Acquisition & Development 223,616 223,616 — — — — — Total commercial loans 9,728,501 9,720,833 538 1,369 5,761 7,668 0.08 Consumer loans Single-Family Residential 5,726,979 5,708,996 2,796 1,316 13,871 17,983 0.31 Construction - Custom 397,343 396,908 — — 435 435 0.11 Land - Consumer Lot Loans 151,945 151,746 — 139 60 199 0.13 HELOC 206,033 205,605 155 46 227 428 0.21 Consumer 75,571 75,357 162 17 35 214 0.28 Total consumer loans 6,557,871 6,538,612 3,113 1,518 14,628 19,259 0.29 Total Loans $ 16,286,372 $ 16,259,445 $ 3,651 $ 2,887 $ 20,389 $ 26,927 0.17 % Delinquency % 99.83 % 0.02 % 0.02 % 0.13 % 0.17 % September 30, 2021 Days Delinquent Based on $ Amount of Loans % based on $ Loan type Loans Receivable (Amortized Cost) Current 30 60 90 Total Past Due ($ in thousands) Commercial loans Multi-Family $ 2,273,689 $ 2,273,214 $ — $ — $ 475 $ 475 0.02 % Commercial Real Estate 2,429,332 2,428,014 971 64 283 1,318 0.05 Commercial & Industrial 2,303,927 2,303,605 — — 322 322 0.01 Construction - Speculative 1,117,227 1,117,186 — — 41 41 — Land - Acquisition & Development 192,416 190,076 — — 2,340 2,340 1.22 Total commercial loans 8,316,591 8,312,095 971 64 3,461 4,496 0.05 Consumer loans Single-Family Residential 4,937,064 4,915,749 3,627 2,165 15,523 21,315 0.43 Construction - Custom 347,752 347,752 — — — — — Land - Consumer Lot Loans 148,534 147,952 5 307 270 582 0.39 HELOC 166,940 166,627 47 — 266 313 0.19 Consumer 87,989 87,727 152 59 51 262 0.30 Total consumer loans 5,688,279 5,665,807 3,831 2,531 16,110 22,472 0.40 Total Loans $ 14,004,870 $ 13,977,902 $ 4,802 $ 2,595 $ 19,571 $ 26,968 0.19 % Delinquency % 99.81 % 0.03 % 0.02 % 0.14 % 0.19 % The Company has actively worked with its borrowers to modify consumer mortgage and commercial loans to provide payment deferrals as a result of the COVID-19 pandemic. The terms of the payment deferrals are generally 90 days for consumer mortgage loans and up to 180 days for commercial loans, and borrowers may be eligible for multiple deferrals. Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress, these loan modifications are not accounted for as TDRs. In total, 1,472 consumer loans and 221 commercial loans were approved for deferrals. As of September 30, 2022, 1 mortgage loan 84 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 totaling $ 64,000 and no commercial loans that had been modified remain in deferral. These loans are not considered past due until after the deferral period is over and scheduled payments have resumed. The Company participated in the Small Business Administration’s Paycheck Protection Program. This program came about through the CARES Act to help small businesses keep their employees employed through the COVID-19 shelter in place orders. The Company assisted over 9,000 businesses with approximately $ 1,085,000,000 in PPP loan originations. As of September 30, 2022, approximately 8,800 PPP loans totaling $ 1,075,000,000 have been forgiven by the SBA and we continued to hold PPP loans receivable with an amortized cost of $ 10,141,000 . Most TDRs are accruing and performing 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 bps for a specific term, usually six to 12 months. Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. As of September 30, 2022, the outstanding balance of TDRs was $ 56,817,000 as compared to $ 65,128,000 as of September 30, 2021. As of September 30, 2022, 98.3 % of the restructured loans were performing. Single-family residential loans comprised 82.5 % of TDRs as of September 30, 2022. The Company's ACL methodology takes into account the following performance indicators for restructured loans: 1) time since modification, 2) current payment status and 3) geographic area. We evaluate the credit quality of our commercial loans based on regulatory risk ratings and also consider other factors. Based on this evaluation, the loans are assigned a grade and classified as follows: • Pass – the credit does not meet one of the definitions below. • Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset. • Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard. • Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. • Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible. Partial charge-off versus full charge-off may be taken if the collateral offers some identifiable protection. 85 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following tables present by credit quality indicator, loan class, and year of origination, the amortized cost basis of loans receivable as of September 30, 2022 and September 30, 2021. September 30, 2022 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2022 2021 2020 2019 2018 Prior to 2018 Revolving Loans Revolving to Term Loans Total Loans Commercial loans Multi-family Pass $ 657,144 $ 778,936 $ 500,917 $ 168,568 $ 157,144 $ 315,858 $ 34,102 $ — $ 2,612,669 Substandard 3,951 — 1,729 — 6,560 1,570 — — 13,810 Total $ 661,095 $ 778,936 $ 502,646 $ 168,568 $ 163,704 $ 317,428 $ 34,102 $ — $ 2,626,479 Commercial real estate Pass $ 820,490 $ 679,321 $ 492,826 $ 301,033 $ 218,171 $ 541,008 $ 1,391 $ — $ 3,054,240 Special Mention — 1,594 — — — — — — 1,594 Substandard 259 — 6,074 30,579 4,857 10,923 2,586 — 55,278 Total $ 820,749 $ 680,915 $ 498,900 $ 331,612 $ 223,028 $ 551,931 $ 3,977 $ — $ 3,111,112 Commercial & industrial Pass $ 254,668 $ 435,630 $ 145,799 $ 39,102 $ 25,709 $ 197,909 $ 1,097,696 $ 255 $ 2,196,768 Special Mention 2,503 — — — — — 29,153 — 31,656 Substandard 2,021 12,639 9,803 5,029 1,213 25,519 58,755 — 114,979 Total $ 259,192 $ 448,269 $ 155,602 $ 44,131 $ 26,922 $ 223,428 $ 1,185,604 $ 255 $ 2,343,403 Construction Pass $ 510,764 $ 671,611 $ 142,816 $ 27,260 $ 375 $ — $ 68,808 $ — $ 1,421,634 Substandard — 2,257 — — — — — — 2,257 Total $ 510,764 $ 673,868 $ 142,816 $ 27,260 $ 375 $ — $ 68,808 $ — $ 1,423,891 Land - acquisition & development Pass $ 100,022 $ 64,539 $ 16,934 $ 3,391 $ 8,175 $ 27,955 $ 2,600 $ — $ 223,616 Total $ 100,022 $ 64,539 $ 16,934 $ 3,391 $ 8,175 $ 27,955 $ 2,600 $ — $ 223,616 Total commercial loans Pass $ 2,343,088 $ 2,630,037 $ 1,299,292 $ 539,354 $ 409,574 $ 1,082,730 $ 1,204,597 $ 255 $ 9,508,927 Special Mention 2,503 1,594 — — — — 29,153 — 33,250 Substandard 6,231 14,896 17,606 35,608 12,630 38,012 61,341 — 186,324 Total $ 2,351,822 $ 2,646,527 $ 1,316,898 $ 574,962 $ 422,204 $ 1,120,742 $ 1,295,091 $ 255 $ 9,728,501 86 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 September 30, 2022 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2022 2021 2020 2019 2018 Prior to 2018 Revolving Loans Revolving to Term Loans Total Loans Consumer loans Single-family residential Current $ 1,131,152 $ 1,652,242 $ 771,769 $ 320,546 $ 276,093 $ 1,557,194 $ — $ — $ 5,708,996 30 days past due — — 400 604 — 1,792 — — 2,796 60 days past due — — — — — 1,316 — — 1,316 90+ days past due — — — 477 — 13,394 — — 13,871 Total $ 1,131,152 $ 1,652,242 $ 772,169 $ 321,627 $ 276,093 $ 1,573,696 $ — $ — $ 5,726,979 Construction - custom Current $ 235,030 $ 150,434 $ 9,811 $ 1,155 $ 478 $ — $ — $ — $ 396,908 90+ days past due — 435 — — — — — — 435 Total $ 235,030 $ 150,869 $ 9,811 $ 1,155 $ 478 $ — $ — $ — $ 397,343 Land - consumer lot loans Current $ 53,396 $ 60,454 $ 15,876 $ 5,399 $ 3,433 $ 13,188 $ — $ — $ 151,746 60 days past due — — 139 — — — — — 139 90+ days past due — — — — — 60 — — 60 Total $ 53,396 $ 60,454 $ 16,015 $ 5,399 $ 3,433 $ 13,248 $ — $ — $ 151,945 HELOC Current $ — $ — $ — $ — $ — $ 4,349 $ 200,267 $ 989 $ 205,605 30 days past due — — — — — 95 60 — 155 60 days past due — — — — — 29 17 — 46 90+ days past due — — — — — — 227 — 227 Total $ — $ — $ — $ — $ — $ 4,473 $ 200,571 $ 989 $ 206,033 Consumer Current $ 1,386 $ 10,156 $ 8,038 $ 215 $ 23,919 $ 6,449 $ 25,194 $ — $ 75,357 30 days past due — — — 2 — 153 7 — 162 60 days past due — — — — — 17 — — 17 90+ days past due 1 — — 32 — 2 — — 35 Total $ 1,387 $ 10,156 $ 8,038 $ 249 $ 23,919 $ 6,621 $ 25,201 $ — $ 75,571 Total consumer loans Current $ 1,420,964 $ 1,873,286 $ 805,494 $ 327,315 $ 303,923 $ 1,581,180 $ 225,461 $ 989 $ 6,538,612 30 days past due — — 400 606 — 2,040 67 — 3,113 60 days past due — — 139 — — 1,362 17 — 1,518 90+ days past due 1 435 — 509 — 13,456 227 — 14,628 Total $ 1,420,965 $ 1,873,721 $ 806,033 $ 328,430 $ 303,923 $ 1,598,038 $ 225,772 $ 989 $ 6,557,871 87 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 September 30, 2021 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior to 2017 Revolving Loans Revolving to Term Loans Total Loans Commercial loans Multi-family Pass $ 796,231 $ 479,038 $ 220,483 $ 205,661 $ 217,203 $ 287,595 $ 46,184 $ — $ 2,252,395 Special Mention — 1,763 — 3,111 — — — — 4,874 Substandard — — 7,548 651 3,703 4,518 — — 16,420 Total $ 796,231 $ 480,801 $ 228,031 $ 209,423 $ 220,906 $ 292,113 $ 46,184 $ — $ 2,273,689 Commercial real estate Pass $ 650,457 $ 434,117 $ 270,174 $ 260,344 $ 216,564 $ 339,374 $ 3,109 $ 247 $ 2,174,386 Special Mention — — 4,419 32,931 — 20,275 — — 57,625 Substandard — 8,362 71,972 17,290 46,800 51,800 1,097 — 197,321 Total $ 650,457 $ 442,479 $ 346,565 $ 310,565 $ 263,364 $ 411,449 $ 4,206 $ 247 $ 2,429,332 Commercial & industrial Pass $ 687,597 $ 224,225 $ 50,054 $ 38,595 $ 75,674 $ 155,171 $ 864,669 $ 12,167 $ 2,108,152 Special Mention 5,947 3,287 6,302 — — — 32,588 — 48,124 Substandard 71 46,695 2,690 4,589 37 17,093 76,217 259 147,651 Total $ 693,615 $ 274,207 $ 59,046 $ 43,184 $ 75,711 $ 172,264 $ 973,474 $ 12,426 $ 2,303,927 Construction Pass $ 402,578 $ 362,799 $ 214,189 $ 44,257 $ 15,656 $ — $ 76,312 $ — $ 1,115,791 Special Mention 931 — — — — — — — 931 Substandard — 464 — — 41 — — — 505 Total $ 403,509 $ 363,263 $ 214,189 $ 44,257 $ 15,697 $ — $ 76,312 $ — $ 1,117,227 Land - acquisition & development Pass $ 89,770 $ 37,773 $ 14,070 $ 15,835 $ 13,635 $ 16,393 $ 2,600 $ — $ 190,076 Substandard — — — — 2,340 — — — 2,340 Total $ 89,770 $ 37,773 $ 14,070 $ 15,835 $ 15,975 $ 16,393 $ 2,600 $ — $ 192,416 Total commercial loans Pass $ 2,626,633 $ 1,537,952 $ 768,970 $ 564,692 $ 538,732 $ 798,533 $ 992,874 $ 12,414 $ 7,840,800 Special Mention 6,878 5,050 10,721 36,042 — 20,275 32,588 — 111,554 Substandard 71 55,521 82,210 22,530 52,921 73,411 77,314 259 364,237 Total $ 2,633,582 $ 1,598,523 $ 861,901 $ 623,264 $ 591,653 $ 892,219 $ 1,102,776 $ 12,673 $ 8,316,591 88 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 September 30, 2021 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior to 2017 Revolving Loans Revolving to Term Loans Total Loans Consumer loans Single-family residential Current $ 1,309,354 $ 824,827 $ 413,564 $ 352,070 $ 395,569 $ 1,620,365 $ — $ — $ 4,915,749 30 days past due 3 — 349 59 391 2,825 — — 3,627 60 days past due — — — — — 2,165 — — 2,165 90+ days past due — — — 115 169 15,239 — — 15,523 Total $ 1,309,357 $ 824,827 $ 413,913 $ 352,244 $ 396,129 $ 1,640,594 $ — $ — $ 4,937,064 Construction - custom Current $ 204,614 $ 139,175 $ 2,854 $ 1,109 $ — $ — $ — $ — $ 347,752 Total $ 204,614 $ 139,175 $ 2,854 $ 1,109 $ — $ — $ — $ — $ 347,752 Land - consumer lot loans Current $ 85,342 $ 28,415 $ 9,012 $ 4,454 $ 5,404 $ 15,325 $ — $ — $ 147,952 30 days past due — — — — — 5 — — 5 60 days past due — 142 — — — 165 — — 307 90+ days past due — — — — 116 154 — — 270 Total $ 85,342 $ 28,557 $ 9,012 $ 4,454 $ 5,520 $ 15,649 $ — $ — $ 148,534 HELOC Current $ — $ — $ — $ — $ — $ 4,764 $ 160,183 $ 1,680 $ 166,627 30 days past due — — — — — 31 16 — 47 90+ days past due — — — — — 30 236 — 266 Total $ — $ — $ — $ — $ — $ 4,825 $ 160,435 $ 1,680 $ 166,940 Consumer Current $ 12,091 $ 8,091 $ 606 $ 35,228 $ 36 $ 10,700 $ 20,975 $ — $ 87,727 30 days past due — — 13 — 54 82 3 — 152 60 days past due — — 4 — — 55 — — 59 90+ days past due — — 35 — — 16 — — 51 Total $ 12,091 $ 8,091 $ 658 $ 35,228 $ 90 $ 10,853 $ 20,978 $ — $ 87,989 Total consumer loans Current $ 1,611,401 $ 1,000,508 $ 426,036 $ 392,861 $ 401,009 $ 1,651,154 $ 181,158 $ 1,680 $ 5,665,807 30 days past due 3 — 362 59 445 2,943 19 — 3,831 60 days past due — 142 4 — — 2,385 — — 2,531 90+ days past due — — 35 115 285 15,439 236 — 16,110 Total $ 1,611,404 $ 1,000,650 $ 426,437 $ 393,035 $ 401,739 $ 1,671,921 $ 181,413 $ 1,680 $ 5,688,279 89 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE E - ALLOWANCE FOR LOAN LOSSES For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A, "Summary of Significant Accounting Policies." The following tables summarize the activity in the allowance for loan losses by loan portfolio segment and class. Twelve Months Ended September 30, 2022 Beginning Allowance Charge-offs Recoveries Provision & Transfers Ending Allowance (In thousands) Commercial loans Multi-family $ 16,949 $ — $ — $ ( 4,936 ) $ 12,013 Commercial real estate 23,437 ( 529 ) 984 1,922 25,814 Commercial & industrial 45,957 ( 1,202 ) 73 12,382 57,210 Construction - speculative 25,585 — 2,179 ( 1,603 ) 26,161 Land - acquisition & development 13,447 ( 11 ) 70 ( 1,228 ) 12,278 Total commercial loans 125,375 ( 1,742 ) 3,306 6,537 133,476 Consumer loans Single-family residential 30,978 — 1,002 ( 6,462 ) 25,518 Construction - custom 4,907 — — ( 1,497 ) 3,410 Land - consumer lot loans 4,939 ( 27 ) 48 87 5,047 HELOC 2,390 — 351 ( 259 ) 2,482 Consumer 2,711 ( 370 ) 940 ( 406 ) 2,875 Total consumer loans 45,925 ( 397 ) 2,341 ( 8,537 ) 39,332 $ 171,300 $ ( 2,139 ) $ 5,647 $ ( 2,000 ) $ 172,808 Twelve Months Ended September 30, 2021 Beginning Allowance Charge-offs Recoveries Provision & Transfers Ending Allowance (In thousands) Commercial loans Multi-family $ 13,853 $ — $ — $ 3,096 $ 16,949 Commercial real estate 22,516 — 2,789 ( 1,868 ) $ 23,437 Commercial & industrial 38,665 ( 31 ) 92 7,231 $ 45,957 Construction - speculative 24,156 — — 1,429 $ 25,585 Land - acquisition & development 10,733 ( 2 ) 622 2,094 $ 13,447 Total commercial loans 109,923 ( 33 ) 3,503 11,982 125,375 Consumer loans Single-family residential 45,186 ( 106 ) 2,026 ( 16,128 ) 30,978 Construction - custom 3,555 — — 1,352 4,907 Land - consumer lot loans 2,729 — 168 2,042 4,939 HELOC 2,571 — 52 ( 233 ) 2,390 Consumer 2,991 ( 286 ) 1,021 ( 1,015 ) 2,711 Total consumer loans 57,032 ( 392 ) 3,267 ( 13,982 ) 45,925 $ 166,955 $ ( 425 ) $ 6,770 $ ( 2,000 ) $ 171,300 90 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 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 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. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet its contractual obligations. No allowance was recorded as of September 30, 2022 or September 30, 2021 for the PPP loans, which are included in the commercial & industrial loan category, due to the government guarantee. Non-accrual loans increased to $ 34,534,000 as of September 30, 2022, from $ 31,749,000 as of September 30, 2021. Non-performing assets totaled $ 44,554,000 , or 0.21 % of total assets, at September 30, 2022, compared to $ 43,625,000 , or 0.22 % of total assets, as of September 30, 2021. As of September 30, 2022, the allowance for loan losses 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 (including the forecast component of the reserve). The Company has an asset quality review function that analyzes its loan portfolio and reports the results of the review to its Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as described in Note D "Loans Receivable." The following tables provide the amortized cost of loans receivable based on risk rating categories (as previously defined). September 30, 2022 Internally Assigned Grade Pass Special mention Substandard Doubtful Loss Total (In thousands) Loan type Commercial loans Multi-family $ 2,612,669 $ — $ 13,810 $ — $ — $ 2,626,479 Commercial real estate 3,054,241 1,594 55,277 — — 3,111,112 Commercial & industrial 2,196,767 31,656 114,980 — — 2,343,403 Construction - speculative 1,421,634 — 2,257 — — 1,423,891 Land - acquisition & development 223,616 — — — — 223,616 Total commercial loans 9,508,927 33,250 186,324 — — 9,728,501 Consumer loans Single-family residential 5,706,199 — 20,780 — — 5,726,979 Construction - custom 396,908 — 435 — — 397,343 Land - consumer lot loans 151,723 — 222 — — 151,945 HELOC 205,800 — 233 — — 206,033 Consumer 75,570 — 1 — — 75,571 Total consumer loans 6,536,200 — 21,671 — — 6,557,871 Total loans $ 16,045,127 $ 33,250 $ 207,995 $ — $ — $ 16,286,372 Total grade as a % of total loans 98.5 % 0.2 % 1.3 % — % — % 91 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 September 30, 2021 Internally Assigned Grade Pass Special mention Substandard Doubtful Loss Total Gross Loans (In thousands) Loan type Commercial loans Multi-family $ 2,252,395 $ 4,874 $ 16,420 $ — $ — $ 2,273,689 Commercial real estate 2,174,386 57,625 197,321 — — 2,429,332 Commercial & industrial 2,108,152 48,124 147,651 — — 2,303,927 Construction - speculative 1,115,791 931 505 — — 1,117,227 Land - acquisition & development 190,076 — 2,340 — — 192,416 Total commercial loans 7,840,800 111,554 364,237 — — 8,316,591 Consumer loans Single-family residential 4,915,106 — 21,958 — — 4,937,064 Construction - custom 347,752 — — — — 347,752 Land - consumer lot loans 148,010 — 524 — — 148,534 HELOC 166,652 — 288 — — 166,940 Consumer 87,962 — 27 — — 87,989 Total consumer loans 5,665,482 — 22,797 — — 5,688,279 Total gross loans $ 13,506,282 $ 111,554 $ 387,034 $ — $ — $ 14,004,870 Total grade as a % of total gross loans 96.4 % 0.8 % 2.8 % — % — % 92 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following tables provide information on amortized cost of loans receivable based on borrower payment activity. September 30, 2022 Performing Loans Non-Performing Loans Amount % of Total Loans Amount % of Total Loans (In thousands) (In thousands) Commercial loans Multi-family $ 2,620,567 99.8 % $ 5,912 0.2 % Commercial real estate 3,106,421 99.8 4,691 0.2 Commercial & industrial 2,337,710 99.8 5,693 0.2 Construction - speculative 1,423,891 100.0 — — Land - acquisition & development 223,616 100.0 — — Total commercial loans 9,712,205 99.8 16,296 0.2 Consumer loans Single-family residential 5,709,529 99.7 17,450 0.3 Construction - custom 396,908 99.9 435 0.1 Land - consumer lot loans 151,861 99.9 84 0.1 HELOC 205,800 99.9 233 0.1 Consumer 75,535 100.0 36 — Total consumer loans 6,539,633 99.7 18,238 0.3 Total $ 16,251,838 99.8 % $ 34,534 0.2 % September 30, 2021 Performing Loans Non-Performing Loans Amount % of Total Loans Amount % of Total Loans (In thousands) (In thousands) Commercial loans Multi-family $ 2,273,214 100.0 % $ 475 — % Commercial real estate 2,421,294 99.7 8,038 0.3 Commercial & industrial 2,303,562 100.0 365 — Construction - speculative 1,116,722 100.0 505 — Land - acquisition & development 190,076 98.8 2,340 1.2 Total commercial loans 8,304,868 99.9 11,723 0.1 Consumer loans Single-family residential 4,917,744 99.6 19,320 0.4 Construction - custom 347,752 100.0 — — Land - consumer lot loans 148,175 99.8 359 0.2 HELOC 166,653 99.8 287 0.2 Consumer 87,929 99.9 60 0.1 Total consumer loans 5,668,253 99.6 20,026 0.4 Total gross loans $ 13,973,121 99.8 % $ 31,749 0.2 % 93 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE F - FAIR VALUE MEASUREMENTS FASB ASC 820, Fair Value Measurement ("ASC 820") defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company has established and documented the process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis. Measured on a Recurring Basis Available-for-sale investment securities and derivative contracts Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges, including the Company's equity securities, are measured using the closing price in an active market and are considered a Level 1 input method. The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered various forms of fair value hedges and cash flow hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method. 94 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following tables present the balance and level in the fair value hierarchy for assets and liabilities that are measured at fair value on a recurring basis (with the exception of those measured using the NAV practical expedient). September 30, 2022 Level 1 Level 2 Level 3 Total (In thousands) Available-for-sale securities U.S. government and agency securities $ — $ 39,354 $ — $ 39,354 Asset-backed securities — 767,001 767,001 Municipal bonds — 34,962 — 34,962 Corporate debt securities — 313,757 — 313,757 Mortgage-backed securities Agency pass-through certificates — 895,963 — 895,963 Total Available-for-sale securities — 2,051,037 — 2,051,037 Client swap program hedges — 67,260 — 67,260 Commercial loan hedges — 2,517 — 2,517 Mortgage loan fair value hedges — 36,765 — 36,765 Borrowings cash flow hedges — 179,945 — 179,945 Total Financial Assets $ — $ 2,337,524 $ — $ 2,337,524 Financial Liabilities Client swap program hedges $ — $ 67,260 $ — $ 67,260 Total Financial Liabilities $ — $ 67,260 $ — $ 67,260 September 30, 2021 Level 1 Level 2 Level 3 Total (In thousands) Available-for-sale securities U.S. government and agency securities $ — $ 61,779 $ — $ 61,779 Asset-backed securities — 1,078,681 — 1,078,681 Municipal bonds — 39,984 — 39,984 Corporate debt securities — 350,988 — 350,988 Mortgage-backed securities Agency pass-through certificates — 606,827 — 606,827 Total Available-for-sale securities — 2,138,259 — 2,138,259 Client swap program hedges — 10,983 — 10,983 Borrowings cash flow hedges — 42,442 — 42,442 Total Financial Assets $ — $ 2,191,684 $ — $ 2,191,684 Financial Liabilities Client swap program hedges $ — $ 10,983 $ — $ 10,983 Commercial loan hedges — 2,177 — 2,177 Mortgage loan fair value hedges — 1,641 — 1,641 Total Financial Liabilities $ — $ 14,801 $ — $ 14,801 95 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 There were no transfers between, into and/or out of Level 1, 2 or 3 during the year ended September 30, 2022 or September 30, 2021. Measured on a Nonrecurring Basis Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as collateral dependent loans and real estate owned ("REO"). REO consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral or REO property. When management determines that the fair value of the collateral or the REO requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the collateral dependent loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis includes loans for which an allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as real estate owned where the fair value of the property was less than the cost basis. The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis for the periods presented, and the total gains (losses) resulting from those fair value adjustments during the respective periods. The estimated fair value measurements are shown gross of estimated selling costs. September 30, 2022 Twelve Months Ended September 30, 2022 Level 1 Level 2 Level 3 Total Total Gains (Losses) (In thousands) Loans receivable (1) $ — $ — $ 7,912 $ 7,912 $ ( 1,286 ) Real estate owned (2) — — 3,128 3,128 ( 367 ) Balance at end of period $ — $ — $ 11,040 $ 11,040 $ ( 1,653 ) (1) The gains (losses) represent re-measurements of collateral-dependent impaired loans. (2) The gains (losses) represent aggregate write-downs and charge-offs on real estate owned. September 30, 2021 Twelve Months Ended September 30, 2021 Level 1 Level 2 Level 3 Total Total Gains (Losses) (In thousands) Impaired loans (1) $ — $ — $ — $ — $ ( 105 ) Real estate owned (2) — — 1,851 1,851 ( 420 ) Balance at end of period $ — $ — $ 1,851 $ 1,851 $ ( 525 ) (1) The gains (losses) represent re-measurements of collateral-dependent impaired loans. (2) The gains (losses) represent aggregate write-downs and charge-offs on real estate owned. At September 30, 2022, there were no foreclosed residential real estate properties held as REO. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $ 3,627,000 . 96 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Fair Values of Financial Instruments U. S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below. September 30, 2022 September 30, 2021 Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (In thousands) Financial assets Cash and cash equivalents 1 $ 683,965 $ 683,965 $ 2,090,809 $ 2,090,809 Available-for-sale securities: U.S. government and agency securities 2 39,354 39,354 61,779 61,779 Asset-backed securities 2 767,001 767,001 1,078,681 1,078,681 Municipal bonds 2 34,962 34,962 39,984 39,984 Corporate debt securities 2 313,757 313,757 350,988 350,988 Mortgage-backed securities Agency pass-through certificates 2 895,963 895,963 606,827 606,827 Total available-for-sale securities 2,051,037 2,051,037 2,138,259 2,138,259 Held-to-maturity securities: Mortgage-backed securities Agency pass-through certificates 2 463,299 406,860 366,025 379,547 Total held-to-maturity securities 463,299 406,860 366,025 379,547 Loans receivable 3 16,113,564 15,417,635 13,833,570 14,279,725 FHLB and FRB stock 2 95,073 95,073 102,863 102,863 Other assets - client swap program hedges 2 67,260 67,260 10,983 10,983 Other assets - commercial loan fair value hedges 2 2,517 2,517 — — Other assets - mortgage loan fair value hedges 2 36,765 36,765 — — Other assets - borrowings cash flow hedges 2 179,945 179,945 42,442 42,442 Financial liabilities Time deposits 2 3,338,043 3,249,169 3,434,087 3,382,206 FHLB advances and other borrowings 2 2,125,000 1,940,813 1,720,000 1,692,412 Other liabilities - client swap program hedges 2 67,260 67,260 10,983 10,983 Other liabilities - commercial loan fair value hedges 2 — — 2,177 2,177 Other liabilities - mortgage loan fair value hedges 2 — — 1,641 1,641 The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value. Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 input method. 97 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base price, with further loan level pricing adjustments made based on individual loan characteristics such as FICO score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using a discount rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as, an annual loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. FHLB and FRB stock – The fair value is based upon the par value of the stock which equates to its carrying value. Time deposits – The fair value of fixed-maturity time deposits is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities. FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities. Interest rate swaps – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Bank enters into the opposite trade with a counterparty to offset its interest rate risk. The Company also uses interest rate swaps for various fair value hedges and cash flow hedges. The fair value of interest rate swaps are estimated by a third-party pricing service using a discounted cash flow technique. NOTE G - DERIVATIVES AND HEDGING ACTIVITIES The following tables present the fair value, notional amount and balance sheet classification of derivative assets and liabilities at September 30, 2022 and September 30, 2021. September 30, 2022 Derivative Assets Derivative Liabilities Interest rate contract purpose Balance Sheet Location Notional Fair Value Balance Sheet Location Notional Fair Value (In thousands) (In thousands) Client swap program hedges Other assets $ 588,676 $ 67,260 Other liabilities $ 588,676 $ 67,260 Commercial loan fair value hedges Other assets 42,209 2,517 Other liabilities — — Mortgage loan fair value hedges Other assets 470,000 36,765 Other liabilities — — Borrowings cash flow hedges Other assets 1,000,000 179,945 Other liabilities — — $ 2,100,885 $ 286,487 $ 588,676 $ 67,260 September 30, 2021 Derivative Assets Derivative Liabilities Interest rate contract purpose Balance Sheet Location Notional Fair Value Balance Sheet Location Notional Fair Value (In thousands) (In thousands) Client swap program hedges Other assets $ 644,355 $ 10,983 Other liabilities $ 644,355 $ 10,983 Commercial loan fair value hedges Other assets — — Other liabilities 44,678 2,177 Mortgage loan fair value hedges Other assets — — Other liabilities 470,000 1,641 Borrowings cash flow hedges Other assets 1,000,000 42,442 Other liabilities — — $ 1,644,355 $ 53,425 $ 1,159,033 $ 14,801 98 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The Company enters into interest rate swaps to hedge interest rate risk. These arrangements include hedges of individual fixed rate commercial loans and also hedges of a specified portion of pools of prepayable fixed rate mortgage loans under the "last of layer" method. These relationships qualify as fair value hedges under FASB ASC 815, Derivatives and Hedging ("ASC 815"), which provides for offsetting of the recognition of gains and losses of the respective interest rate swap and the hedged items. Gains and losses on interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item. Upon electing to apply ASC 815 fair value hedge accounting, the carrying value of the hedged items are adjusted to reflect the cumulative impact of changes in fair value attributable to the hedged risk. The hedge basis adjustment remains with each hedged item until the hedged item is de-recognized from the balance sheet. The following tables presents the impact of fair value hedge accounting on the carrying value of the hedged items at September 30, 2022 and September 30, 2021. (In thousands) September 30, 2022 Balance sheet line item in which hedged item is recorded Carrying value of hedged items Cumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items Loans receivable (1) (2) $ 1,159,496 $ ( 39,090 ) $ 1,159,496 $ ( 39,090 ) (1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At September 30, 2022, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $ 1,119,975,000 , the cumulative basis adjustment associated with the hedging relationships was $( 36,458,000 ), and the amount of the designated hedged items was $ 470,000,000 . (2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At September 30, 2022, the amortized cost basis of the hedged commercial loans was $ 39,521,000 and the cumulative basis adjustment associated with the hedging relationships was $( 2,632,000 ). (In thousands) September 30, 2021 Balance sheet line item in which hedged item is recorded Carrying value of hedged items Cumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items Loans receivable (1) (2) $ 1,515,487 $ 4,215 $ 1,515,487 $ 4,215 (1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At September 30, 2021, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $ 1,468,517,000 , the cumulative basis adjustment associated with the hedging relationships was $ 1,864,000 , and the amount of the designated hedged items was 470,000,000 . During the year ended September 30, 2021, hedge accounting was discontinued on $ 30,000,000 ( 30 %) of a $ 100,000,000 last of layer hedge. The $ 1,238,000 unamortized discount associated with the terminated portion of the hedge is being amortized over the remaining life of the associated pool of loans. (2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At September 30, 2021, the amortized cost basis of the hedged commercial loans was $ 46,970,000 and the cumulative basis adjustment associated with the hedging relationships was $ 2,351,000 . During the year ended September 30, 2021, hedge accounting was discontinued on a $ 46,240,000 commercial loan hedge. The Company has entered into interest rate swaps to convert certain short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of changes in future cash flows resulting from increasing interest rates. For qualifying 99 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 cash flow hedges under ASC 815, gains and losses on the interest rate swaps are recorded in accumulated other comprehensive income ("AOCI") and then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line item as the hedged cash flows. As of September 30, 2022, the maturities for hedges of adjustable rate borrowings ranged from less than two years to eight years , with the weighted average being 6.5 years. The following table presents the impact of derivative instruments (cash flow hedges on borrowings) on AOCI for the periods presented. (In thousands) Twelve Months Ended September 30, Amount of gain/(loss) recognized in AOCI on derivatives in cash flow hedging relationships 2022 2021 Interest rate contracts: Pay fixed/receive floating swaps on cash flow hedges of borrowings $ 137,502 $ 59,817 Total pre-tax gain/(loss) recognized in AOCI $ 137,502 $ 59,817 The following table presents the gains/(losses) on derivative instruments in fair value and cash flow accounting hedging relationships under ASC 815 for the period presented. Twelve Months Ended September 30, 2022 Twelve Months Ended September 30, 2021 Interest income on loans receivable Interest expense on FHLB advances Interest income on loans receivable Interest expense on FHLB advances (In thousands) (In thousands) Interest income/(expense), including the effects of fair value and cash flow hedges $ 601,592 $ ( 28,729 ) $ 537,660 $ ( 44,188 ) Gain/(loss) on fair value hedging relationships: Interest rate contracts Amounts related to interest settlements on derivatives $ ( 1,782 ) $ ( 6,320 ) Recognized on derivatives 43,100 20,736 Recognized on hedged items ( 43,305 ) ( 20,449 ) Net income/(expense) recognized on fair value hedges $ ( 1,987 ) $ ( 6,033 ) Gain/(loss) on cash flow hedging relationships: Interest rate contracts Amounts related to interest settlements on derivatives $ ( 408 ) $ 10,846 Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense — 14,110 Net income/(expense) recognized on cash flow hedges $ ( 408 ) $ 24,956 The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The interest rate swaps are derivatives under ASC 815, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the years ended September 30, 2022 and 2021 as the changes in fair value of the receive fixed swap and pay fixed swap offset each other. As of September 30, 2022, none of the outstanding notional balance is associated with related party loans. 100 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following table presents the impact of derivative instruments (client swap program) that are not designated in accounting hedges under ASC 815 for the periods presented. (In thousands) Twelve Months Ended September 30, Derivative instruments Classification of gain/(loss) recognized in income on derivative instrument 2022 2021 Interest rate contracts: Pay fixed/receive floating swap Other noninterest income $ 78,244 $ 37,218 Receive fixed/pay floating swap Other noninterest income ( 78,244 ) ( 37,218 ) $ — $ — NOTE H – REVENUE FROM CONTRACTS WITH CUSTOMERS On October 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606") . Since net interest income on financial assets and liabilities is excluded from this guidance, a significant majority of our revenues are not subject to the new guidance. Revenue streams that are within the scope of the new guidance are presented within noninterest income and are, in general, recognized as revenue at the same time the Company's obligation to the customer is satisfied. Most of the Company's customer contracts that are within the scope of the new guidance are cancelable by either party without penalty and are short-term in nature. These sources of revenue include depositor and other consumer and business banking fees, commission income, as well as debit and credit card interchange fees. For fiscal years ended 2022 and 2021, in scope revenue streams represented approximately 5.6 % and 5.8 % of our total revenues, respectively. As this standard is immaterial to our consolidated financial statements, the Company has omitted certain disclosures in ASC 606, including the disaggregation of revenue table. Sources of noninterest income within the scope of the new guidance include the following: Deposit related and other service charges (recognized in Deposit Fee Income) : The Company's deposit accounts are governed by standardized contracts customary in the industry. Revenues are earned at a point in time or over time (monthly) from account maintenance fees and charges for specific transactions such as wire transfers, stop payment orders, overdrafts, debit card replacements, check orders and cashiers' checks. The Company’s performance obligation related to each of these fees is generally satisfied, and the related revenue recognized, at the time the service is provided (point in time or monthly). The Company is principal in each of these contracts. Debit and credit card interchange fees (recognized in Deposit Fee Income) : The Company receives interchange fees from the debit card and credit card payment networks based on transactions involving debit or credit cards issued by the Company, generally measured as a percentage of the underlying transaction. Interchange fees from debit and credit card transactions are recognized as the transaction processing services are provided by the network. The Company acts as an agent in the card payment network arrangement so the interchange fees are recorded net of any expenses paid to the principal (the card payment networks in this case). Insurance agency commissions (recognized in Other Income) : WAFD Insurance Group, Inc. is a wholly-owned subsidiary of Washington Federal Bank that operates as an insurance agency, selling and marketing property and casualty insurance policies for a small number of high-quality insurance carriers. WAFD Insurance Group, Inc. earns revenue in the form of commissions paid by the insurance carriers for policies that have been sold. In addition to the origination commission, WAFD Insurance Group, Inc. may also receive contingent incentive fees based on the volume of business generated for the insurance carrier and based on policy renewal rates. 101 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE I - INTEREST RECEIVABLE The following table provides a summary of interest receivable by interest-earning asset type. September 30, 2022 September 30, 2021 (In thousands) Loans receivable $ 57,070 $ 46,234 Mortgage-backed securities 3,313 2,159 Investment securities 3,489 2,243 $ 63,872 $ 50,636 NOTE J - PREMISES AND EQUIPMENT The following table provides a summary of premises and equipment by asset type. September 30, 2022 September 30, 2021 Estimated Useful Life (In thousands) Land — $ 92,938 $ 95,247 Buildings 10 - 40 185,573 185,813 Leasehold improvements 5 - 15 18,361 15,698 Furniture, software and equipment 2 - 10 92,164 91,174 389,036 387,932 Less accumulated depreciation and amortization ( 145,974 ) ( 132,780 ) $ 243,062 $ 255,152 NOTE K - CUSTOMER ACCOUNTS The following tables provide the composition of the Company's customer accounts, including time deposits. 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 ($ in thousands) 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 % 102 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Time deposits by rate band are as follows: September 30, 2022 September 30, 2021 (In thousands) Less than 1.00% $ 2,705,212 $ 3,153,788 1.00% to 1.99% 304,702 229,594 2.00% to 2.99% 327,852 50,608 3.00% to 3.99% 277 97 $ 3,338,043 $ 3,434,087 Time deposits by maturity band are as follows: September 30, 2022 September 30, 2021 (In thousands) Three months or less $ 1,007,735 $ 1,085,001 Over 3 through 6 months 966,800 819,906 Over 6 through 12 months 810,680 870,801 Over 12 months 552,828 658,379 $ 3,338,043 $ 3,434,087 Customer accounts over $250,000 (uninsured deposits) totaled $ 7,400,474,000 as of September 30, 2022, compared to $ 7,198,111,000 as of September 30, 2021. Interest expense on customer accounts consisted of the following: Year ended September 30, 2022 2021 2020 (In thousands) Checking accounts $ 10,086 $ 5,545 $ 8,447 Savings accounts 1,377 1,143 959 Money market accounts 12,423 8,723 18,951 Time deposit accounts 19,422 27,100 72,494 43,308 42,511 100,851 Less early withdrawal penalties ( 267 ) ( 198 ) ( 539 ) $ 43,041 $ 42,313 $ 100,312 Weighted average interest rate at end of year 0.51 % 0.23 % 0.48 % Daily weighted average interest rate during the year 0.34 % 0.35 % 0.94 % NOTE L - FHLB ADVANCES AND OTHER BORROWINGS The table below shows the contractual maturity dates of outstanding FHLB advances. September 30, 2022 September 30, 2021 (In thousands) FHLB advances Within 1 year $ 2,025,000 $ 1,320,000 1 to 3 years 100,000 400,000 $ 2,125,000 $ 1,720,000 As of September 30, 2022, there are no advances that are callable by the FHLB. Taking into account cash flow hedges, the weighted average effective maturity of FHLB advances at September 30, 2022 is 3.25 years. 103 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Financial information pertaining to the weighted-average cost and the amount of FHLB advances were as follows. 2022 2021 2020 ($ in thousands) Weighted average interest rate, including cash flow hedges, at end of year 2.02 % 1.51 % 1.79 % Weighted daily average interest rate, including cash flow hedges, during the year 1.66 % 1.98 % 2.03 % Daily average of FHLB advances during the year $ 1,731,110 $ 2,234,027 $ 2,532,596 Maximum amount of FHLB advances at any month end $ 2,125,000 $ 2,700,000 $ 3,050,000 Interest expense during the year (including swap interest income and expense) $ 28,729 $ 44,188 $ 51,445 The Bank has a credit line with the FHLB equal to 45 % of total assets, subject to collateral requirements. The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and a fixed-rate term loan 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. 104 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE M - COMMITMENTS AND CONTINGENCIES Lease Commitments - The Company’s lease commitments consist primarily of real estate property for branches and office space under various non-cancellable operating leases that expire between 2022 and 2070. The majority of the leases contain renewal options and provisions for increases in rental rates based on a predetermined schedule or an agreed upon index. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. Operating lease liabilities and right-of-use assets are recognized on the lease commencement date based on the present value of the future minimum lease payments over the lease term. The future lease payments are discounted at a rate that represents the Company's collateralized borrowing rate for financing instruments of a similar term and are included in Accrued expenses and other liabilities . The related right-of-use asset is included in Other assets . The table below presents the Company’s operating lease right-of-use asset and the related lease liability. (In thousands) September 30, 2022 September 30, 2021 Operating lease asset $ 25,546 $ 27,785 Operating lease liability $ 27,974 $ 29,569 As of September 30, 2022, the Company’s operating leases have a weighted average remaining lease term of 8.5 years and a weighted average discount rate of 1.99 %. Cash paid for amounts included in the measurement of the above operating lease liability was $ 6,788,000 and $ 6,425,000 for the twelve months ended September 30, 2022 and 2021, respectively. Right-of-use assets obtained in exchange for new operating lease liabilities during the twelve months ended September 30, 2022 and 2021 were $ 3,611,000 and $ 2,864,000 . The following table presents the components of net lease costs, a component of Occupancy expense. The Company elected not to separate lease and non-lease components and instead account for them as a single lease component. Variable lease costs include subsequent increases in index-based rents and variable payments such as common area maintenance. (In thousands) Twelve Months Ended September 30, Twelve Months Ended September 30, 2022 2021 Operating lease cost $ 6,654 $ 6,754 Variable lease cost 1,537 1,095 Sublease income ( 358 ) ( 185 ) Net lease cost $ 7,833 $ 7,664 The following table shows future minimum payments for operating leases as of September 30, 2022 for the respective periods. 105 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 (In thousands) Year ending September 30, 2023 $ 6,215 2024 5,503 2025 4,596 2026 3,732 2027 2,866 Thereafter 7,783 Total minimum payments 30,695 Amounts representing interest ( 2,721 ) Present value of minimum lease payments $ 27,974 Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $ 8,191,000 and $ 7,849,000 in 2022, and 2021, respectively. Financial Instruments with Off-Balance Sheet Risk - The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance of $ 4,947,570,000 and $ 3,804,444,000 at September 30, 2022 and September 30, 2021, respectively. The reserve for unfunded commitments was $ 32,500,000 as of September 30, 2022, which is an increase from $ 27,500,000 at September 30, 2021. See Note A "Summary of Significant Accounting Policies" for details regarding the reserve methodology. Legal Proceedings - The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company. 106 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 NOTE N - INCOME TAXES Under generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to reverse. The table below provides a summary of the Company's tax assets and liabilities, including deferred tax assets and deferred tax liabilities by major source. Deferred tax balances represent temporary differences between the financial statement and corresponding tax treatment of income, gains, losses, deductions or credits. September 30, 2022 September 30, 2021 (In thousands) Deferred tax assets Allowance for credit losses $ 47,426 $ 45,724 REO reserves 329 173 Non-accrual loan interest 1,104 1,080 Deferred compensation 6,841 6,230 Stock based compensation 2,636 2,508 Lease liability 6,207 6,655 Other 1,329 4,525 Total deferred tax assets 65,872 66,895 Deferred tax liabilities FHLB stock dividends 9,826 9,783 Valuation adjustment on available-for-sale securities and cash flow hedges 15,765 20,845 Loan origination fees and costs 10,918 5,645 Premises and equipment 20,132 21,426 Lease right-of-use assets 5,992 6,249 Equity investments 5,323 2,982 Other 4,141 6,157 Total deferred tax liabilities 72,097 73,087 Net deferred tax asset (liability) ( 6,225 ) ( 6,192 ) Current tax asset (liability) 2,920 10,069 Net tax asset (liability) $ ( 3,305 ) $ 3,877 107 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The table below presents a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate. Year ended September 30, 2022 2021 2020 Statutory income tax rate 21 % 21 % 21 % State income tax 2 2 2 Other differences ( 2 ) ( 2 ) ( 2 ) Effective income tax rate 21 % 21 % 21 % The following table summarizes the Company's income tax expense (benefit) for the respective periods. Year ended September 30, 2022 2021 2020 (In thousands) Federal: Current $ 50,854 $ 53,820 $ 49,782 Deferred 7,187 ( 8,468 ) ( 7,858 ) 58,041 45,352 41,924 State: Current 6,600 5,584 5,310 Deferred ( 934 ) ( 1,413 ) ( 1,486 ) 5,666 4,171 3,824 Total Current 57,454 59,404 55,092 Deferred 6,253 ( 9,881 ) ( 9,344 ) $ 63,707 $ 49,523 $ 45,748 Based on current information, the Company does not expect that changes in the amount of unrecognized tax benefits over the next 12 months will have a significant impact on its results of operations or financial position. The Company does not have a liability for uncertain tax positions as of September 30, 2022 or September 30, 2021. The Company's federal income tax returns are open and subject to potential examination by the IRS for fiscal years 2019 and later. State income tax returns are generally subject to examination for a period of three to five years after filing. The state impact of any federal changes remains subject to examination by various states for a period of up to two years after formal notification to the states. NOTE O - 401(k) PLAN The Company maintains a 401(k) Plan (the "Plan") for the benefit of its employees. Company contributions are made annually as approved by the Board of Directors. Such amounts are not in excess of amounts permitted by the Employee Retirement Income Security Act of 1974. Plan participants may make voluntary after-tax contributions of their considered earnings as defined by the Plan. In addition, participants may make pre-tax contributions up to the statutory limits through the 401(k) provisions of the Plan. The annual addition from contributions to an individual participant's account in this Plan cannot exceed the lesser of 100 % of base salary or $ 61,000 . 108 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 New employees become eligible to participate in the Plan and make employee contributions on the first day of the calendar month following the completion of 30 days of employment. Such eligible employees do not become eligible for profit sharing or matching contributions until the first day of the quarter (January 1, April 1, July 1 or October 1) following completion of 1 year of service. A “year of service” is defined as a 12-month period in which the eligible employee works at least 1,000 hours of service and the first eligibility service period started on the first day of employment. The Plan provides for a guaranteed safe harbor matching contribution equal to 100 % of the first 4 % of compensation that employees contribute to their account and this amount is immediately vested. The safe harbor match is not subject to the six year vesting schedule of the profit sharing contribution. This provides plan participants more investment flexibility. Additionally, the Company anticipates that all eligible employees, regardless of personal plan participation, will continue to receive an annual discretionary profit sharing contribution from the Company. Company contributions to the Plan amounted to $ 10,559,000 , $ 9,905,000 and $ 8,333,000 for the years ended 2022, 2021 and 2020, respectively. NOTE P - STOCK AWARD PLANS The Company's stock based compensation plan provides for grants of stock options and restricted stock. On January 22, 2020, the shareholders approved the 2020 Incentive Plan. Upon approval of the 2020 Incentive Plan, the 2011 Incentive Plan terminated with respect to future awards, and the remaining shares that were not awarded under the 2011 Incentive Plan as of that date were canceled. A total of 3,200,000 shares are available for grant under the 2020 Incentive Plan and 1,882,283 shares remain available for issuance as of September 30, 2022. When applicable, stock options are granted with an exercise price equal to the market price of the Company's stock at the date of grant; those option awards generally vest based on three to five years of continuous service and have 10-year contractual terms. The Company's policy is to issue new shares upon option exercises. The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Expected volatility is based on the historical volatility of the Company's stock. The risk-free interest rate is based on the U.S. Treasury yield curve that is in effect at the time of grant with a remaining term equal to the options' expected life. The expected term represents the period of time that options granted are expected to be outstanding. Stock Option Awards: There were 352,043 stock options granted under the incentive plans during 2022, compared to no stock options granted in 2021 and 1,043,349 stock options granted in 2020 under the previous plan. 109 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 A summary of stock option activity and changes during the year are as follows. Options Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) Outstanding at September 30, 2020 1,229,724 $ 28.93 9 $ — Granted — — Exercised ( 19,846 ) 17.06 Forfeited ( 179,555 ) 29.05 Outstanding at September 30, 2021 1,030,323 29.14 8 5,330 Granted 352,043 32.49 Exercised ( 64,415 ) 28.16 Forfeited ( 180,343 ) 30.24 Outstanding at September 30, 2022 1,137,608 $ 30.06 8 $ — Exercisable at September 30, 2022 156,698 $ 28.16 6.0 $ 285 The table below presents other information regarding stock options. Year ended September 30, 2022 2021 2020 (In thousands, except grant date fair value per stock option) Compensation cost for stock options $ 1,296 $ 1,676 $ 1,344 Weighted average grant date fair value per stock option 5.10 4.39 4.37 Total intrinsic value of options exercised 433 276 102 Grant date fair value of options exercised 345 78 33 Cash received from option exercises 1,823 339 144 The following is a summary of activity related to unvested stock options. Year ended September 30, 2022 2021 2020 Unvested Stock Options Options Outstanding Weighted Average Grant Date Fair Value Options Outstanding Weighted Average Grant Date Fair Value Options Outstanding Weighted Average Grant Date Fair Value Outstanding at beginning of period 1,031,134 $ 4.39 1,210,689 $ 4.38 293,167 $ 5.33 Granted 352,043 7.18 — — 1,043,349 4.17 Vested ( 223,387 ) 5.32 — — — — Forfeited ( 178,380 ) 5.02 ( 179,555 ) 4.31 ( 125,827 ) 4.83 Outstanding at end of period 981,410 $ 5.07 1,031,134 $ 4.39 1,210,689 $ 4.38 As of September 30, 2022, there was $ 1,851,364 of unrecognized compensation cost related to stock options. Restricted Stock Awards: The Company grants shares of restricted stock pursuant to the incentive plans. The restricted stock grants are subject to a service condition and vest over a period of one to seven years . Certain grants of restricted stock to executive officers are also subject to additional market and performance conditions based upon meeting certain total shareholder return targets pre-established by the Board. The Company had a total of 489,777 shares of restricted stock outstanding as of September 30, 2022, with a total grant date fair value of $ 10,598,774 . 110 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following table summarizes information about unvested restricted stock activity. Year ended September 30, 2022 2021 2020 Non-vested Restricted Stock Outstanding Weighted Average Fair Value Outstanding Weighted Average Fair Value Outstanding Weighted Average Fair Value Outstanding at beginning of period 522,991 $ 19.96 409,469 $ 24.32 435,838 $ 23.73 Granted 224,593 25.34 331,344 17.04 197,706 26.24 Vested ( 246,119 ) 21.34 ( 132,649 ) 30.64 ( 205,715 ) 25.56 Forfeited ( 11,688 ) 23.96 ( 85,173 ) 12.94 ( 18,360 ) 17.20 Outstanding at end of period 489,777 $ 21.64 522,991 $ 19.96 409,469 $ 24.32 Compensation expense related to restricted stock awards was $ 4,367,000 , $ 4,473,000 , and $ 4,453,000 for the years ended 2022, 2021 and 2020, respectively. NOTE Q - SHAREHOLDERS' EQUITY The Company and the Bank are subject to various regulatory capital requirements. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Common Equity Tier 1, Tier 1 and Total capital to risk weighted assets (as defined in the regulations) and Tier 1 capital to average assets (as defined in the regulations). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The Company and the Bank are also subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval. 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. 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 1/40 th 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 Global Select Market 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. As of September 30, 2022, and 2021, the Company and the Bank met all capital adequacy requirements to which they are subject, and the Bank's regulators categorized it as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Common Equity Tier 1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios as set forth in the following table. The Bank's actual capital amounts and ratios as of these dates are also presented. There are no conditions or events since that management believes have changed the Bank's categorization. 111 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Actual Capital Adequacy Guidelines Categorized as Well Capitalized Under Prompt Corrective Action Provisions Capital Ratio Ratio Ratio September 30, 2022 ($ in thousands) Common Equity Tier 1 risk-based capital ratio: The Company $ 1,613,075 9.86 % 4.50 % NA The Bank 1,781,932 10.89 4.50 6.50 % Tier 1 risk-based capital ratio: The Company 1,913,075 11.69 6.00 NA The Bank 1,781,932 10.89 6.00 8.00 Total risk-based capital ratio: The Company 2,117,574 12.94 8.00 NA The Bank 1,986,434 12.14 8.00 10.00 Tier 1 leverage ratio: The Company 1,913,075 9.51 4.00 NA The Bank 1,781,932 8.86 4.00 5.00 September 30, 2021 Common Equity Tier 1 risk-based capital ratio: The Company $ 1,446,613 9.50 % 4.50 % NA The Bank 1,717,014 11.28 4.50 6.50 % Tier 1 risk-based capital ratio: The Company 1,746,613 11.47 6.00 NA The Bank 1,717,014 11.28 6.00 8.00 Total risk-based capital ratio: The Company 1,937,036 12.72 8.00 NA The Bank 1,907,408 12.53 8.00 10.00 Tier 1 leverage ratio: The Company 1,746,613 9.07 4.00 NA The Bank 1,717,014 8.92 4.00 5.00 At periodic intervals, the Federal Reserve, the WDFI and the FDIC examine the Company's and the Bank's financial statements as part of their oversight. Based on their examinations, these regulators can direct that the Company's or Bank's financial statements be adjusted in accordance with their findings. The Company and the Bank are subject to regulatory restrictions on paying dividends. The Company has an ongoing common share repurchase program and 92,774 shares were repurchased during 2022 at a weighted average price of $ 35.14 . In 2021, 10,810,113 shares were repurchased at a weighted average price of $ 32.25 . As of September 30, 2022, management had authorization from the Board of Directors to repurchase up to 3,724,344 additional shares. 112 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 The following table sets forth information regarding earnings per common share calculations. Year ended September 30, 2022 2021 2020 Weighted average shares outstanding 65,287,650 72,529,188 76,721,969 Weighted average dilutive options 116,460 36,732 9,495 Weighted average diluted shares 65,404,110 72,565,920 76,731,464 Net income available to common shareholders (in thousands) $ 221,705 $ 173,581 $ 173,438 Basic EPS $ 3.40 $ 2.39 $ 2.26 Diluted EPS 3.39 2.39 2.26 NOTE R - FINANCIAL INFORMATION – WASHINGTON FEDERAL, INC. The following Washington Federal, Inc. (parent company only) financial information should be read in conjunction with the other notes to the Consolidated Financial Statements. Condensed Statements of Financial Condition September 30, 2022 September 30, 2021 (In thousands) Assets Cash $ 130,502 $ 28,696 Other assets 5,000 5,000 Investment in subsidiary 2,143,116 2,096,464 Total assets $ 2,278,618 $ 2,130,160 Liabilities Dividend payable on preferred stock $ 3,656 $ 3,656 Other liabilities 702 440 Total liabilities 4,358 4,096 Shareholders’ equity Total shareholders’ equity 2,274,260 2,126,064 Total liabilities and shareholders’ equity $ 2,278,618 $ 2,130,160 113 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020 Condensed Statements of Operations Twelve Months Ended September 30, 2022 2021 2020 (In thousands) Income Dividends from subsidiary $ 172,850 $ 92,400 $ 190,900 Total Income 172,850 92,400 190,900 Expense Miscellaneous expense 619 626 529 Total expense 619 626 529 Net income (loss) before equity in undistributed net income (loss) of subsidiary 172,231 91,774 190,371 Equity in undistributed net income (loss) of subsidiaries 63,956 91,697 ( 17,055 ) Income before income taxes 236,187 183,471 173,316 Income tax benefit (expense) 143 144 122 Net income 236,330 183,615 173,438 Dividends on preferred stock 14,625 10,034 — Net income available to common shareholders $ 221,705 $ 173,581 $ 173,438 Condensed Statements of Cash Flows Twelve Months Ended September 30, 2022 2021 2020 (In thousands) Cash Flows From Operating Activities Net income $ 236,330 $ 183,615 $ 173,438 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings from investments in subsidiaries ( 63,956 ) ( 91,697 ) — Distributions in excess of earnings from investments in subsidiaries — — 17,055 Stock based compensation expense 6,808 6,381 6,469 Increase (decrease) in other liabilities 262 440 — Net cash provided by (used in) operating activities 179,444 98,739 196,962 Cash Flows From Investing Activities Purchase of strategic investments — — — Net cash provided by (used in) investing activities — — — Cash Flows From Financing Activities Proceeds from exercise of common stock options and related tax benefit 1,823 339 144 Proceeds from issuance of preferred stock, net — 293,325 Treasury stock purchased ( 3,260 ) ( 348,651 ) ( 112,133 ) Dividends on preferred stock ( 14,625 ) ( 6,378 ) — Dividends on common stock ( 61,576 ) ( 65,876 ) ( 66,496 ) Net cash provided by (used in) financing activities ( 77,638 ) ( 127,241 ) ( 178,485 ) Increase (decrease) in cash 101,806 ( 28,502 ) 18,477 Cash at beginning of year 28,696 57,198 38,721 Cash at end of year $ 130,502 $ 28,696 $ 57,198 114 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.