WAFD INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of WaFd, Inc. (the “Company” or “WaFd”) and its financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and the Consolidated Financial Statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations and other disclosures contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the Securities and Exchange Commission ("SEC") on November 17, 2023 (the “2023 10-K”). FORWARD LOOKING STATEMENTS This discussion contains forward-looking statements that involve risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements. You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, and including the Risk Factors included in the Company’s 2023 10-K, and in any of the Company's other subsequent Securities and Exchange Commission ("SEC") filings, which could cause the Company's future results to differ materially from the plans, objectives, goals, estimates, intentions and expectations expressed in forward-looking statements: Operational Risks: • fluctuating interest rates and the impact of inflation on the Company's business and financial results; • risks related to the Company's integration of the operations of Luther Burbank Corporation; • impacts of the merger with Luther Burbank Corporation; • risks related to the sale of loans designated as held for sale, including the expected benefits to the Company's financial performance and effect on future earnings per share; • the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government; • economic uncertainty or a deterioration in economic conditions or slowdowns in economic growth, including financial stress on borrowers (consumers and businesses) as a result of higher interest rates or an uncertain economic environment; • global economic trends, including developments related to Ukraine and Russia, Israel and Gaza, and related negative financial impacts on our borrowers, the financial markets and the global economy; • our ability to make accurate assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the assets securing these loans; • risks related to operational, technological, and third-party provided technology infrastructure; • risks associated with cybersecurity incidents and threat actors; • the effects of natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as the COVID-19 pandemic), and the resulting governmental and societal responses, including on our asset credit quality and business operations, as well as its impact on general economic and financial market conditions; • risks associated with our failure to retain or attract key employees; • risks associated with failures of our risk management framework; • risks related to the impacts of climate change on our business or reputation. Regulatory and Litigation Risk: • the Company’s ability to manage the risks and costs involved in the remediation efforts to the Bank's Home Mortgage Disclosure Act (“HMDA”) compliance and reporting, and the impact of enforcement actions or legal proceedings with respect to the Bank’s HMDA program; 47 Table of Contents WAFD, INC. AND SUBSIDIARIES • non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Community Reinvestment Act, Fair Lending Laws, Flood Insurance Reform Act or other laws and regulations; • legislative and regulatory limitations, including those arising under the Dodd-Frank Act, the Washington Commercial Bank Act and potential limitations in the manner in which the Company conducts its business and undertakes new investments and activities; • risks associated with increases to deposit insurance premiums or special assessments; • litigation risks resulting in significant expenses, losses and reputational damage; • environmental risks resulting from our real estate lending business. Market and Industry Risk: • eroding confidence in the banking system and regional banks in particular; • downturns in the real estate market; • changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees; • risks associated with inadequate or faulty underwriting and loan collection practices; • changes in banking operations, including a shift from retail to online activities; • risks associated with our geographic concentration, including the effects of a severe economic downturn, including high unemployment rates and declines in housing prices and property values, in our primary market areas; • industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process; • impairment of goodwill. Competitive Risks: • competition from other financial institutions and new market participants, offering services similar to those offered by the Bank; • our ability to grow organically or through acquisitions; • risks associated with our entry into the California market. Security Ownership Risks: • our ability to continue to pay dividends, including on our outstanding Series A Preferred Stock; • risks related to the volatility of our Common Stock, and future dilution; • the ability of the Company to obtain external financing to fund its operations or obtain financing on favorable terms; • risks related to Washington's anti-takeover statute; • effects of activist shareholders. General Risks: • the success of the Company at managing the risks involved in the foregoing and managing its business; and • the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control. For the reasons described above, we caution you against relying on any forward-looking statements. You should not consider the summary of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, all forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made. 48 Table of Contents WAFD, INC. AND SUBSIDIARIES GENERAL & BUSINESS DESCRIPTION Washington Federal Bank, a federally-insured state-charted commercial bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 24, 1917 in Ballard, Washington and is engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate. Washington Federal, Inc., a Washington corporation was formed as the Bank’s holding company in November, 1994. On September 27, 2023, Articles of Amendment were filed with the Washington Secretary of State, to change the name of Washington Federal, Inc. to WaFd, Inc. This change was effective on September 29, 2023. As used throughout this document, the terms “WaFd,” the “Company” or “we” or “us” and “our” refer to the WaFd, Inc. and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank dba WaFd Bank. The Company is headquartered in Seattle, Washington. On February 29, 2024, WaFd, Inc. closed its previously announced merger with Luther Burbank Corporation ("Luther Burbank" or "LBC"), a California corporation, effective as of 12:00am on March 1, 2024. Pursuant to the Merger Agreement, at the Effective Time Luther Burbank merged with and into the Company (the “Corporate Merger”), with the Company surviving the Corporate Merger. Promptly following the Corporate Merger, Luther Burbank’s wholly-owned bank subsidiary, Luther Burbank Savings, merged with and into WaFd Bank with WaFd Bank as the surviving institution (the “Bank Merger”). The Corporate Merger and the Bank Merger are collectively referred to in this Current Report on Form 10-Q as the “Merger.” The merger added approximately $7.7 billion of LBC assets at fair value to the Company's balance sheet, and the Company assumed $50,175,000 in floating rate junior subordinated debentures, due June 2036 and June 2037, and $93,514,000 in 6.5% senior unsecured term notes maturing September 30, 2024. The Merger expanded WaFd Bank's footprint to nine western states with the addition of ten California branches of Luther Burbank. The Corporate Merger was accounted for using the acquisition method of accounting and was effectively an all-stock transaction accounted for as a business combination. As a result of the Merger, the Company's financials as of March 31, 2024 reflect the newly combined entity, and the activity for the quarter then ended includes one month of LBC-related activity. Given this, the Company's financial results for the second fiscal quarter of 2024 may not be directly comparable to prior reported periods. CRITICAL ACCOUNTING POLICIES See Note A to the Consolidated Financial Statements in "Item 1. Financial Statements" above. Also, refer to "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2023 10-K. ASSET QUALITY & ALLOWANCE FOR CREDIT LOSSES See Note A, D and E to the Consolidated Financial Statements in "Item 1. Financial Statements" above. Also, refer to "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2023 10-K. INTEREST RATE RISK Based on management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term loans and transaction deposit accounts, to reduce its interest rate risk profile. The mix of transaction and savings accounts is 58% of total deposits as of March 31, 2024 while the composition of the investment securities portfolio is 52% variable and 48% fixed rate. When interest rates rise, the fair value of the investment securities with fixed rates will decrease and vice versa when interest rates decline. The Company has $457,882,000 of mortgage-backed securities that it has designated as HTM and are carried at amortized cost. As of March 31, 2024, the net unrealized loss on these securities was $50,421,000. The Company has $2,438,114,000 of AFS securities that are carried at fair value. As of March 31, 2024, the net unrealized loss on these securities was $85,022,000. The Company has executed interest rate swaps to hedge interest rate risk on certain FHLB borrowings. The unrealized gain on these interest rate swaps as of March 31, 2024 was $154,588,000. All of the above are pre-tax net unrealized gains or losses. The Company relies on various measures of interest rate risk, including an asset/liability analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) of the Company. 49 Table of Contents WAFD, INC. AND SUBSIDIARIES Net Interest Income Sensitivity - The Company estimates the sensitivity of its net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in the Company's interest-earning assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. The analysis assumes a constant balance sheet. Actual results would differ from the assumptions used in this model, as management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates. As of March 31, 2024, in the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 9.3% in the next year. This compares to an estimated decrease of 2.0% as of the September 30, 2023 analysis. The current results reflect the assumed redeployment of the funds received from the loans held for sale balance. Further, a flattening yield curve where the spread between short-term and long-term rates decreases would likely result in lower net interest income and vice versa for a steepening yield curve. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long-term rates over two years would result in a net interest income increase of 3.1% in the first year and increase of 8.1% in the second year assuming a constant balance sheet and no management intervention. Alternatively, in the event of an immediate and parallel decrease of 100 basis points in both short and long-term interest rates, the model estimates that net interest income would decrease by 0.16%. NPV Sensitivity - NPV is an estimate of the market value of shareholders' equity. NPV is calculated as the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of NPV to changes in interest rates provides a view of interest rate risk as it incorporates all future expected cash flows. As of March 31, 2024, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $609,000,000 or 19.14% and the NPV to total assets ratio to decline to 9.22% from a base of 10.90%. As of September 30, 2023, the NPV in the event of a 200 basis point increase in rates was estimated to decrease by $723,000,000 or 27.41% and the NPV to total assets ratio to decline to 9.50% from a base of 12.40%. The change in the sensitivity of the NPV ratio to this assumed change in interest rates is primarily due to the flattening of the yield curve and changes in balance sheet mix during the six months ended March 31, 2024. Prepayment speeds continue to be low at March 31, 2024 with the Bank's conditional payment rate ("CPR") for single family mortgages at 4.80%, down from 5.80% the year before. As of March 31, 2024, in the event of an immediate and parallel decrease of 100 basis points in interest rates is estimated to increase NPV by $114,000,000 or 3.60% and the NPV to total assets ratio to grow to 11.12% from a base of 10.90%. Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 2.73% for the quarter ended March 31, 2024 compared to 3.51% for the quarter ended March 31, 2023. The yield on interest-earning assets increased 38 basis points to 5.50% and the cost of interest-bearing liabilities increased 129 basis points to 3.32% over that same period. The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable-rate assets and cash. The higher rate in interest-bearing liabilities resulted primarily from customer deposits repricing and higher rates on borrowings. 50 Table of Contents WAFD, INC. AND SUBSIDIARIES The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago. Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) ($ in thousands) Assets Loans receivable $ 19,696,515 $ 274,341 5.60 % $ 17,097,130 $ 222,957 5.29 % Mortgage-backed securities 1,470,581 12,905 3.53 1,355,403 10,422 3.12 Cash & Investments 2,020,460 28,901 5.75 1,657,027 19,786 4.84 FHLB stock 138,452 2,679 7.78 139,484 2,181 6.34 Total interest-earning assets 23,326,008 318,826 5.50 % 20,249,044 255,346 5.11 % Other assets 1,581,368 1,491,981 Total assets $ 24,907,376 $ 21,741,025 Liabilities and Equity Interest-bearing customer accounts $ 15,080,002 $ 116,164 3.10 % $ 12,746,827 $ 52,123 1.66 % Borrowings 4,323,454 44,065 4.10 3,235,278 27,659 3.47 Total interest-bearing liabilities 19,403,456 160,229 3.32 % 16,028,772 80,308 2.03 % Noninterest-bearing customer accounts 2,536,757 3,046,867 Other liabilities 328,680 290,702 Total liabilities 22,268,893 19,366,341 Shareholders' equity 2,638,483 2,374,684 Total liabilities and equity $ 24,907,376 $ 21,741,025 Net interest income/interest rate spread $ 158,597 2.18 % $ 175,038 3.08 % Net interest margin (NIM) 2.73 % 3.51 % 51 Table of Contents WAFD, INC. AND SUBSIDIARIES Six Months Ended March 31, 2024 Six Months Ended March 31, 2023 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) ($ in thousands) Assets Loans receivable $ 18,609,321 $ 520,133 5.59 % $ 16,835,843 $ 426,903 5.09 % Mortgage-backed securities 1,403,513 24,171 3.44 1,362,154 21,035 3.10 Cash & Investments 1,935,418 56,255 5.81 1,624,258 37,272 4.60 FHLB stock 131,196 5,113 7.79 128,573 3,555 5.55 Total interest-earning assets 22,079,448 605,672 5.49 % 19,950,828 488,765 4.91 % Other assets 1,558,068 1,496,485 Total assets $ 23,637,516 $ 21,447,313 Liabilities and Equity Interest-bearing customer accounts $ 14,159,221 $ 212,835 3.01 % $ 12,678,483 $ 83,769 1.33 % Borrowings 4,019,177 82,003 4.08 2,985,577 47,159 3.17 Total interest-bearing liabilities 18,178,398 294,838 3.24 % 15,664,060 130,928 1.68 % Noninterest-bearing customer accounts 2,596,192 3,147,155 Other liabilities 320,416 297,546 Total liabilities 21,095,006 19,108,761 Shareholders' equity 2,542,510 2,338,552 Total liabilities and equity $ 23,637,516 $ 21,447,313 Net interest income/interest rate spread $ 310,834 2.24 % $ 357,837 3.24 % Net interest margin (NIM) 2.81 % 3.60 % As of March 31, 2024, total assets had increased by $7,665,613,000 to $30,140,288,000 from $22,474,675,000 at September 30, 2023 primarily due to the addition of $7,676,343,000 of LBC assets at fair value in connection with the Merger. During the six months ended March 31, 2024, loans receivable increased $3,318,709,000 and FHLB stock increased by $33,997,000 while cash and cash equivalents increased by $525,122,000 and investment securities increased by $477,313,000. Cash and cash equivalents of $1,505,771,000 and shareholders’ equity of $2,921,906,000 as of March 31, 2024 provide management with flexibility in managing interest rate risk going forward. LIQUIDITY AND CAPITAL RESOURCES The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, sales and repayments of investments and borrowings 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. The Bank has a credit line with the FHLB - DM of up to 45% of total assets depending on specific collateral eligibility. This line provides the Bank a substantial source of additional liquidity. The Bank has entered into borrowing agreements with the FHLB - DM to borrow funds under a short-term floating rate cash management advance program and fixed-rate term loan agreements. All borrowings are secured by stock of the FHLB - DM, deposits with the FHLB - DM, and a blanket pledge of qualifying loans receivable. The Bank also has a credit line with the FHLB - SF in support of LBC borrowings from the FHLB - SF, but the Bank is unable to take down new advances against this line. The FHLB - SF credit line is secured by a line-item pledge of single-family residential mortgages that are specifically identified. To ensure ample contingent liquidity the Bank participates in the FRB of San Francisco Borrower-in-Custody program which collateralizes primary credit borrowings and serves as a backstop for the FHLB - DM credit line. Due to differing program requirements between the FHLB - DM and FRB of San Francisco, participating in both increases the amount of eligible collateral that may be pledged in support of contingent liquidity needs. The Bank is also eligible to borrow under the Federal 52 Table of Contents WAFD, INC. AND SUBSIDIARIES Reserve Bank's primary credit program. The Bank elected to utilize the Federal Reserve's Bank Term Funding Program ("BTFP") to leverage its highly favorable terms to fortify the Bank's liquidity position. These borrowings are repayable at any time without penalty and are currently the lowest cost funding source available. The Federal Reserve ceased making new BTFP loans on March 11, 2024. The Company has classified a portion of the LBC multi-family portfolio as held-for-sale and has engaged a third party to facilitate this process. The Company is currently working through the bidding process. The cash proceeds from the sale will provide substantial additional liquidity that can be used to reduce debt and originate loans. Customer accounts balances increased by $5,269,444,000, or 32.8%, to $21,339,773,000 at March 31, 2024 compared with $16,070,329,000 at September 30, 2023. This increase the result of the addition of $5,640,440,000 of LBC accounts in connection with the Merger. Total borrowings were $5,345,518,000 as of March 31, 2024 an increase from $3,650,000,000 at September 30, 2023. The increase in borrowings was also due to the Merger which added $1,432,138,000 in LBC balances. The Company's cash and cash equivalents totaled $1,505,771,000 at March 31, 2024, an increase from $980,649,000 at September 30, 2023. These amounts include the Bank's operating cash and $627,403,000 in cash obtained in the Merger. The Company’s shareholders' equity at March 31, 2024 was $2,921,906,000, or 9.69% of total assets. This is an increase of $495,480,000 from September 30, 2023 when shareholders' equity was $2,426,426,000, or 10.80% of total assets. The Company’s shareholders' equity was impacted in the six months ended March 31, 2024 by the stock consideration paid in the Merger of $465,504,000, net income of $74,341,000, the payment of $32,472,000 in common stock dividends, payment of $7,312,000 in preferred stock dividends, treasury stock purchases of $17,304,000, as well as other comprehensive income of $5,014,000. The ratio of tangible capital to tangible assets at March 31, 2024 was 8.31%. Management believes the Company's strong equity position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment. WaFd, Inc. and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Federal banking agencies establish regulatory capital rules that require minimum capital ratios and establish criteria for calculating regulatory capital. Minimum capital ratios for four measures are used for assessing capital adequacy. The standards are indicated in the table below. The common equity tier 1 capital ratio recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The rules set forth a “capital conservation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus these buffers, the bank's regulators may place restrictions on it. These restrictions include reducing dividend payments, share buy-backs, and staff bonus payments. The purpose of these buffers is to require banks to build up capital outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where losses are incurred, the minimum capital ratios can still be met. There are also standards for Adequate and Well Capitalized criteria that are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank and the Company must maintain minimum common equity risk-based, tier 1 risk-based, total risk-based and tier 1 leverage ratios as set forth in the following table. 53 Table of Contents WAFD, INC. AND SUBSIDIARIES As of March 31, 2024 and September 30, 2023, the Company and the Bank met all capital adequacy requirements to which they are subject, and the Bank's regulators categorized it as well capitalized under the regulatory framework for prompt corrective action. Actual Minimum Capital Adequacy Guidelines Minimum Well-Capitalized Guidelines ($ in thousands) Capital Ratio Ratio Ratio March 31, 2024 Common Equity Tier I risk-based capital ratio: The Company $ 2,074,332 10.07 % 4.50 % NA The Bank 2,427,110 11.78 % 4.50 % 6.50 % Tier I risk-based capital ratio: The Company 2,374,332 11.52 % 6.00 % NA The Bank 2,427,110 11.78 % 6.00 % 8.00 % Total risk-based capital ratio: The Company 2,649,878 12.86 % 8.00 % NA The Bank 2,652,187 12.87 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 2,374,332 9.68 % 4.00 % NA The Bank 2,427,110 9.91 % 4.00 % 5.00 % September 30, 2023 Common Equity Tier 1 risk-based capital ratio: The Company $ 1,769,170 10.37 % 4.50 % NA The Bank 1,982,943 11.63 % 4.50 % 6.50 % Tier I risk-based capital ratio: The Company 2,069,170 12.12 % 6.00 % NA The Bank 1,982,943 11.63 % 6.00 % 8.00 % Total risk-based capital ratio: The Company 2,270,877 13.31 % 8.00 % NA The Bank 2,184,650 12.81 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 2,069,170 9.39 % 4.00 % NA The Bank 1,982,943 9.10 % 4.00 % 5.00 % CHANGES IN FINANCIAL CONDITION Cash and cash equivalents - Cash and cash equivalents were $1,505,771,000 at March 31, 2024, an increase of $525,122,000, or 53.5%, since September 30, 2023. This increase reflects cash received from LBC as a result of the Merger offset by lending and outflows on customer accounts. Available-for-sale and held-to-maturity investment securities - AFS securities increased $443,017,000, or 22.2%, during the six months ended March 31, 2024, mostly due to the addition of LBC's AFS investments. During this time the Bank also had securities purchases of $214,707,000 and unrealized gains during the period of $2,244,000 offset by principal repayments and maturities of $150,666,000. During the same period, the balance of HTM securities increased by $34,296,000 primarily due to the purchase of $47,670,000 of HTM securities. There were also principal pay-downs and maturities of $15,800,000 during the period. As of March 31, 2024, the Company had a total net unrealized loss on AFS securities of $85,022,000, which is included on a net of tax basis in accumulated other comprehensive income (loss). 54 Table of Contents WAFD, INC. AND SUBSIDIARIES Substantially all of the Company’s HTM and AFS debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. The Company did not record an allowance for credit losses for HTM securities as of March 31, 2024 or September 30, 2023 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 securities portfolios as well as the economic conditions at future reporting periods. The Company does not believe that any of its AFS debt securities had credit loss impairment as of March 31, 2024 or September 30, 2023, therefore, no allowance was recorded. Loans receivable - Loans receivable, net of related contra accounts, increased by $3,318,709,000 to $20,795,259,000 at March 31, 2024, compared to $17,476,550,000 at September 30, 2023. The increase was primarily the addition of loans obtained in the Merger. Additionally, the balance reflects originations of $1,697,179,000, a decrease to loans-in-process of $212,544,000, and principal repayments of $2,136,858,000. Commercial loan originations accounted for 76% of total originations and consumer loan originations were 24% during the six months ended March 31, 2024. The Company continues to focus on commercial lending and growing operations in all major markets in which we operate. The following table shows the loan portfolio by category and the change. March 31, 2024 September 30, 2023 Change ($ in thousands) ($ in thousands) $ % Commercial loans Multi-family $ 4,173,375 18.5 % $ 2,907,086 14.8 % $ 1,266,289 43.6 % Commercial real estate 3,570,790 15.8 3,344,959 17.0 225,831 6.8 Commercial & industrial 2,290,452 10.1 2,321,717 11.8 (31,265) (1.3) Construction 2,631,783 11.6 3,318,994 16.9 (687,211) (20.7) Land - acquisition & development 215,831 1.0 201,538 1.0 14,293 7.1 Total commercial loans 12,882,231 57.0 12,094,294 61.6 787,937 6.5 Consumer loans Single-family residential 8,816,039 39.0 6,451,270 32.8 2,364,769 36.7 Construction - custom 466,740 2.1 672,643 3.4 (205,903) (30.6) Land - consumer lot loans 115,022 0.5 125,723 0.6 (10,701) (8.5) HELOC 243,852 1.1 234,410 1.2 9,442 4.0 Consumer 74,269 0.3 70,164 0.4 4,105 5.9 Total consumer loans 9,715,922 43.0 7,554,210 38.4 2,161,712 28.6 Total gross loans 22,598,153 100 % 19,648,504 100 % 2,949,649 15.0 Less: Allowance for credit losses on loans 201,577 177,207 24,370 13.8 Loans in process 1,303,978 1,895,940 (591,962) (31.2) Net deferred fees, costs and discounts 297,339 98,807 198,532 200.9 Total loan contra accounts 1,802,894 2,171,954 (369,060) (17.0) Net loans $ 20,795,259 $ 17,476,550 $ 3,318,709 19.0 % Non-performing assets - Non-performing assets increased $10,437,000 during the six months ended March 31, 2024 to $68,361,000 from $57,924,000 at September 30, 2023. The change is primarily due to a $13,487,000 increase in non-accrual loans acquired in the Merger. Given that the overall assets grew with the Merger, non-performing assets as a percentage of total assets was 0.23% at March 31, 2024 compared to 0.26% at September 30, 2023. 55 Table of Contents WAFD, INC. AND SUBSIDIARIES The following table sets forth information regarding non-performing assets. March 31, 2024 September 30, 2023 ($ in thousands) Non-accrual loans: Multi - family $ 8,377 13.8 % $ 5,127 10.2 % Commercial real estate 27,022 44.4 23,435 46.5 Commercial & industrial 4,436 7.3 6,082 12.1 Construction — — — — Land - acquisition & development 112 0.2 — — Single-family residential 20,016 32.9 14,918 29.6 Construction - custom 88 0.2 88 0.2 Land - consumer lot loans — — 9 — HELOC 491 0.8 736 1.5 Consumer 264 0.4 27 0.1 Total non-accrual loans 60,806 100 % 50,422 100 % Real estate owned 4,245 4,149 Other property owned 3,310 3,353 Total non-performing assets $ 68,361 $ 57,924 Total non-performing assets and performing restructured loans as a percentage of total assets 0.23 % 0.26 % For the six months ended March 31, 2024, the Company recognized $435,000 in interest income on cash payments received from borrowers on non-accrual loans. Recognized interest income on loans for the six months ended March 31, 2024 was lower than what otherwise would have been recognized in the period due to the collection of past due amounts. The Company would have recognized interest income of $1,347,000 for the same period had these loans performed according to their original contract terms. In addition to the non-accrual loans reflected in the above table, the Company had $259,164,000 of loans that were less than 90 days delinquent at March 31, 2024 but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs as a percent of total assets would have increased to 1.09% at March 31, 2024. Loans may be modified as the result of borrowers experiencing financial difficulty needing relief from the contractual terms of their loan. Most loan modifications to borrowers experiencing financial difficulty are accruing and performing loans where the borrower has approached the Company about modification due to temporary financial difficulties. Each request for modification is individually evaluated for merit and likelihood of success. Often a term extension is needed in the short term in order to evaluate the need for further corrective action. Payment delays and interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. For commercial loans, six consecutive payments on newly restructured loan terms are generally required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform, it will be placed in non-accrual status when it is 90 days delinquent. Allowance for credit losses - The following table shows the composition of the Company’s allowance for credit losses. 56 Table of Contents WAFD, INC. AND SUBSIDIARIES March 31, 2024 September 30, 2023 Change Allowance for credit losses: ($ in thousands) ($ in thousands) $ % Commercial loans Multi-family $ 21,979 10.9 % 13,155 7.4 % $ 8,824 67.1 % Commercial real estate 32,991 16.4 28,842 16.3 4,149 14.4 Commercial & industrial 59,261 29.4 58,773 33.2 488 0.8 Construction 27,317 13.5 29,408 16.6 (2,091) (7.1) Land - acquisition & development 7,865 3.9 7,016 4.0 849 12.1 Total commercial loans 149,413 74.1 137,194 77.4 12,219 8.9 Consumer loans Single-family residential 41,054 20.4 28,029 15.8 13,025 46.5 Construction - custom 1,918 0.9 2,781 1.6 (863) (31.0) Land - consumer lot loans 3,214 1.6 3,512 2.0 (298) (8.5) HELOC 2,974 1.5 2,859 1.6 115 4.0 Consumer 3,004 1.5 2,832 1.6 172 6.1 Total consumer loans 52,164 25.9 40,013 22.6 12,151 30.4 Total allowance for loan losses 201,577 100.0 % 177,207 100.0 % 24,370 13.8 Reserve for unfunded commitments 23,500 22,500 1,000 4.4 Total allowance for credit losses $ 225,077 $ 199,707 $ 25,370 12.7 % Management believes the allowance for credit losses of $225,077,000, or 1.00% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. See Note E and Note I for further details of the allowance for loan losses and reserve for unfunded commitments as of and for the period ended March 31, 2024 and September 30, 2023. Real estate owned ("REO") - REO increased during the six months ended March 31, 2024 by $96,000 to $4,245,000. The increase was due to the addition of former branch properties for sale offset by existing REO sales. Intangible assets - Intangible assets increased to $453,539,000 as of March 31, 2024 from $310,619,000 as of September 30, 2023 primarily as the result of the Merger. The increase included goodwill of $106,276,000 and core deposit intangibles of $37,462,000. Customer accounts - Customer accounts increased $5,269,444,000, or 32.8%, to $21,339,773,000 at March 31, 2024 compared with $16,070,329,000 at September 30, 2023 due to the addition of $5,640,440,000 in deposits obtained in the Merger. Transaction accounts increased by $1,573,549,000 or 14.6% during that period, while time deposits increased $3,695,895,000 or 69.7% as 66% of the LBC customer accounts were time deposits. The following table shows the composition of the Bank’s customer accounts by deposit type. March 31, 2024 September 30, 2023 Deposit Account Balance As a % of Total Deposits Weighted Average Rate Deposit Account Balance As a % of Total Deposits Weighted Average Rate ($ in thousands) Non-interest checking $ 2,482,010 11.6 % — % $ 2,706,448 16.8 % — % Interest checking 4,579,413 21.6 3.09 3,882,715 24.2 2.28 Savings 771,260 3.6 0.27 817,547 5.1 0.21 Money market 4,506,179 21.1 2.21 3,358,603 20.9 1.48 Time deposits 9,000,911 42.1 4.21 5,305,016 33.0 3.77 Total $ 21,339,773 100 % 2.92 % $ 16,070,329 100 % 2.12 % 57 Table of Contents WAFD, INC. AND SUBSIDIARIES Borrowings - Total FHLB and FRB borrowings were $5,345,518,000 as of March 31, 2024 an increase from $3,650,000,000 as of September 30, 2023. This increase was driven by the additional $1,432,138,000 of FHLB and FRB borrowings assumed in connection with the Merger. The company also assumed additional LBC debt in the form of $50,175,000 in floating rate junior subordinated debentures, due June 2036 and June 2037, and $93,514,000 in 6.5% senior unsecured term notes maturing September 30, 2024. The weighted average rate of the combined combined borrowings and debt was 4.48% as of March 31, 2024 and 3.98% at September 30, 2023. Shareholders' equity - The Company’s shareholders' equity at March 31, 2024 was $2,921,906,000, or 9.69% of total assets. This is an increase of $495,480,000 from September 30, 2023 when shareholders' equity was $2,426,426,000, or 10.80% of total assets. The Company’s shareholders' equity was impacted in the six months ended March 31, 2024 by the stock consideration paid in the Merger of $465,504,000, net income of $74,341,000, the payment of $32,472,000 in common stock dividends, payment of $7,312,000 in preferred stock dividends, treasury stock purchases of $17,304,000, as well as changes in other comprehensive income of $5,014,000. RESULTS OF OPERATIONS Net Income - The Company recorded net income of $15,888,000 for the three months ended March 31, 2024 compared to $65,934,000 for the prior year quarter, a decrease of 75.90%. The Company recorded net income of $74,341,000 for the six months ended March 31, 2024 compared to $145,443,000 for the prior year same period. The changes are due to the factors described below. Net Interest Income - For the three months ended March 31, 2024, net interest income was $158,597,000, which is a decline of $16,441,000, or 9.39%, compared with the same quarter of the prior year. Net interest margin was 2.73% for the quarter ended March 31, 2024 compared to 3.51% for the quarter ended March 31, 2023. The decrease in net interest income is largely due to rising deposit costs. The average rate earned on interest-earning assets grew by 38 basis points to 5.50% while the average rate paid on interest-bearing liabilities increased by 129 basis points to 3.32%. Additionally, average interest-earning assets increased by $3,076,964,000 from the same quarter last year while average interest-bearing liabilities increased by $3,374,684,000. For the six months ended March 31, 2024, net interest income was $310,834,000, which is a decline of $47,003,000 from the same period of the prior year. Net interest margin was 2.81% for the six months ended March 31, 2024 compared to 3.60% for the prior year same period. The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Rate / Volume Analysis : Comparison of Three Months Ended 3/31/24 and 3/31/23 Comparison of Six Months Ended 3/31/24 and 3/31/23 ($ in thousands) Volume Rate Total Volume Rate Total Interest income: Loans receivable $ 37,082 $ 14,302 $ 51,384 $ 48,258 $ 44,972 $ 93,230 Mortgage-backed securities 974 1,509 2,483 680 2,456 3,136 Investments 1 5,007 4,606 9,613 8,161 12,380 20,541 All interest-earning assets 43,063 20,417 63,480 57,099 59,808 116,907 Interest expense: Customer accounts 11,123 52,918 64,041 10,865 118,201 129,066 Borrowings 10,231 5,649 15,880 19,065 15,779 34,844 All interest-bearing liabilities 21,354 58,567 79,921 29,930 133,980 163,910 Change in net interest income $ 21,709 $ (38,150) $ (16,441) $ 27,169 $ (74,172) $ (47,003) ___________________ 1 Includes interest on cash equivalents and dividends on FHLB stock. 58 Table of Contents WAFD, INC. AND SUBSIDIARIES Provision for Credit Losses - The Company recorded a $16,000,000 provision for credit losses for the three months ended March 31, 2024, compared with a provision for credit losses of $3,500,000 for the three months ended March 31, 2023. The provision in the three months ended March 31, 2024 was largely the initial ACL recorded on the acquired LBC loan portfolio as the WaFd legacy portfolio was stable in both balance and credit quality. The Company recorded a $16,000,000 provision for credit losses for the six months ended March 31, 2024, compared with a provision for credit losses of $6,000,000 for the six months ended March 31, 2023. Charge-offs, net of recoveries, totaled $146,000 for the three months ended March 31, 2024, compared to $5,877,000 during the three months ended March 31, 2023. Charge-offs, net of recoveries, totaled $33,000 for the six months ended March 31, 2024, compared to $5,388,000 during the six months ended March 31, 2023. Other Income - The three months ended March 31, 2024 results include total other income of $13,392,000 compared to $10,072,000 for the same period one year ago, a $3,320,000 increase. The increase is primarily due to decreased losses on certain equity method investments, increases in WAFD Insurance Group commissions and overall fee increases as a result of the Merger. The six months ended March 31, 2024 results include total other income of $27,559,000 compared to $24,096,000 for the same period one year ago, a $3,463,000 increase. The increase is primarily due to the items described above. Other Expense - Total other expense was $133,712,000 for the three months ended March 31, 2024, an increase of $36,831,000 from $96,881,000 for the prior year quarter. Compensation expense increased as a result of $19,000,000 in merger-related retention, severance and change-in-control expenses combined with a larger post-merger workforce. FDIC premiums increased $3,900,000 compared to the same period last year and included $1,800,000 related to an FDIC special assessment. Miscellaneous other expense also increased by $10,900,000 compared to the same quarter in the prior year due to $5,900,00 in merger-related expenses combined with a $2,000,000 charitable donation and legal and compliance related accruals. Total other expense for the three months ended March 31, 2024 and March 31, 2023 equaled 2.15% and 1.78%, respectively, of average assets. Total other expense was $230,252,000 for the six months ended March 31, 2024, an increase of $41,093,000 from $189,159,000 for the prior year same period. Total other expense for the six months ended March 31, 2024 and March 31, 2023 equaled 1.95% and 1.76%, respectively, of average assets. Gain (Loss) on Real Estate Owned - Results for the three months ended March 31, 2024 include a net loss on REO of $1,315,000, compared to a net loss of $199,000 for the prior year quarter. The loss during the three months ended March 31, 2024 was due to property sales at less than carrying value for a former branch property held for sale. Results for the six months ended March 31, 2024 include a net gain on REO of $511,000, compared to a net loss of $311,000 for the prior year same period. Income Tax Expense - Income tax expense totaled $5,074,000 for the three months ended March 31, 2024, compared to $18,596,000 for the prior year quarter. The effective tax rate was 24.21% and 22.00% for the three months ended March 31, 2024 and March 31, 2023, respectively. Income tax expense totaled $18,311,000 for the six months ended March 31, 2024, compared to $41,020,000 for the prior year same period. The effective tax rate was 19.76% and 22.00% for the six months ended March 31, 2024 and March 31, 2023, respectively. The Company’s effective tax rate varies from the statutory rate mainly due to state taxes, tax-exempt income, tax-credit investments miscellaneous non-deductible expenses and discrete tax adjustments for prior periods.