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 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 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 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 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 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 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 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 June 30, 2024 was $151,333,000. 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 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. 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 1.7% in the first year and increase of 5.4% 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 1.64%. 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 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 nine months ended June 30, 2024. 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 $101,000,000 or 3.53% and the NPV to total assets ratio to grow to 10.73% from a base of 10.52%. Interest Rates - The Company measures the difference between the rate on total interest-earning assets and the rate on interest-bearing liabilities at the end of each period. This period-end interest rate spread was 2.07% at June 30, 2024, decreased from 2.61% at September 30, 2023, and 2.72% at June 30, 2023. At June 30, 2024, the weighted average period-end rate on interest-earning assets increased by 10 basis points to 5.17% compared to 5.07% at September 30, 2023 and by 23 basis points compared to 4.94% at June 30, 2023. However, these increases were exceeded by the increases in interest-bearing deposits. The weighted average period-end rate on interest-bearing liabilities increased by 64 basis points to 3.10% from 2.46% at September 30, 2023 and by 65 basis points from 2.22% at June 30, 2023. Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 2.56% for the quarter ended June 30, 2024 compared to 3.27% for the quarter ended June 30, 2023. The yield on interest-earning assets increased 37 basis points to 5.66% and the cost of interest-bearing liabilities increased 112 basis points to 3.63% over that same period. The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable-rate assets and cash. The higher rate in interest-bearing liabilities resulted primarily from customer deposits repricing and higher rates on borrowings. 50 Table of Contents WAFD, INC. AND SUBSIDIARIES The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago. Three Months Ended June 30, 2024 Three Months Ended June 30, 2023 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) ($ in thousands) Assets Loans receivable $ 23,536,530 $ 337,118 5.76 % $ 17,307,298 $ 232,167 5.38 % Mortgage-backed securities 1,765,314 17,523 3.99 1,349,264 10,454 3.11 Cash & Investments 2,386,434 33,693 5.68 1,879,893 27,249 5.81 FHLB stock 164,018 3,608 8.85 131,191 2,610 7.98 Total interest-earning assets 27,852,296 391,942 5.66 % 20,667,646 272,480 5.29 % Other assets 1,851,041 1,445,635 Total assets $ 29,703,337 $ 22,113,281 Liabilities and Equity Interest-bearing customer accounts $ 18,398,704 $ 154,359 3.37 % $ 13,019,055 $ 70,062 2.16 % Borrowings 5,406,585 60,397 4.49 3,016,209 27,132 3.61 Total interest-bearing liabilities 23,805,289 214,756 3.63 % 16,614,934 103,780 2.51 % Noninterest-bearing customer accounts 2,593,381 2,826,538 Other liabilities 357,611 275,522 Total liabilities 26,756,281 19,716,994 Shareholders' equity 2,947,056 2,396,287 Total liabilities and equity $ 29,703,337 $ 22,113,281 Net interest income/interest rate spread $ 177,186 2.03 % $ 168,700 2.78 % Net interest margin (NIM) 2.56 % 3.27 % 51 Table of Contents WAFD, INC. AND SUBSIDIARIES Nine Months Ended June 30, 2024 Nine Months Ended June 30, 2023 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) ($ in thousands) Assets Loans receivable $ 20,245,730 $ 857,251 5.66 % $ 16,992,994 $ 659,070 5.19 % Mortgage-backed securities 1,523,673 41,694 3.66 1,357,857 31,489 3.10 Cash & Investments 2,085,208 89,947 5.76 1,709,469 64,522 5.05 FHLB stock 142,097 8,721 8.20 129,445 6,164 6.37 Total interest-earning assets 23,996,708 997,613 5.55 % 20,189,765 761,245 5.04 % Other assets 1,655,369 1,479,537 Total assets $ 25,652,077 $ 21,669,302 Liabilities and Equity Interest-bearing customer accounts $ 15,567,225 $ 367,194 3.15 % $ 12,792,107 $ 153,831 1.61 % Borrowings 4,479,958 142,399 4.25 3,189,011 80,877 3.39 Total interest-bearing liabilities 20,047,183 509,593 3.40 % 15,981,118 234,708 1.96 % Noninterest-bearing customer accounts 2,595,259 3,040,183 Other liabilities 332,769 290,204 Total liabilities 22,975,211 19,311,505 Shareholders' equity 2,676,866 2,357,797 Total liabilities and equity $ 25,652,077 $ 21,669,302 Net interest income/interest rate spread $ 488,020 2.16 % $ 526,537 3.08 % Net interest margin (NIM) 2.72 % 3.49 % 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 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 52 Table of Contents WAFD, INC. AND SUBSIDIARIES 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. 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 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 $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 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. 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 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 Adequacy Guidelines Minimum Well-Capitalized Guidelines ($ in thousands) Capital Ratio Ratio Ratio June 30, 2024 Common Equity Tier I risk-based capital ratio: The Company $ 2,113,789 11.01 % 4.50 % NA The Bank 2,451,717 12.79 % 4.50 % 6.50 % Tier I risk-based capital ratio: The Company 2,413,789 12.58 % 6.00 % NA The Bank 2,451,717 12.79 % 6.00 % 8.00 % Total risk-based capital ratio: The Company 2,682,195 13.98 % 8.00 % NA The Bank 2,669,638 13.92 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 2,413,789 8.24 % 4.00 % NA The Bank 2,451,717 8.37 % 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 $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. During the same period, the balance of HTM securities increased by $24,052,000 primarily due to the purchase of $47,092,000 of HTM securities. There were also principal pay-downs and maturities of $25,503,000 during the period. 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). 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 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 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 $3,172,373,000. Commercial loan originations accounted for 73% of total originations and consumer loan originations were 27% during the nine months ended June 30, 2024. The Company continues to focus on commercial lending and growing operations in all major markets in which we operate. The following table shows the loan portfolio by category and the change. June 30, 2024 September 30, 2023 Change ($ in thousands) ($ in thousands) $ % Commercial loans Multi-family $ 4,616,359 20.5 % $ 2,907,086 14.8 % $ 1,709,273 58.8 % Commercial real estate 3,781,247 16.8 3,344,959 17.0 436,288 13.0 Commercial & industrial 2,394,978 10.7 2,321,717 11.8 73,261 3.2 Construction 2,247,530 10.0 3,318,994 16.9 (1,071,464) (32.3) Land - acquisition & development 195,796 0.9 201,538 1.0 (5,742) (2.8) Total commercial loans 13,235,910 58.9 12,094,294 61.6 1,141,616 9.4 Consumer loans Single-family residential 8,364,415 37.2 6,451,270 32.8 1,913,145 29.7 Construction - custom 414,483 1.9 672,643 3.4 (258,160) (38.4) Land - consumer lot loans 112,317 0.5 125,723 0.6 (13,406) (10.7) HELOC 255,271 1.1 234,410 1.2 20,861 8.9 Consumer 84,445 0.4 70,164 0.4 14,281 20.4 Total consumer loans 9,230,931 41.1 7,554,210 38.4 1,676,721 22.2 Total gross loans 22,466,841 100 % 19,648,504 100 % 2,818,337 14.3 Less: Allowance for credit losses on loans 203,824 177,207 26,617 15.0 Loans in process 1,094,956 1,895,940 (800,984) (42.2) Net deferred fees, costs and discounts 294,142 98,807 195,335 197.7 Total loan contra accounts 1,592,922 2,171,954 (579,032) (26.7) Net loans $ 20,873,919 $ 17,476,550 $ 3,397,369 19.4 % Non-performing assets - Non-performing assets increased $10,863,000 during the nine months ended June 30, 2024 to $68,787,000 from $57,924,000 at September 30, 2023. The change is primarily due to non-accrual loans acquired in the Merger. Given that the overall assets grew with the Merger, non-performing assets as a percentage of total assets was 0.24% at June 30, 2024 compared to 0.26% at September 30, 2023. 55 Table of Contents WAFD, INC. AND SUBSIDIARIES The following table sets forth information regarding non-performing assets. June 30, 2024 September 30, 2023 ($ in thousands) Non-accrual loans: Multi - family $ 9,984 16.3 % $ 5,127 10.2 % Commercial real estate 26,408 43.1 23,435 46.5 Commercial & industrial 2,138 3.5 6,082 12.1 Construction 1,120 1.8 — — Land - acquisition & development 74 0.1 — — Single-family residential 20,422 33.3 14,918 29.6 Construction - custom 88 0.2 88 0.2 Land - consumer lot loans 236 0.4 9 — HELOC 758 1.2 736 1.5 Consumer 40 0.1 27 0.1 Total non-accrual loans 61,268 100 % 50,422 100 % Real estate owned 4,209 4,149 Other property owned 3,310 3,353 Total non-performing assets $ 68,787 $ 57,924 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 $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. 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 June 30, 2024 September 30, 2023 Change Allowance for credit losses: ($ in thousands) ($ in thousands) $ % Commercial loans Multi-family $ 25,199 12.4 % 13,155 7.4 % $ 12,044 91.6 % Commercial real estate 39,756 19.5 28,842 16.3 10,914 37.8 Commercial & industrial 57,833 28.4 58,773 33.2 (940) (1.6) Construction 22,707 11.0 29,408 16.6 (6,701) (22.8) Land - acquisition & development 7,700 3.9 7,016 4.0 684 9.7 Total commercial loans 153,195 75.2 137,194 77.4 16,001 11.7 Consumer loans Single-family residential 40,316 19.8 28,029 15.8 12,287 43.8 Construction - custom 1,494 0.6 2,781 1.6 (1,287) (46.3) Land - consumer lot loans 2,648 1.3 3,512 2.0 (864) (24.6) HELOC 2,924 1.4 2,859 1.6 65 2.3 Consumer 3,247 1.7 2,832 1.6 415 14.7 Total consumer loans 50,629 24.8 40,013 22.6 10,616 26.5 Total allowance for loan losses 203,824 100.0 % 177,207 100.0 % 26,617 15.0 Reserve for unfunded commitments 21,500 24,500 (3,000) (12.2) Total allowance for credit losses $ 225,324 $ 201,707 $ 23,617 11.7 % 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 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 $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 $3,950,744,000 or 74.5% as 66% of the LBC customer accounts were time deposits. The following table shows the composition of the Bank’s customer accounts by deposit type. June 30, 2024 September 30, 2023 Deposit Account Balance As a % of Total Deposits Weighted Average Rate Deposit Account Balance As a % of Total Deposits Weighted Average Rate ($ in thousands) Non-interest checking $ 2,514,310 11.9 % — % $ 2,706,448 16.8 % — % Interest checking 4,481,465 21.3 3.05 3,882,715 24.2 2.28 Savings 733,973 3.5 0.44 817,547 5.1 0.21 Money market 4,199,257 19.8 2.25 3,358,603 20.9 1.48 Time deposits 9,255,760 43.6 4.14 5,305,016 33.0 3.77 Total $ 21,184,765 100 % 2.91 % $ 16,070,329 100 % 2.12 % 57 Table of Contents WAFD, INC. AND SUBSIDIARIES 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 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. 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 changes in other comprehensive income of $7,995,000. RESULTS OF OPERATIONS 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 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, 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 $38,517,000 from the same period of the prior year. Net interest margin was 2.72% for the nine months ended June 30, 2024 compared to 3.49% for the prior year same period. The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Rate / Volume Analysis : Comparison of Three Months Ended 6/30/24 and 6/30/23 Comparison of Nine Months Ended 6/30/24 and 6/30/23 ($ in thousands) Volume Rate Total Volume Rate Total Interest income: Loans receivable $ 87,753 $ 17,198 $ 104,951 $ 134,547 $ 63,634 $ 198,181 Mortgage-backed securities 3,685 3,384 7,069 4,114 6,091 10,205 Investments 1 7,853 (412) 7,441 16,278 11,704 27,982 All interest-earning assets 99,291 20,170 119,461 154,939 81,429 236,368 Interest expense: Customer accounts 35,711 48,586 84,297 39,289 174,074 213,363 Borrowings 19,249 7,429 26,678 37,782 23,740 61,522 All interest-bearing liabilities 54,960 56,015 110,975 77,071 197,814 274,885 Change in net interest income $ 44,331 $ (35,845) $ 8,486 $ 77,868 $ (116,385) $ (38,517) ___________________ 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 $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. 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.