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Item 7. Management’s Discussion and Analysis

2023-11-17 compared with 2022-11-18 · 115 added, 74 removed, 482 unchanged (28% of the section changed)

7 unchanged sentences

For management's review of the factors that affected our results of operations for the years ended September 30, 2022 and 2021, refer to our Annual Report on Form 10-K for the year ended September 30, 2022, which was filed with the Securities and Exchange Commission on November 18, 2022.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has determined that the only accounting policy critical to an understanding of its consolidated financial statements relates to the methodology for determining the amount of the allowance for credit losses (“ACL”).

Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on individually evaluated loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

The preparation of consolidated financial statements in conformity with U.S.

GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts within the consolidated financial statements.

Actual results may differ from these estimates.

While our significant accounting policies are described in more detail in Note A to the Consolidated Financial Statements, we believe that the accounting policies discussed below are critical for understanding our historical and future performance.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.

Allowance for Credit Losses.

Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on individually evaluated loans, significant reliance on historical loss rates on homogeneous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Going forward, the methodology used to calculate the ACL will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized.

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

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

Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed.

We have determined our goodwill balance is all related to a single reporting unit and perform an annual impairment assessment on August 31st, or sooner if an impairment indicator exists.

We perform a quantitative impairment assessment and, upon performing the quantitative test, if the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

When performing the quantitative assessment of goodwill impairment, we estimate the fair value of our reporting unit using the market capitalization approach, based on quoted market prices of our securities, adjusted for the effect of a control premium.

Based on the results of the annual quantitative evaluation for 2023, the fair value of our single reporting unit exceeded its respective carrying value and did not result in impairment for the reporting unit.

The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value.

While the Company believes the judgments and assumptions used in the goodwill impairment test are reasonable, different assumptions or changes in general industry, market and macro-economic conditions could change the estimated fair values and, therefore, future impairment charges could be required, which could be material to the consolidated financial statements.

Select information regarding the ACL is under the "Allowance for Credit Losses" heading within this section below.

For further details on the ACL or goodwill, see Notes A and E to the Consolidated Financial Statements in “Item 8.

Financial Statements and Supplementary Data.”

UPDATE ON LUTHER BURBANK MERGER

On November 13, 2022, the Company announced that it had entered into a definitive agreement and plan of reorganization with Luther Burbank Corporation (“Luther Burbank”), pursuant to which Luther Burbank will be merged with and into WaFd with WaFd as the surviving institution, promptly followed by the merger of Luther Burbank’s wholly-owned bank subsidiary, Luther Burbank Savings, (“LBS”) with and into WaFd Bank (the “Merger”).

The proposed Merger is an all-stock transaction valued at approximately $654 million based upon the closing price of the Company’s Common Stock on November 11, 2022.

As part of the merger agreement, Luther Burbank shares of Common Stock will be converted into, and canceled in exchange for, the right to receive 0.3353 shares of the Company’s Common Stock, with Luther Burbank shareholders receiving cash in lieu of fractional shares of Company Common Stock.

The Company has submitted an application for approval of the Merger to the Washington State Department of Financial Institutions (“WDFI”), the Federal Deposit Insurance Corporation (“FDIC”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”).

Shareholders of both companies approved the Merger at special meetings of their respective shareholders on May 4, 2023.

On October 13, 2023, the WDFI approved the Merger subject to approval by the Federal Reserve and the FDIC.

The Company continues to work with the Federal Reserve and the FDIC to receive their approval.

Luther Burbank is headquartered in Santa Rosa, CA and operates 10 full service branches in

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

California, 1 full service branch in Washington, 6 loan production offices in California and one loan production office in Oregon.

If approved, the Merger will result in the Bank’s footprint expanding to include the state of California.

RECENT INDUSTRY DEVELOPMENTS

During the first calendar quarter of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures, primarily due to liquidity concerns.

This resulted in industry-wide uncertainty and concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system.

The Company took a number of preemptive actions which included proactive outreach to clients and actions to maximize funding sources in response to these recent developments.

These actions included increasing the target cash balance range, enhancing deposit flow and concentration monitoring, and utilizing the Federal Reserve's Bank Term Funding Program as an additional source of liquidity.

Despite these negative industry developments, the Company's liquidity position and balance sheet remain strong and the Company did not experience negative impacts to its financial condition outside of those observed generally across the industry, such as increasing funding costs.

The Company experienced net deposit inflows for the year ending September 30, 2023 with total deposits increasing slightly by 0.25%.

Our deposit base is highly diversified with little industry or customer concentration and 74% of total deposits are FDIC insured or collateralized as of September 30, 2023.

Furthermore, the Company remains well capitalized.

The Company's capital at September 30, 2023 remains at high levels with common equity tier 1 capital ("CET1") and total risk-based capital ratios of 10.37% and 13.31%, respectively, for the Company and 11.63% and 12.81% for the Bank, respectively, which exceed the regulatory minimum well-capitalized guidelines of 6.50% and 10.00%.

The FDIC has approved a final rule to implement a special assessment to recover the loss to the DIF following the recent bank closures.

The special assessment will be 13.4 basis points applied to estimated uninsured deposits greater than $5 billion, collected over eight quarterly assessment periods beginning in the first quarterly assessment period of 2024.

The assessment is subject to true ups based on the changes to the estimated loss from the receiverships and corrective amendments to the amount of uninsured deposits reported for December 31, 2022.

Management does not expect the resulting expense to be material to its financial results given the Company's low level of uninsured deposits.

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

ALLOWANCE FOR CREDIT LOSSES

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The Company recorded a provision for credit losses of $41,500,000 in 2023, compared to a provision of $3,000,000 for 2022.

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

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

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

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

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

These amounts are net of provision and recapture related to the unfunded commitments reserve.

In 2023, provisioning was largely due to adjustments resulting from one large charge-off taken, offset by reduced unfunded commitment balances.

For the year ended September 30, 2023, net charge-offs were $45,101,000, compared to recoveries of $3,508,000 in the prior year.

The ratio of the total ACL to total gross loans decreased to 1.03% as of September 30, 2023, as compared to 1.06% as of September 30, 2022.

The decrease was primarily related to a shift in mix of loan types within the portfolio.

Loan portfolios with lower historical losses, like multi-family and single family residential saw increased balances while those with higher historical losses, like construction, saw decreases.

The reserve for unfunded loan commitments was $24,500,000 as of September 30, 2023, compared to $32,500,000 as of September 30, 2022.

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

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

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

September 30, 2023 2022 2021 2020 2019

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After the required six consecutive payments are made, a management assessment may conclude that collection of the entire principal and interest due is still in doubt.

In those instances, the loan will remain on non-accrual.

In those instances, the loan will remain non-accrual.

A loan that defaults and is subsequently modified would impact the Company's delinquency trend, which is part of the qualitative risk factors component of the CECL methodology.

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Interest accrual ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expensed as incurred.

Costs incurred for the improvement or development of such property is capitalized.

Costs incurred for the improvement or development of such property are capitalized.

See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.

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Non-performing assets increased 30.0% to $57,924,000, or 0.26% of total assets, at September 30, 2023, compared to $44,554,000, or 0.21% of total assets, at September 30, 2022.

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

The increase was primarily a result of an increase of $15,888,000 in non-accrual loans partially offset by a $2,518,000 decline in real estate owned.

Other property owned of $3,353,000 as of September 30, 2023 is comprised entirely of a government guarantee related to equipment obtained via a commercial loan foreclosure.

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

TDRs declined to $46,117,000 as of September 30, 2023, from $56,817,000 as of September 30, 2022.

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Non-performing TDRs of $950,000 are included in NPAs.

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

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

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

Total NPAs and performing TDRs as a percent of total assets have declined to 0.46% as of September 30, 2023, from 0.48% as of September 30, 2022.

During 2023, there were no TDR additions and reductions of $10,700,223 due to prepayments and normal payment activity.

As of September 30, 2023, 84.7% of TDRs are comprised of single-family residential loans.

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

As of September 30, 2023, real estate owned totaled $4,149,000, a decrease of $2,518,000, or 37.8%, from $6,667,000 as of September 30, 2022, primarily due to sales of REO properties offset by new REO additions.

During 2023, the Company sold real estate owned properties for total net proceeds of $7,192,000.

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Cash and cash equivalents :

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

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

Cash and cash equivalents increased to $980,649,000 at September 30, 2023, as compared to $683,965,000 at September 30, 2022.

The change was meant to increase balance sheet liquidity and was used to fund growth in the loan portfolio.

The increase in cash was the result of the $40,759,000 increase in customer accounts and $1,525,000,000 increase in borrowings.

Available-for-sale investment securities :

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

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

Available-for-sale securities decreased $55,940,000, or 2.7%, during the year ended September 30, 2023, to $1,995,097,000, primarily due to principal repayments of $420,154,000, which exceeded purchases of $376,481,000, a $9,360,000 decline in the value of available-for-sale securities, and sales of $1,169,000.

As of September 30, 2023, the Company had a net unrealized loss on available-for-sale securities of $123,519,000, which is recorded net of tax within AOCI, compared to an unrealized loss of $111,700,000 as of September 30, 2022.

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

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The Company does not believe that any of its available-for-sale debt securities have credit loss impairment as of September 30, 2023, therefore, no allowance was recorded.

The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods.

The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolios as well as the economic conditions at future reporting periods.

Held-to-maturity investment securities :

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

Held-to-maturity securities decreased by $39,713,000 to $423,586,000, or 8.6%, during the year ended September 30, 2023, primarily due to principal repayments and maturities of $39,414,000.

There were no held-to-maturity securities sold during the year ended September 30, 2023.

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

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

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

As of September 30, 2023, the net unrealized loss on held-to-maturity securities was $68,398,000, compared to $56,439,000 the year prior, which management attributes to the change in interest rates since acquisition.

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

government agencies or U.S.

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These securities carry the explicit and/or implicit guarantee of the U.S.

government and have a long history of zero credit loss.

The Company did not record an allowance for credit losses for held-to-maturity securities as of September 30, 2022 as the investment portfolio consists primarily of U.S.

government agency mortgage-backed securities that management deems to have immaterial risk of loss.

The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods.

government and have a long history of zero credit loss, thus the Company did not record an allowance for credit losses for held-to-maturity securities as of September 30, 2023.

The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolios as well as the economic conditions at future reporting periods.

The table below shows the available-for-sale and held-for-investment securities portfolios categorized by maturity band.

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Loans receivable, net of related contra accounts, increased $1,362,986,000, or 8.5%, to $17,476,550,000 at September 30, 2023, from $16,113,564,000 one year earlier.

The increase resulted primarily from originations of $8,736,193,000 and loan purchases of $564,584,000, partially offset by loan repayments of $6,194,448,000 and a $773,187,000 increase to loans-in-process during the year ended September 30, 2022.

Commercial loan originations accounted for 77.7% of

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

total originations and consumer originations were 22.3% as the Company continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate.

The increase resulted primarily from originations of $4,702,156,000, a decrease to loans-in-process of $1,110,083,000 and loan purchases of $80,015,000, partially offset by loan repayments of $4,435,269,000 during the year ended September 30, 2023.

Commercial loan originations accounted for 73.9% of total originations and consumer originations were 26.1% as the Company continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate.

The following table presents loan balances by category and the year-over-year change.

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

September 30, 2023 September 30, 2022 Change

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Commercial & industrial

2,321,717 11.8 2,350,984 12.1 (29,267) (1.2)

Construction 3,318,994 16.9 3,784,388 19.5 (465,394) (12.3)

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Net loans $ 17,476,550 $ 16,113,564 $ 1,362,986 8.5%

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

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

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

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

September 30, 2023 Total Less than

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$ 17,653,757 $ 5,508,464 $ 2,604,126 $ 3,199,985 $ 6,341,182

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

The contractual loan payment period for residential mortgage loans originated by the Company normally ranges from 15 to 30 years.

Experience during recent years has indicated that, because of prepayments in connection with refinancing and sales of property, residential loans typically have a weighted average life of approximately five years.

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

The following tables provide information regarding loans receivable by loan class and geography.

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(1) Includes loans from outside of our eight state footprint.

CARES Act and PPP Program :

Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress, the Company offered payment deferrals on consumer loans and commercial loans.

The Company also made loans to small businesses through the Small Business Administration Paycheck Protection Program.

For further information on these activities, see Note D to the Consolidated Financial Statements in “Item 8.

Financial Statements and Supplementary Data” of this report.

Allowance for credit losses :

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Interest receivable was $87,003,000 as of September 30, 2023, an increase of $23,131,000, or 36.2%, since September 30, 2022.

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

The increase was the result of an 8.5% increase in loans receivable combined with the increase in interest rates.

Bank Owned Life Insurance :

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As of September 30, 2023, customer deposits totaled $16,070,329,000 compared with $16,029,570,000 at September 30, 2022, a $40,759,000, or 0.3%, increase.

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

During 2023, transaction accounts decreased by $1,926,214,000 or 15.2% while time deposits increased by $1,966,973,000 or 58.9%.

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

The following table shows customer deposits by account type.

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

Deposit Account Balance As a % of Total Deposits Weighted

September 30, 2023 September 30, 2022

($ in thousands) Deposit Account Balance As a % of Total Deposits Weighted

Average Rate Deposit Account Balance As a % of Total Deposits Weighted

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3.00% to 3.99% 2,185,246 1,313,508 385,583 — — — 3,884,337

4.00% to 4.99% 60,797 1,459 — 404,597 65,300 — 532,153

5.00% and higher 98,920 202,412 98,209 36,225 — — 435,766

Total $ 2,383,793 $ 1,517,379 $ 732,141 $ 545,358 $ 96,569 $ 29,776 $ 5,305,016

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however, the Bank believes that by competitively pricing these certificates, levels deemed appropriate by management can be achieved on a continuing basis.

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

At September 30, 2023, the Bank had $1,779,272,000 of time deposits in amounts of $250,000 or more outstanding, maturing as follows:

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When the maturity is greater than one year but less than four years, the penalty is 180 days of interest.

When the maturity is

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

greater than four years, the penalty is 365 days of interest.

When the maturity is greater than four years, the penalty is 365 days of interest.

Early withdrawal penalty fee income for the years ended 2023, 2022 and 2021 amounted to $1,618,000, $267,000 and $198,000, respectively.

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Financial Statements and Supplementary Data” of this report.

FHLB advances :

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

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

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

Total borrowings increased to $3,650,000,000 as of September 30, 2023, as compared to $2,125,000,000 at September 30, 2022.

Growth in loans receivable was largely funded by new borrowings from both the FHLB and FRB.

The weighted average rate for borrowings was 3.98% as of September 30, 2023, versus 2.02% at September 30, 2022, the increase being primarily due to higher rates on new short-term borrowings.

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

Taking into account these hedges, the weighted average effective maturity of FHLB advances at September 30, 2023 is 2.01 years.

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

RESULTS OF OPERATIONS

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For the year ended September 30, 2023, net interest income was $690,234,000, an increase of $95,645,000 or 16.1% from the year ended September 30, 2022.

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

Net interest margin was 3.40% for the year ended September 30, 2023 compared to 3.16% in the prior year.

The increase in net interest income was primarily due to rising interest rates.

The average rate earned on interest-earning assets grew by 159 basis points to 5.13% while the average rate paid on interest-bearing liabilities increased by 168 basis points to 2.18%.

The change in net interest income was also impacted by the $1,514,820,000, or 8.1%, increase in interest earning assets while average interest-bearing liabilities increased by $1,698,461,000 or 11.7%.

During 2023, the average balance of loans receivable increased $2,011,903,000 or 13.3%, while the combined average balances of mortgage backed securities, other investment securities and cash decreased by $536,288,000 or 14.7%.

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

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

Average noninterest-bearing deposits decreased by $279,150,000 over the same period.

Rate/Volume Analysis

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The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

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

Twelve Months Ended September 30,

Increase (Decrease) Due to 2021 vs.

Increase (Decrease) Due to

Increase (Decrease) Due to 2021 vs.

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Customer accounts 570 193,622 194,192 2,170 (1,442) 728 11,184 (69,183) (57,999)

FHLB advances and other borrowings (9,002) (6,457) (15,459) (6,003) (1,254) (7,257) (35) (16,710) (16,745)

38,084 48,675 86,759 (9,002) (6,457) (15,459) (6,003) (1,254) (7,257)

All interest-bearing liabilities 38,654 242,297 280,951 (6,832) (7,899) (14,731) 5,181 (70,437) (65,256)

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The Company recorded a provision for credit losses of $41,500,000 in 2023, compared to a provision of $3,000,000 for 2022.

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

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

In 2023, provisioning was largely due to adjustments made as a result of one large charge-off taken, offset by reduced unfunded commitment balances.

For the year ended September 30, 2023, net charge-offs were $45,101,000, compared to recoveries of $3,508,000 in the prior year.

Other Income :

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

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

Other income was $52,201,000 for the year ended September 30, 2023, a decrease of $14,171,000, or 21.4%, from $66,372,000 for the year ended September 30, 2022.

The decrease is primarily due to unrealized gains recorded in the prior year for certain equity investments that resulted in small losses in the current year.

This change made up $13,992,730 of the overall decrease.

Other Expense :

Operating expense was $376,035,000 for the year ended September 30, 2023, an increase of $17,460,000, or 4.9%, from the $358,575,000 for the year ended September 30, 2022.

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

Compensation and benefits costs increased $2,617,000 or 1.3% year-over-year primarily due to annual merit increases and investments in strategic initiatives combined with reduced cost capitalization as loan originations have decreased.

FDIC Premiums increased $10,494,000 in 2023 compared to the prior year as a result of increase FDIC assessment rates.

Information technology costs increased by $2,245,000 in 2023 as compared to 2022 as we continue to execute becoming a digital first bank.

Also, the Company realized expenses of $2,991,000 in 2023 related to our pending merger with Luther Burbank Corporation.

The Company’s efficiency ratio was 50.7% for 2023 as compared to 54.3% for the prior year.

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Total operating expense for the years ended September 30, 2023, and 2022 were 1.74% and 1.78%, respectively, of average assets.

Gain (Loss) on Real Estate Owned :

Gain on Real Estate Owned :

Net gain on real estate owned was $176,000 for the year ended September 30, 2023, compared to a net gain of $651,000 for the year ended September 30, 2022.

This amount includes ongoing maintenance expense, periodic valuation adjustments, and gains (losses) on sales of REO.

This amount includes ongoing maintenance expense, periodic valuation adjustments, and gains on sales of REO.

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

Income Tax Expense :

Income tax expense was $67,650,000 for the year ended September 30, 2023, an increase of $3,943,000, or 6.2%, from the $63,707,000 for the year ended September 30, 2022.

The increase is mostly due to a 28.7% increase in pre-tax income.

The increase is mostly due to an 8.3% increase in pre-tax income.

The effective tax rate for 2023 was 20.81% as compared to 21.23% for the year ended September 30, 2022.

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For management's review of the factors that affected our results of operations for the years ended September 30, 2022 and 2021 refer to our Annual Report on Form 10-K for the year ended September 30, 2022, which was filed with the Securities and Exchange Commission on November 18, 2022.

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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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.

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

The Bank has elected to utilize the Federal Reserve's Bank Term Funding program to leverage its highly favorable terms to fortify the Bank's liquidity position.

These borrowings are repayable at any time without penalty and are the lowest cost funding source available.

Based on collateral pledged as of September 30, 2023, the Bank had $1,119,000,000 of additional borrowing capacity within the BTFP.

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

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

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

The Company's cash and cash equivalents were $980,649,000 at September 30, 2023, which is a 43.4% increase from the balance of $683,965,000 as of September 30, 2022.

The change was meant to increase balance sheet liquidity and was used to fund growth in the loan portfolio.

The increase in cash was the result of a $40,759,000 increase in customer accounts and $1,525,000,000 increase in borrowings.

The net loans balance increased by $1,362,986,000 during the year ended September 30, 2023.

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

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

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

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(1) Includes non-maturing customer transaction accounts.

(2) Represents contractual maturities of FHLB advances.

(2) Represents contractual maturities of FHLB advances and FRB borrowings.

Taking into account cash flow hedges, the weighted average effective maturity of FHLB advances at September 30, 2023 is 2.01 years.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis