Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date for the previous year.
In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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.
Goodwill. 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
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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.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLOWANCE FOR CREDIT LOSSES
The following table provides detail regarding the Company's allowance for credit losses (periods prior to 2020 applied the incurred loss model as the current expected credit loss methodology ("CECL") was implemented in 2020).
Twelve Months Ended September 30, 2023 2022 2021 2020 2019
(In thousands)
Beginning balance $ 172,808 $ 171,300 $ 166,955 $ 131,534 $ 129,257
Charge-offs:
Commercial loans
Multi-Family — — — — —
Commercial Real Estate — 529 — 111 428
Commercial & Industrial Loans 45,856 1,202 31 4,196 5,782
Construction — — — — —
Land – Acquisition & Development — 11 2 11 107
Total commercial loans 45,856 1,742 33 4,318 6,317
Consumer loans
Single-Family Residential 34 — 106 131 268
Construction – Custom — — — — 1,973
Land – Consumer Lot Loans — 27 — 237 804
HELOC — — — — 1,086
Consumer 580 370 286 1,069 1,028
Total consumer loans 614 397 392 1,437 5,159
46,470 2,139 425 5,755 11,476
Recoveries:
Commercial loans
Multi-Family — — — 498 —
Commercial Real Estate 103 984 2,789 2,447 1,102
Commercial & Industrial Loans 93 73 92 443 3,443
Construction — 2,179 — 188 99
Land – Acquisition & Development 78 70 622 2,070 7,457
Total commercial loans 274 3,306 3,503 5,646 12,101
Consumer loans
Single-Family Residential 568 1,002 2,026 1,394 1,020
Construction – Custom — — — — —
Land – Consumer Lot Loans 23 48 168 639 719
HELOC 2 351 52 95 46
Consumer 502 940 1,021 1,252 1,167
Total consumer loans 1,095 2,341 3,267 3,380 2,952
1,369 5,647 6,770 9,026 15,053
Net charge-offs (recoveries) 45,101 (3,508) (6,345) (3,271) (3,577)
ASC 326 Adoption Impact — — — 17,750 —
Provision (release) for loan losses and transfers 49,500 (2,000) (2,000) 14,400 (1,300)
Ending balance (1) $ 177,207 $ 172,808 $ 171,300 $ 166,955 $ 131,534
Ratio of net charge-offs (recoveries) to average loans outstanding 0.26 % (0.02) % (0.05) % (0.03) % (0.03) %
(1) This does not include a reserve for unfunded commitments of $24,500,000, $32,500,000, $27,500,000, $25,000,000 and $6,900,000 as of September 30, 2023, 2022, 2021, 2020 and 2019 respectively.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows changes in the Company's allowance for credit losses since the prior year.
September 30, 2023 September 30, 2022 $ Change % Change
(In thousands)
Allowance for credit losses:
Commercial loans
Multi-family $ 13,155 $ 12,013 $ 1,142 10 %
Commercial real estate 28,842 25,814 3,028 12 %
Commercial & industrial 58,773 57,210 1,563 3 %
Construction 29,408 26,161 3,247 12 %
Land - acquisition & development 7,016 12,278 (5,262) (43) %
Total commercial loans 137,194 133,476 3,718 3 %
Consumer loans
Single-family residential 28,029 25,518 2,511 10 %
Construction - custom 2,781 3,410 (629) (18) %
Land - consumer lot loans 3,512 5,047 (1,535) (30) %
HELOC 2,859 2,482 377 15 %
Consumer 2,832 2,875 (43) (1) %
Total consumer loans 40,013 39,332 681 2 %
Total allowance for loan losses 177,207 172,808 4,399 3 %
Reserve for unfunded commitments 24,500 32,500 (8,000) (25) %
Total allowance for credit losses $ 201,707 $ 205,308 $ (3,601) (2) %
The allowance for loan losses increased by $4,399,000, or 2.55%, from $172,808,000 as of September 30, 2022, to $177,207,000 at September 30, 2023. As of September 30, 2023, the allowance of $177,207,000 is for loans that are evaluated on a pooled basis, which was comprised of $107,049,000 related to the quantitative component and $70,158,000 related to management's qualitative overlays.
The Company recorded a provision for credit losses of $41,500,000 in 2023, compared to a provision of $3,000,000 for 2022. 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 $32,500,000 as of September 30, 2022.
Management believes the total ACL is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the amount of the Company’s allowance for loan losses by loan portfolio and class (periods prior to 2020 applied the incurred loss model as CECL was implemented in 2020).
September 30, 2023 2022 2021 2020 2019
Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2)
($ in thousands)
Commercial loans
Multi-family $ 13,155 16.4 % 0.5 % $ 12,013 16.2 % 0.5 % $ 16,949 16.3 % 0.8 % $ 13,853 11.8 % 0.9 % $ 7,391 11.7 % 0.5 %
Commercial real estate 28,842 18.8 0.9 25,814 19.1 0.8 23,437 17.4 1.0 22,516 14.4 1.2 13,170 13.5 0.8
Commercial & industrial 58,773 12.9 2.6 57,210 14.2 2.5 45,957 16.3 2.0 38,665 16.5 1.8 31,450 10.5 2.5
Construction 29,408 10.4 1.6 26,161 8.7 1.9 25,585 7.9 2.3 24,156 10.5 1.8 32,304 9.6 2.8
Land – acquisition & development 7,016 0.9 4.7 12,278 1.3 5.8 13,447 1.3 7.5 10,733 1.2 7.0 9,155 1.3 5.7
Total commercial loans 137,194 133,476 125,375 109,923 93,470
Consumer loans
Single-family residential 28,029 36.4 0.4 25,518 35.4 0.4 30,978 35.5 0.6 45,186 40.8 0.9 30,988 48.2 0.5
Construction – custom 2,781 1.8 0.9 3,410 2.4 0.9 4,907 2.5 1.4 3,555 2.3 1.2 1,369 2.1 0.5
Land – consumer lot loans 3,512 0.7 2.9 5,047 0.9 3.4 4,939 1.0 3.4 2,729 0.8 2.7 2,143 0.8 2.2
HELOC 2,859 1.3 1.2 2,482 1.3 1.2 2,390 1.2 1.5 2,571 1.1 1.8 1,103 1.2 0.8
Consumer 2,832 0.4 4.2 2,875 0.5 4.0 2,711 0.6 3.2 2,991 0.6 3.6 2,461 1.1 1.9
Total consumer loans 40,013 39,332 45,925 57,032 38,064
Total allowance for loan losses (3) $ 177,207 100 % $ 172,808 100 % $ 171,300 100 % $ 166,955 100 % $ 131,534 100 %
___________________
(1) Represents the loans receivable for each respective loan class as a % of total loans receivable.
(2) Represents the allowance for each respective loan class as a % of loans receivable for that same loan class. The underlying commercial & industrial loan balances for September 30, 2023, 2022, 2021, 2020 include PPP loans for which no allowance was recorded. These PPP loan balances were $1,000,000, $10,000,000, $312,000,000 and $745,000,000 as of September 30, 2023, 2022, 2021, and 2020 respectively.
(3) This does not include a reserve for unfunded commitments of $24,500,000, $32,500,000, $27,500,000, $25,000,000 and $6,900,000 as of September 30, 2023, 2022, 2021, 2020 and 2019, respectively.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET QUALITY
Troubled debt restructured loans ("TDRs"). TDRs are reserved for under the Company's CECL methodology. Most TDRs are performing and accruing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 basis points for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period.
Concessions for construction, land A&D and multi-family loans are typically an extension of maturity combined with a rate reduction of normally 100 basis points. Before granting approval to modify a loan in a TDR, a borrower’s ability to repay is considered by evaluating current income levels, debt-to-income ratio, credit score, loan payment history and an updated evaluation of the secondary repayment source.
If a loan is on non-accrual status before becoming a TDR, it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on accrual status before it becomes a TDR, and it is concluded that a full repayment is highly probable, it will remain on accrual status following restructuring. If the homogeneous restructured loan does not perform, it is placed in non-accrual status when it is 90 days delinquent. For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. After the required six consecutive payments are made, a management assessment may conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain non-accrual. A loan that defaults and is subsequently modified would impact the Company's delinquency trend, which is part of the qualitative risk factors component of the CECL methodology. Any modified loan that re-defaults and is charged-off would impact the quantitative component of the CECL methodology.
Non-Performing Assets. When a borrower violates a condition of a loan, the Bank attempts to cure the default by contacting the borrower. In most cases, defaults are cured promptly. If the default is not cured within an appropriate time frame, typically 90 days, the Bank may institute appropriate action to collect the loan, such as making demand for payment or initiating foreclosure proceedings on the collateral. If foreclosure occurs, the collateral will typically be sold at public auction and may be purchased by the Bank.
Loans are placed on nonaccrual status when, in the judgment of management, the probability of collecting interest or principal is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days past due or more. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.
The Bank will consider modifying the interest rate and terms of a loan if it determines that a modification is deemed to be the best option available for collection in full or to minimize the loss to the Bank. Most loans restructured in TDRs are accruing and performing loans where the borrower has proactively approached the Bank about a modification due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The modification of these loans is typically a payment reduction through a rate reduction of between 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness generally is not an available option for restructured loans. As of September 30, 2023, single-family residential loans comprised 84.7% of restructured loans. The Bank reserves for restructured loans within its pool based general reserve methodology, except in instances where management considers it appropriate to evaluate individually.
Real estate acquired by foreclosure or deed-in-lieu thereof (“REO” or “Real Estate Owned”) is classified as real estate held for sale. When property is acquired, it is recorded at the fair market value less estimated selling costs at the date of acquisition. Interest accrual ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expensed as incurred. Costs incurred for the improvement or development of such property are capitalized. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth information regarding the Company's restructured loans and non-performing assets.
September 30, 2023 2022 2021 2020 2019
(In thousands)
Performing restructured loans $ 45,167 $ 55,823 $ 63,655 $ 89,072 $ 116,659
Non-performing restructured loans 950 994 1,473 2,336 5,018
Total restructured loans 46,117 56,817 65,128 91,408 121,677
Non-accrual loans:
Commercial loans
Multi-family 5,127 5,912 475 — —
Commercial real estate 23,435 4,691 8,038 3,771 5,835
Commercial & industrial 6,082 5,693 365 329 1,292
Construction — — 505 1,669 —
Land – acquisition & development — — 2,340 — 169
Total commercial loans 34,644 16,296 11,723 5,769 7,296
Consumer loans
Single-family residential 14,918 17,450 19,320 22,431 25,271
Construction – custom 88 435 — — —
Land – consumer lot loans 9 84 359 243 246
HELOC 736 233 287 553 907
Consumer 27 36 60 60 11
Total consumer loans 15,778 18,238 20,026 23,287 26,435
Total non-accrual loans (1) 50,422 34,534 31,749 29,056 33,731
Real estate owned 4,149 6,667 8,204 4,966 6,781
Other property owned 3,353 3,353 3,672 3,673 3,314
Total non-performing assets 57,924 44,554 43,625 37,695 43,826
Total non-performing assets and performing restructured loans $ 103,091 $ 100,377 $ 107,280 $ 126,767 $ 160,485
Total non-performing assets and restructured loans as a percent of total assets 0.46 % 0.48 % 0.55 % 0.67 % 0.97 %
Total non-performing assets to total assets 0.26 % 0.21 % 0.22 % 0.20 % 0.27 %
___________________
(1) For the year ended September 30, 2023, the Company recognized $2,824,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $1,981,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than twelve months of interest for some of the non-accrual loans that were brought current or paid off. In addition to the non-accrual loans reflected in the above table, the Company had $263,075,000 of loans that were less than 90 days delinquent at September 30, 2023 but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total non-performing assets and performing restructured loans as a percent of total assets would have increased to 1.63% at September 30, 2023. For a discussion of the Company's policy for placing loans on non-accrual status, see Note A to the Consolidated Financial Statements included in Item 8 of this report.
Non-performing assets increased 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 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.
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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. As of September 30, 2023, $45,167,000 or 97.9% of TDRs were performing. Non-performing TDRs of $950,000 are included in NPAs. 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, 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. The majority of REO properties are former bank premises that are expected to be sold.
The ratio of the allowance for loan losses to non-accrual loans decreased to 351% as of September 30, 2023, from 500% as of September 30, 2022.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents : 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 $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. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. The remaining securities are issued by highly-rated municipalities or corporate borrowers. The Company does not believe that any of its available-for-sale debt securities have credit loss impairment as of September 30, 2023, therefore, no allowance was recorded. 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 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. As of September 30, 2023, the net unrealized loss on held-to-maturity securities was $68,398,000, compared to $56,439,000 the year prior, which management attributes to the change in interest rates since acquisition.
All of the Company’s held-to-maturity debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss, thus the Company did not record an allowance for credit losses for held-to-maturity securities as of September 30, 2023. The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolios as well as the economic conditions at future reporting periods.
The table below shows the available-for-sale and held-for-investment securities portfolios categorized by maturity band.
September 30, 2023 Amortized
Cost Weighted Average Yield
($ in thousands)
Due in less than 1 year $ 3,500 6.06 %
Due after 1 year through 5 years 231,307 4.61
Due after 5 years through 10 years 426,180 4.55
Due after 10 years 1,881,215 4.27
$ 2,542,202 4.35 %
For further information on our investment portfolio, see Note C to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Loans receivable: Loans receivable, net of related contra accounts, increased $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 $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 $4,435,269,000 during the year ended September 30, 2023. Commercial loan originations accounted for 73.9% of total originations and consumer originations were 26.1% as the Company continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate.
The following table presents loan balances by category and the year-over-year change.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2023 September 30, 2022 Change
($ in thousands) ($ in thousands) $ %
Gross loans by category
Commercial loans
Multi-family $ 2,907,086 14.8 % $ 2,645,801 13.6 % $ 261,285 9.9%
Commercial real estate 3,344,959 17.0 3,133,660 16.2 211,299 6.7
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)
Land - acquisition & development 201,538 1.0 291,301 1.5 (89,763) (30.8)
Total commercial loans 12,094,294 61.6 12,206,134 63.0 (111,840) (0.9)
Consumer loans
Single-family residential 6,451,270 32.8 5,771,862 29.8 679,408 11.8
Construction - custom 672,643 3.4 974,652 5.0 (302,009) (31.0)
Land - consumer lot loans 125,723 0.6 153,240 0.8 (27,517) (18.0)
HELOC 234,410 1.2 203,528 1.0 30,882 15.2
Consumer 70,164 0.4 75,543 0.4 (5,379) (7.1)
Total consumer loans 7,554,210 38.4 7,178,825 37.0 375,385 5.2
Total gross loans 19,648,504 100 % 19,384,959 100 % 263,545 1.4%
Less:
Allowance for loan losses 177,207 172,808 4,399 2.5
Loans in process 1,895,940 3,006,023 (1,110,083) (36.9)
Net deferred fees, costs and discounts 98,807 92,564 6,243 6.7
Total loan contra accounts 2,171,954 3,271,395 (1,099,441) (33.6)
Net loans $ 17,476,550 $ 16,113,564 $ 1,362,986 8.5%
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
1 Year 1 to 5
Years 5 to 15
Years After 15
Years
(In thousands)
Commercial loans
Multi-family $ 2,886,594 $ 867,201 $ 1,106,697 $ 886,054 $ 26,642
Commercial real estate 3,310,101 1,243,850 979,318 1,078,645 8,288
Commercial & industrial 2,315,318 1,657,668 325,846 307,816 23,988
Construction 1,838,936 1,226,231 138,925 459,569 14,211
Land - acquisition & development 156,661 144,912 9,716 2,033 —
Total commercial loans 10,507,610 5,139,862 2,560,502 2,734,117 73,129
Consumer loans
Single-family residential 6,388,990 75,988 31,645 384,237 5,897,120
Construction - custom 324,451 927 — 37,865 285,659
Land - consumer lot loans 124,842 22,519 7,582 9,469 85,272
HELOC 237,754 237,636 118 — —
Consumer 70,110 31,532 4,279 34,297 2
Total consumer loans 7,146,147 368,602 43,624 465,868 6,268,053
$ 17,653,757 $ 5,508,464 $ 2,604,126 $ 3,199,985 $ 6,341,182
48
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.
The following tables provide information regarding loans receivable by loan class and geography.
September 30, 2023 Multi-
family Commercial
Real Estate Commercial
and Industrial Construction Land -
A & D Single -
Family
Residential Construction -
custom Land -
Lot Loans Consumer HELOC Total
(In thousands)
Washington $ 298,226 $ 471,506 $ 838,104 $ 319,438 $ 49,341 $ 3,097,811 $ 169,091 $ 68,492 $ 31,288 $ 127,938 $ 5,471,235
Oregon 522,804 405,230 190,979 206,980 51,643 893,228 34,083 13,221 312 31,693 2,350,173
Arizona 714,683 537,779 110,354 222,113 2,600 789,512 31,715 19,174 129 27,807 2,455,866
Utah 365,150 305,671 93,525 513,443 28,646 557,600 38,668 3,895 21,949 10,785 1,939,332
Texas 417,253 777,543 706,216 329,953 9,468 157,540 1,987 92 11 3,048 2,403,111
New Mexico 138,083 269,856 16,398 72,468 6,050 210,044 9,249 2,777 449 9,699 735,073
Idaho 167,379 186,680 19,119 80,090 4,439 381,482 21,774 12,240 48 17,989 891,240
Nevada 172,805 162,625 47,994 36,072 4,474 284,771 17,884 4,951 23 8,795 740,394
Other 90,211 193,211 292,629 58,379 — 17,002 — — 15,901 — 667,333
$ 2,886,594 $ 3,310,101 $ 2,315,318 $ 1,838,936 $ 156,661 $ 6,388,990 $ 324,451 $ 124,842 $ 70,110 $ 237,754 $ 17,653,757
Percentage by geographic area
September 30, 2023 Multi-
family Commercial
Real Estate Commercial
and Industrial Construction Land -
A & D Single -
Family
Residential Construction -
custom Land -
Lot Loans Consumer HELOC Total
As % of total gross loans
Washington 1.7 % 2.7 % 4.7 % 1.8 % 0.3 % 17.5 % 1.0 % 0.4 % 0.2 % 0.7 % 31.0 %
Oregon 3.0 2.3 1.1 1.1 0.3 5.1 0.2 0.1 — 0.1 13.3
Arizona 4.0 3.0 0.6 1.3 — 4.5 0.2 0.1 — 0.2 13.9
Utah 2.1 1.8 0.5 2.9 0.2 3.2 0.1 — 0.1 0.1 11.0
Texas 2.4 4.4 4.0 1.9 0.1 0.8 — — — — 13.6
New Mexico 0.8 1.5 0.1 0.4 — 1.2 0.1 — — 0.1 4.2
Idaho 0.9 1.1 0.1 0.5 — 2.2 0.1 0.1 — 0.1 5.1
Nevada 1.0 0.9 0.3 0.2 — 1.6 0.1 — — — 4.1
Other 0.5 1.1 1.7 0.3 — 0.1 — — 0.1 — 3.8
16.4 % 18.8 % 13.1 % 10.4 % 0.9 % 36.2 % 1.8 % 0.7 % 0.4 % 1.3 % 100 %
Percentage by geographic area as a % of each loan type
September 30, 2023 Multi-
family Commercial
Real Estate Commercial
and Industrial Construction Land -
A & D Single -
Family
Residential Construction -
custom Land -
Lot Loans Consumer HELOC
As % of total gross loans
Washington 10.3 % 14.3 % 36.2 % 17.4 % 31.5 % 48.5 % 52.1 % 54.9 % 44.6 % 53.8 %
Oregon 18.1 12.3 8.2 11.3 33.0 14.0 10.5 10.6 0.4 13.3
Arizona 24.8 16.2 4.8 12.1 1.6 12.3 9.8 15.3 0.2 11.7
Utah 12.6 9.2 4.1 27.9 18.3 8.7 11.9 3.1 31.3 4.5
Texas 14.5 23.5 30.5 17.9 6.0 2.5 0.6 0.1 — 1.3
New Mexico 4.8 8.2 0.7 3.9 3.9 3.3 2.9 2.2 0.7 4.1
Idaho 5.8 5.6 0.8 4.4 2.8 6.0 6.7 9.8 0.1 7.6
Nevada 6.0 4.9 2.1 1.9 2.9 4.4 5.5 4.0 — 3.7
Other 3.1 5.8 12.6 3.2 — 0.3 — — 22.7 —
100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the change in the geographic distribution by state of the loan portfolio since the prior year.
September 30, 2023 2022 Change
Washington 31.0 % 32.5 % (1.5)
Oregon 13.3 13.8 (0.5)
Arizona 13.9 14.3 (0.4)
Utah 11.0 9.6 1.4
Texas 13.6 12.2 1.4
New Mexico 4.2 4.4 (0.2)
Idaho 5.1 5.1 —
Nevada 4.1 4.2 (0.1)
Other (1) 3.8 3.9 (0.1)
100 % 100 %
(1) Includes loans from outside of our eight state footprint.
Allowance for credit losses : For details, see the “Allowance for Credit Losses" section above in this report.
Non-performing assets : For details, see the “Asset Quality" section above in this report.
Troubled debt restructured loans ("TDRs") : For details, see the “Asset Quality" section above in this report.
Real estate owned : For details, see the “Asset Quality" section above in this report.
Interest receivable : Interest receivable was $87,003,000 as of September 30, 2023, an increase of $23,131,000, or 36.2%, since September 30, 2022. The increase was the result of an 8.5% increase in loans receivable combined with the increase in interest rates.
Bank Owned Life Insurance : Bank-owned life insurance increased to $242,919,000 as of September 30, 2023 from $237,931,000 as of September 30, 2022, primarily as a result of increases in the cash surrender value of the policies. The investments in bank-owned life insurance serve to assist in funding growing employee benefit costs.
Intangible assets : The Company's intangible assets totaled $310,619,000 at September 30, 2023 compared to $309,009,000 as of September 30, 2022. The balance at September 30, 2023 is comprised of $304,750,000 of goodwill and the unamortized balance of the core deposit and other intangibles of $5,869,000.
Customer accounts : 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 2023, transaction accounts decreased by $1,926,214,000 or 15.2% while time deposits increased by $1,966,973,000 or 58.9%.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows customer deposits by account type.
September 30, 2023 September 30, 2022
($ in thousands) Deposit Account Balance As a % of Total Deposits Weighted
Average Rate Deposit Account Balance As a % of Total Deposits Weighted
Average Rate
Non-interest checking $ 2,706,448 16.8 % — % $ 3,266,734 20.4 % — %
Interest checking 3,882,715 24.2 2.28 3,497,795 21.8 0.90
Savings 817,547 5.1 0.21 1,059,093 6.6 0.13
Money market 3,358,603 20.9 1.48 4,867,905 30.4 0.49
Time deposits 5,305,016 33.0 3.77 3,338,043 20.8 0.74
Total $ 16,070,329 100 % 2.12 % $ 16,029,570 100 % 0.51 %
The following table shows the geographic distribution by state for customer deposits.
($ in thousands) September 30, 2023 September 30, 2022 $ Change % Change
Washington $ 7,627,674 47.5 % $ 7,209,123 45.0 % $ 418,551 5.8 %
Oregon 2,820,338 17.5 2,878,933 18.0 (58,595) (2.0) %
Arizona 1,635,345 10.2 1,625,957 10.1 9,388 0.6 %
New Mexico 1,474,986 9.2 1,363,525 8.5 111,461 8.2 %
Idaho 972,424 6.1 1,052,550 6.6 (80,126) (7.6) %
Utah 662,192 4.1 802,635 5.0 (140,443) (17.5) %
Nevada 495,794 3.1 534,655 3.3 (38,861) (7.3) %
Texas 381,576 2.4 562,192 3.5 (180,616) (32.1) %
$ 16,070,329 100 % $ 16,029,570 100 % $ 40,759 0.3 %
The following table sets forth, by various interest rate categories, the amount of fixed-rate time deposits that mature during the periods indicated.
Maturing in
September 30, 2023 1 to 3
Months 4 to 6
Months 7 to 12
Months 13 to 24
Months 25 to 36
Months 37 to 60
Months Total
(In thousands)
Fixed-rate time deposits:
Under 1.00% $ 38,206 $ — $ — $ 40,274 $ 31,269 $ 29,776 $ 139,525
1.00% to 1.99% — — — 64,262 — — 64,262
2.00% to 2.99% 624 — 248,349 — — — 248,973
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
Historically, a significant number of time deposit account holders roll over their balances into new time deposits of the same term at the Bank’s then current rate. To ensure a continuity of this trend, the Bank expects to continue to offer market rates of interest. The ability to retain maturing time deposits is difficult to project; however, the Bank believes that by competitively pricing these certificates, levels deemed appropriate by management can be achieved on a continuing basis.
51
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: $763,615,000 within 3 months; $419,791,000 over 3 months through 6 months; $281,404,000 over 6 months through 12 months; and $314,462,000 thereafter.
Time deposits with a maturity of one year or less have penalties for premature withdrawal equal to 90 days of interest. When the maturity is greater than one year but less than four years, the penalty is 180 days of interest. When the maturity is 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.
For additional details on customer accounts, including uninsured deposits, see Note K to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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.
RESULTS OF OPERATIONS
COMPARISON OF 2023 RESULTS WITH 2022
Net Income : Net income increased $21,096,000, or 8.9%, to $257,426,000 for the year ended September 30, 2023, as compared to $236,330,000 for the year ended September 30, 2022. The change was due to the factors described below.
Net Interest Income : 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. 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 decreased by $279,150,000 over the same period.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Twelve Months Ended September 30,
2023 vs. 2022
Increase (Decrease) Due to
2022 vs. 2021
Increase (Decrease) Due to 2021 vs. 2020
Increase (Decrease) Due to
Volume Rate Total Volume Rate Total Volume Rate Total
(In thousands) (In thousands) (In thousands)
Interest income:
Loan portfolio $ 87,565 $ 210,911 $ 298,476 $ 74,710 $ (10,778) $ 63,932 $ 40,365 $ (48,413) $ (8,048)
Mortgage-backed securities 5,760 11,092 16,852 (3,101) 4,725 1,624 (16,011) (8,593) (24,604)
Investments (1) (13,400) 74,668 61,268 (9,347) 18,540 9,193 18,824 (15,827) 2,997
All interest-earning assets 79,925 296,671 376,596 62,262 12,487 74,749 43,178 (72,833) (29,655)
Interest expense:
Customer accounts 570 193,622 194,192 2,170 (1,442) 728 11,184 (69,183) (57,999)
Borrowings
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)
Change in net interest income $ 41,271 $ 54,374 $ 95,645 $ 69,094 $ 20,386 $ 89,480 $ 37,997 $ (2,396) $ 35,601
___________________
(1) Includes interest on cash equivalents and dividends on stock of the FHLB of Des Moines and FRB of San Francisco.
Provision (Release) for Credit Losses : The Company recorded a provision for credit losses of $41,500,000 in 2023, compared to a provision of $3,000,000 for 2022. 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 $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 $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. The number of staff, including part-time employees on a full-time equivalent basis, was 2,120 and 2,132 at September 30, 2023 and 2022, respectively. Total operating expense for the years ended September 30, 2023, and 2022 were 1.74% and 1.78%, respectively, of average assets.
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 on sales of REO.
53
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 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. The effective tax rate of 20.81% for 2023 differs from the statutory rate of 21% mainly due to the effects of state taxes, tax exempt income, tax credit investments and certain differences in book and tax deductions.
COMPARISON OF 2022 RESULTS WITH 2021
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.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, borrowings, repayments and sales of investments and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments. Additionally, the Company earns fee income for loan, deposit, insurance and other services.
On February 8, 2021, in connection with an underwritten public offering, the Company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock (“Series A Preferred Stock”). Net proceeds, after underwriting discounts and expenses, were $293,325,000. The public offering consisted of the issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series A Preferred Stock, at a public offering price of $25.00 per depositary share. Holders of the depositary shares are entitled to all proportional rights and preferences of the Series A Preferred Stock (including dividend, voting, redemption and liquidation rights). The depositary shares are traded on the NASDAQ under the symbol "WAFDP." The Series A Preferred Stock is redeemable at the option of the Company, subject to all applicable regulatory approvals, on or after April 15, 2026.
The Company's shareholders' equity at September 30, 2023, was $2,426,426,000, or 10.80% of total assets, as compared to $2,274,260,000, or 10.95% of total assets, at September 30, 2022. The Company's shareholders' equity was impacted in the year by net income of $257,426,000, the payment of $63,792,000 in Common Stock dividends, payment of $14,625,000 in preferred stock dividends, $30,463,000 of treasury stock purchases, as well as other comprehensive loss of $5,560,000. The Company paid out 26.6% of its 2023 earnings in cash dividends to common shareholders, compared with 28.0% last year. For the year ended September 30, 2023, the Company returned 36.6% of net income to shareholders in the form of cash dividends and share repurchases as compared to 27% for the year ended September 30, 2022. Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment. The Company’s share repurchase program may be modified, suspended or terminated at any time, and the timing and amount of share repurchases is subject to market conditions and the market price of the Company’s Common Stock, as well as other factors.
The Bank has a credit line with the FHLB of up to 45% of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity if needed. Based on collateral pledged as of September 30, 2023, the Bank had $2,357,588,000 of additional borrowing capacity at the FHLB.
The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term advance agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB.
54
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 $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.
The following table presents the Company's significant fixed and determinable contractual obligations, within the categories described below, by contractual maturity or payment amount.
September 30, 2023 Total Less than
1 Year 1 to 5
Years Over 5
Years
(In thousands)
Customer accounts (1) $ 16,070,329 $ 15,398,626 $ 671,703 $ —
Debt obligations (2) 3,650,000 3,650,000 — —
Operating lease obligations 25,934 5,861 13,649 6,424
$ 19,746,263 $ 19,054,487 $ 685,352 $ 6,424
(1) Includes non-maturing customer transaction accounts.
(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.
These obligations are included in the Consolidated Statements of Financial Condition. The payment amounts of the operating lease obligations represent those amounts contractually due.
55