What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-02 compared with 2024-05-03 · 107 added, 95 removed, 348 unchanged (37% of the section changed)

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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.

As used throughout this document, the terms “WaFd,” the “Company” or “we” or “us” and “our” refer to WaFd, Inc.

and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank dba WaFd Bank.

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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 Corporate Merger and the Bank Merger are collectively referred to in this Quarterly 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.

The 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 June 30, 2024 reflect the newly combined entity, and the activity for the quarter ended June 30, 2024 includes a full quarter of LBC-related activity.

Given this, the Company's financial results for the third fiscal quarter of 2024 may not be directly comparable to prior reported periods.

CRITICAL ACCOUNTING POLICIES

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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.

The mix of transaction and savings accounts is 56% of total deposits as of June 30, 2024 while the composition of the investment securities portfolio is 51% variable and 49% 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 $447,638,000 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.

As of June 30, 2024, the net unrealized loss on these securities was $49,633,000.

The Company has $2,428,769,000 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.

As of June 30, 2024, the net unrealized loss on these securities was $79,454,000.

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.

The unrealized gain on these interest rate swaps as of June 30, 2024 was $151,333,000.

All of the above are pre-tax net unrealized gains or losses.

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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.

As of June 30, 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 7.2% in the next year.

This compares to an estimated decrease of 2.0% as of the September 30, 2023 analysis.

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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 June 30, 2024, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $752,000,000 or 26.13% and the NPV to total assets ratio to decline to 8.19% from a base of 10.52%.

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%.

Prepayment speeds continue to be low at June 30, 2024 with the Bank's conditional payment rate ("CPR") for single family mortgages at 6.60%, down from 7.90% the year before.

As of June 30, 2024, in the event of an immediate and parallel decrease of 100 basis points in interest rates, the model estimates an increase to NPV of $101,000,000 or 3.53% and the NPV to total assets ratio to grow to 10.73% from a base of 10.52%.

Interest Rates - The Company measures the difference between the rate on total interest-earning assets and the rate on interest-bearing liabilities at the end of each period.

This period-end interest rate spread was 2.07% at June 30, 2024, decreased from 2.61% at September 30, 2023, and 2.72% at June 30, 2023.

At June 30, 2024, the weighted average period-end rate on interest-earning assets increased by 10 basis points to 5.17% compared to 5.07% at September 30, 2023 and by 23 basis points compared to 4.94% at June 30, 2023.

However, these increases were exceeded by the increases in interest-bearing deposits.

The weighted average period-end rate on interest-bearing liabilities increased by 64 basis points to 3.10% from 2.46% at September 30, 2023 and by 65 basis points from 2.22% at June 30, 2023.

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.

Net interest margin was 2.56% for the quarter ended June 30, 2024 compared to 3.27% for the quarter ended June 30, 2023.

The yield on interest-earning assets increased 37 basis points to 5.66% and the cost of interest-bearing liabilities increased 112 basis points to 3.63% over that same period.

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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

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

Average Balance Interest Average Rate Average Balance Interest Average Rate

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AND SUBSIDIARIES

Six Months Ended March 31, 2024 Six Months Ended March 31, 2023

Nine Months Ended June 30, 2024 Nine Months Ended June 30, 2023

Average Balance Interest Average Rate Average Balance Interest Average Rate

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Net interest margin (NIM) 2.72 % 3.49 %

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.

As of June 30, 2024, total assets had increased by $6,106,125,000 to $28,580,800,000 from $22,474,675,000 at September 30, 2023 primarily due to the addition of $7,676,486,000 of LBC assets at fair value in connection with the Merger offset by the sale of $2,500,000,000 in LBC multifamily loans.

$1,600,000,000 of the sales proceeds were used to pay down on FHLB advances, reducing the cash balance.

During the nine months ended June 30, 2024, loans receivable increased $3,397,369,000, cash and cash equivalents increased by $1,511,855,000 and investment securities increased by $457,724,000.

Cash and cash equivalents of $2,492,504,000 and shareholders’ equity of $2,958,339,000 as of June 30, 2024 provide management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES

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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

Due to differing program requirements between the FHLB - DM and FRB of San Francisco, participating in both increases the amount of eligible

AND SUBSIDIARIES

Reserve Bank's primary credit program.

collateral that may be pledged in support of contingent liquidity needs.

The Bank is also eligible to borrow under the Federal 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.

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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.

The Company sold a portion of the LBC multi-family portfolio acquired in the Merger during the three months ended June 30, 2024.

The $2,500,000,000 of proceeds from the sale have increased liquidity adding approximately $1 billion in cash after paying down borrowings of approximately $1,600,000,000.

The Company classified a portion of the LBC single-family portfolio as held-for-sale during the quarter having entered into a commitment to sell.

The purchaser is currently working through due diligence and the sale is expected to close in August 2024.

The cash proceeds from the sale will provide additional liquidity that may be used to further reduce debt and originate loans.

Customer accounts balances increased by $5,114,436,000, or 31.8%, to $21,184,765,000 at June 30, 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.

Total borrowings were $3,934,514,000 as of June 30, 2024 an increase from $3,650,000,000 at September 30, 2023.

The increase in borrowings was a largely due to the Merger which added $1,432,138,000 in LBC balances offset by repayments.

The Company's cash and cash equivalents totaled $2,492,504,000 at June 30, 2024, an increase from $980,649,000 at September 30, 2023.

These amounts include $627,403,000 in cash obtained in the Merger and approximately $1,000,000,000 in proceeds from the LBC multi-family loan portfolio sale.

The Company’s shareholders' equity at June 30, 2024 was $2,958,339,000, or 10.35% of total assets.

This is an increase of $531,913,000 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%.

The Company’s shareholders' equity was impacted in the nine months ended June 30, 2024 by the stock consideration paid in the Merger of $465,504,000, net income of $138,901,000, the payment of $53,404,000 in common stock dividends, payment of $10,969,000 in preferred stock dividends, treasury stock purchases of $26,819,000, as well as other comprehensive income of $7,995,000.

The ratio of tangible capital to tangible assets at June 30, 2024 was 8.91%.

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.

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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.

As of June 30, 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

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($ in thousands) Capital Ratio Ratio Ratio

March 31, 2024

June 30, 2024

Common Equity Tier I risk-based capital ratio:

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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.

Cash and cash equivalents - Cash and cash equivalents were $2,492,504,000 at June 30, 2024, an increase of $1,511,855,000, or 154.2%, since September 30, 2023.

This increase reflects cash received from LBC as a result of the Merger combined with cash received from the recent LBC multi-family loan portfolio sale, offset by pay-downs on borrowings.

Available-for-sale and held-to-maturity investment securities - AFS securities increased $433,672,000, or 21.7%, during the nine months ended June 30, 2024, mostly due to the addition of LBC's AFS investments.

During this time the Bank also had securities purchases of $321,308,000 and unrealized gains during the period of $5,489,000 offset by principal repayments and maturities of $270,178,000.

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There were also principal pay-downs and maturities of $25,503,000 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).

As of June 30, 2024, the Company had a total net unrealized loss on AFS securities of $79,454,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

AND SUBSIDIARIES

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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.

The Company did not record an allowance for credit losses for HTM securities as of June 30, 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 Company does not believe that any of its AFS debt securities had credit loss impairment as of June 30, 2024 or September 30, 2023, therefore, no allowance was recorded.

Loans receivable - Loans receivable, net of related contra accounts, increased by $3,397,369,000 to $20,873,919,000 at June 30, 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 $2,669,679,000, a decrease to loans-in-process of $800,984,000, and principal repayments of $3,172,373,000.

Commercial loan originations accounted for 76% of total originations and consumer loan originations were 24% during the six months ended March 31, 2024.

Commercial loan originations accounted for 73% of total originations and consumer loan originations were 27% during the nine months ended June 30, 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

June 30, 2024 September 30, 2023 Change

($ in thousands) ($ in thousands) $ %

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Net loans $ 20,873,919 $ 17,476,550 $ 3,397,369 19.4 %

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.

Non-performing assets - Non-performing assets increased $10,863,000 during the nine months ended June 30, 2024 to $68,787,000 from $57,924,000 at September 30, 2023.

The change is primarily due to 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 0.24% at June 30, 2024 compared to 0.26% at September 30, 2023.

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Total non-performing assets $ 68,787 $ 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.

Total non-performing assets as a percentage of total assets 0.24 % 0.26 %

For the nine months ended June 30, 2024, the Company recognized $706,000 in interest income as a result of cash payments received from borrowers on non-accrual loans.

Recognized interest income on loans for the nine months ended June 30, 2024 was lower than what otherwise would have been recognized in the period due to non-accrual loans.

The Company would have recognized interest income of $2,121,000 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.

In addition to the non-accrual loans reflected in the above table, the Company had $359,572,000 of loans that were less than 90 days delinquent at June 30, 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 1.50% at June 30, 2024.

Loans may be modified as the result of borrowers experiencing financial difficulty needing relief from the contractual terms of their loan.

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March 31, 2024 September 30, 2023 Change

June 30, 2024 September 30, 2023 Change

Allowance for credit losses:

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Management believes the allowance for credit losses of $225,324,000, 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.

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 June 30, 2024 and September 30, 2023.

Real estate owned ("REO") - REO increased during the nine months ended June 30, 2024 by $60,000 to $4,209,000.

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.

Intangible assets - Intangible assets increased to $452,255,000 as of June 30, 2024 from $310,619,000 as of September 30, 2023 primarily as the result of the Merger.

The increase included goodwill of $107,463,000 and core deposit intangibles of $37,462,000 offset by normal amortization on intangibles.

Customer accounts - Customer accounts increased $5,114,436,000, or 31.8%, to $21,184,765,000 at June 30, 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 $1,163,692,000 or 10.8% during that period, while time deposits increased $3,950,744,000 or 74.5% 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

June 30, 2024 September 30, 2023

Deposit Account Balance As a % of Total Deposits Weighted

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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.

Borrowings - Total FHLB and FRB borrowings were $3,934,514,000 as of June 30, 2024 an increase from $3,650,000,000 as of September 30, 2023, a net increase of $284,514,000.

The Company utilized proceeds from the multifamily loan sale to pay off $1,600,000,000 of borrowings which matured during the quarter.

The Merger added $1,432,138,000 in borrowings to the balance sheet in addition to net borrowing activity of approximately $400,000,000 fiscal year to date.

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.

The weighted average rate of the combined borrowings and debt was 4.10% as of June 30, 2024 and 3.98% at September 30, 2023.

Shareholders' equity - The Company’s shareholders' equity at June 30, 2024 was $2,958,339,000, or 10.35% of total assets.

This is an increase of $531,913,000 from September 30, 2023 when shareholders' equity was $2,426,426,000, or 10.80% of total assets.

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.

Net Income - The Company recorded net income of $64,560,000 for the three months ended June 30, 2024 compared to $61,775,000 for the prior year quarter, an increase of 4.51%.

The Company recorded net income of $138,901,000 for the nine months ended June 30, 2024 compared to $207,218,000 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.

Net Interest Income - For the three months ended June 30, 2024, net interest income was $177,186,000, which is an increase of $8,486,000, or 5.03%, compared with the same quarter of the prior year.

Net interest margin was 2.56% for the quarter ended June 30, 2024 compared to 3.27% for the quarter ended June 30, 2023.

The decrease in net interest income is largely due to rising deposit costs.

The average rate earned on interest-earning assets grew by 37 basis points to 5.66% while the average rate paid on interest-bearing liabilities increased by 112 basis points to 3.63%.

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.

Additionally, as a result of the Merger, average interest-earning assets increased by $7,184,650,000 from the same quarter last year while average interest-bearing liabilities increased by $7,190,355,000.

For the nine months ended June 30, 2024, net interest income was $488,020,000, which is a decline of $38,517,000 from the same period of the prior year.

Net interest margin was 2.72% for the nine months ended June 30, 2024 compared to 3.49% 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.

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6/30/24 and 6/30/23

Comparison of Six Months Ended

Comparison of Nine Months Ended

6/30/24 and 6/30/23

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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.

Provision for Credit Losses - The Company recorded a $1,500,000 provision for credit losses for the three months ended June 30, 2024, compared with a provision for credit losses of $9,000,000 for the three months ended June 30, 2023.

The provision in the three months ended June 30, 2024 was due to prolonged and increased borrower sensitivity to high interest rates and operating costs resulting from inflationary pressures in the commercial portfolio.

The Company recorded a $17,500,000 provision for credit losses for the nine months ended June 30, 2024, including the $16,000,000 initial ACL recorded on the acquired LBC loan portfolio, compared with a provision for credit losses of $15,000,000 for the nine months ended June 30, 2023.

Charge-offs, net of recoveries, totaled $1,253,000 for the three months ended June 30, 2024, compared to $10,351,000 during the three months ended June 30, 2023.

Charge-offs, net of recoveries, totaled $1,286,000 for the nine months ended June 30, 2024, compared to $15,739,000 during the nine months ended June 30, 2023.

Non-interest Income - The three months ended June 30, 2024 results include total non-interest income of $17,255,000 compared to $13,771,000 for the same period one year ago, a $3,484,000 increase.

The nine months ended June 30, 2024 results include total non-interest income of $44,814,000 compared to $37,867,000 for the same period one year ago, a $6,947,000 increase.

These increases are primarily due to increased gains on certain equity method investments, increases in WAFD Insurance Group commissions and overall fee increases as a result of the Merger.

Non-interest Expense - Total non-interest expense was $110,079,000 for the three months ended June 30, 2024, an increase of $15,380,000 from $94,699,000 for the prior year quarter.

Compensation expense increased by $6,713,000 as a result of approximately $1,400,000 in acquisition related retention costs during the quarter, combined with a larger post-acquisition workforce.

Information technology costs increased by $1,767,000 due to increased telephone and data lines combined with lingering conversion costs and termination fees on LBC software.

FDIC premiums increased $2,250,000 compared to the same period last year.

Other expense also increased by $3,317,000 due to a full quarter of amortization resulting from the core deposit intangible created in the Merger.

Total non-interest expense for the three months ended June 30, 2024 and June 30, 2023 equaled 1.48% and 1.71%, respectively, of average assets.

Total non-interest expense was $340,331,000 for the nine months ended June 30, 2024, an increase of $56,473,000 from $283,858,000 for the prior year same period.

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 $9,045,000 compared to the same period last year and included $2,300,000 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.

Other expense also increased by $10,900,000 compared to the same quarter in the prior year due to $5,900,000 in merger-related expenses combined with a $2,000,000 charitable donation and legal and compliance related accruals.

Total non-interest expense for the nine months ended June 30, 2024 and June 30, 2023 equaled 1.77% and 1.71%, respectively, of average assets.

Gain (Loss) on Real Estate Owned - Results for the three months ended June 30, 2024 include a net loss on REO of $124,000, compared to a net gain of $722,000 for the prior year quarter.

The loss during the three months ended June 30, 2024 was due to normal REO-related expenses.

Results for the nine months ended June 30, 2024 include a net gain on REO of $387,000, compared to a net gain of $411,000 for the prior year same period.

Income Tax Expense - Income tax expense totaled $18,178,000 for the three months ended June 30, 2024, compared to $17,719,000 for the prior year quarter.

The effective tax rate was 21.97% and 22.29% for the three months ended June 30, 2024 and June 30, 2023, respectively.

Income tax expense totaled $36,489,000 for the nine months ended June 30, 2024, compared to $58,739,000 for the prior year same period.

The effective tax rate was 20.80% and 22.09% for the nine months ended June 30, 2024 and June 30, 2023, respectively.

The Company’s effective tax rate varies from the Federal statutory rate of 21% mainly due to state taxes, tax-exempt income, tax-credit investments, miscellaneous non-deductible expenses and true-up adjustments for prior periods.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis