What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-11-20 compared with 2023-11-17 · 122 added, 150 removed, 447 unchanged (38% of the section changed)

7 unchanged sentences

For management's review of the factors that affected our results of operations for the years ended September 30, 2023 and 2022, refer to our Annual Report on Form 10-K for the year ended September 30, 2023, which was filed with the Securities and Exchange Commission on November 17, 2023.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

Business Combinations.

The Company applies the acquisition method of accounting for business combinations.

Under the acquisition method, the acquiring entity recognizes the assets acquired and liabilities assumed at their acquisition date fair values.

Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values.

This method often involves estimates based on third party valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective.

Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill.

Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period.

Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.

Fair values are subject to refinement over the measurement period, not to exceed one year after the closing date.

Management uses various valuation methodologies to estimate the fair value of acquired assets and liabilities which often involve a significant degree of judgement.

Changes in the assumptions utilized within these valuations, including downturns in economic or business conditions, could have a significant adverse impact on the carrying value of assets which could result in impairment losses affecting the Company's financial statements as a whole.

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

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

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

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

Financial Statements and Supplementary Data.”

UPDATE ON LUTHER BURBANK MERGER

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

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

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

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

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

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

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

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

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

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

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

RECENT INDUSTRY DEVELOPMENTS

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

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

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

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

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

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

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

Furthermore, the Company remains well capitalized.

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

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

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

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

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

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

ALLOWANCE FOR CREDIT LOSSES

The following table provides detail regarding the Company's allowance for credit losses (periods prior to 2020 applied the incurred loss model as the current expected credit loss methodology ("CECL") was implemented in 2020).

The following table provides detail regarding the Company's allowance for credit losses.

Twelve Months Ended September 30, 2024 2023 2022 2021 2020

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As of September 30, 2024, the allowance of $203,753,000 is for loans that are evaluated on a pooled basis, which was comprised of $144,848,000 related to the quantitative component and $58,905,000 related to management's qualitative overlays.

The fluctuations that resulted in the overall increase from the prior year can be seen in the table above.

The allowance for multi-family and single-family residential loans increased largely as a result of the Merger.

The allowance for both consumer and commercial construction loans decreased as projects were completed and transitioned to CRE and single-family loans which also contributed to increases.

The Company recorded a provision for credit losses of $17,500,000 in 2024, compared to a provision of $41,500,000 for 2023.

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

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

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

In 2024, provisioning included the initial provision of $16,000,000 recorded on LBC loans acquired, as well as adjustments resulting from qualitative considerations such as prolonged and intensified borrower sensitivity to high interest rates and operating costs due to inflationary pressures.

For the year ended September 30, 2024, net charge-offs were $1,356,000, compared to charge-offs of $45,101,000 in the prior year.

The ratio of the total ACL to total gross loans decreased to 1.01% as of September 30, 2024, as compared to 1.03% as of September 30, 2023.

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

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

Loan portfolios with lower historical losses, like multi-family and single family residential saw increased balances as a result of the Merger while those with higher historical losses, like construction, saw decreases.

The reserve for unfunded loan commitments was $21,500,000 as of September 30, 2024, compared to $24,500,000 as of September 30, 2023.

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

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

The following table sets forth the amount of the Bank’s allowance for loan losses by loan portfolio and class.

September 30, 2024 2023 2022 2021 2020

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ASSET QUALITY

Troubled debt restructured loans ("TDRs").

TDRs are reserved for under the Company's CECL methodology.

Most TDRs are performing and accruing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties.

Each request is individually evaluated for merit and likelihood of success.

The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 basis points for a specific term, usually six to twelve months.

Interest-only payments may also be approved during the modification period.

Concessions for construction, land A&D and multi-family loans are typically an extension of maturity combined with a rate reduction of normally 100 basis points.

Before granting approval to modify a loan in a TDR, a borrower’s ability to repay is considered by evaluating current income levels, debt-to-income ratio, credit score, loan payment history and an updated evaluation of the secondary repayment source.

If a loan is on non-accrual status before becoming a TDR, it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status.

If a loan is on accrual status before it becomes a TDR, and it is concluded that a full repayment is highly probable, it will remain on accrual status following restructuring.

If the homogeneous restructured loan does not perform, it is placed in non-accrual status when it is 90 days delinquent.

For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status.

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

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

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

Any modified loan that re-defaults and is charged-off would impact the quantitative component of the CECL methodology.

Modifications to Borrowers Experiencing Financial Difficulty.

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 Bank 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.

Non-Performing Assets.

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If foreclosure occurs, the collateral will typically be sold at public auction and may be purchased by the Bank.

Loans are placed on nonaccrual status when, in the judgment of management, the probability of collecting interest or principal is deemed to be insufficient to warrant further accrual.

When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

Loans are placed on non-accrual status when, in the judgment of management, the probability of collecting interest or principal is deemed to be insufficient to warrant further accrual.

When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income.

The Bank does not accrue interest on loans 90 days past due or more.

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

The Bank will consider modifying the interest rate and terms of a loan if it determines that a modification is deemed to be the best option available for collection in full or to minimize the loss to the Bank.

Most loans restructured in TDRs are accruing and performing loans where the borrower has proactively approached the Bank about a modification due to temporary financial difficulties.

Each request is individually evaluated for merit and likelihood of success.

The modification of these loans is typically a payment reduction through a rate reduction of between 100 to 200 bps for a specific term, usually six to twelve months.

Interest-only payments may also be approved during the modification period.

Principal forgiveness generally is not an available option for restructured loans.

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

The Bank reserves for restructured loans within its pool based general reserve methodology, except in instances where management considers it appropriate to evaluate individually.

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.

Real estate acquired by foreclosure or deed-in-lieu thereof (“REO” or “Real Estate Owned”) is classified as real estate held for sale.

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

The following table sets forth information regarding the Company's restructured loans and non-performing assets.

The following table sets forth information regarding the Bank's non-performing assets.

September 30, 2024 2023 2022 2021 2020

(In thousands)

Performing restructured loans $ 45,167 $ 55,823 $ 63,655 $ 89,072 $ 116,659

Non-performing restructured loans 950 994 1,473 2,336 5,018

Total restructured loans 46,117 56,817 65,128 91,408 121,677

Non-accrual loans:

Commercial loans

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Total non-performing assets $ 77,418 $ 57,924 $ 44,554 $ 43,625 $ 37,695

Total non-performing assets and performing restructured loans $ 103,091 $ 100,377 $ 107,280 $ 126,767 $ 160,485

Total non-performing assets and restructured loans as a percent of total assets 0.46 % 0.48 % 0.55 % 0.67 % 0.97 %

Total non-performing assets to total assets 0.28 % 0.26 % 0.21 % 0.22 % 0.20 %

___________________

(1) For the year ended September 30, 2023, the Company recognized $2,824,000 in interest income on cash payments received from borrowers on non-accrual loans.

The Company would have recognized interest income of $1,981,000 for the same period had these loans performed according to their original contract terms.

(1) For the year ended September 30, 2024, the Bank recognized $1,775,000 in interest income on cash payments received from borrowers on non-accrual loans.

The Bank would have recognized interest income of $3,081,000 for the same period had these loans performed according to their original contract terms.

The recognized interest income may include more than twelve months of interest for some of the non-accrual loans that were brought current or paid off.

In addition to the non-accrual loans reflected in the above table, the Company had $263,075,000 of loans that were less than 90 days delinquent at September 30, 2023 but were classified as substandard for one or more reasons.

In addition to the non-accrual loans reflected in the above table, the Bank had $356,893,000 of loans that were less than 90 days delinquent at September 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 non-performing assets and performing restructured loans as a percent of total assets would have increased to 1.55% at September 30, 2024.

For a discussion of the Company's policy for placing loans on non-accrual status, see Note A to the Consolidated Financial Statements included in Item 8 of this report.

For a discussion of the Bank's policy for placing loans on non-accrual status, see Note A to the Consolidated Financial Statements included in Item 8 of this report.

Non-performing assets increased 33.7% to $77,418,000, or 0.28% of total assets, at September 30, 2024, compared to $57,924,000, or 0.26% of total assets, at September 30, 2023.

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

The increase was primarily a result of an increase of $19,119,000 in non-accrual loans partially offset by a $418,000 increase in real estate owned.

Other property owned of $3,310,000 as of September 30, 2024 is comprised entirely of a government guarantee related to equipment obtained via a commercial loan foreclosure.

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

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

As of September 30, 2023, $45,167,000 or 97.9% of TDRs were performing.

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

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

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

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

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

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

As of September 30, 2024, real estate owned totaled $4,567,000, an increase of $418,000, or 10.1%, from $4,149,000 as of September 30, 2023.

During 2024, the Bank sold real estate owned properties for total net proceeds of $6,802,000.

The majority of REO properties are former bank premises that are expected to be sold.

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Cash and cash equivalents increased to $2,381,102,000 at September 30, 2024, as compared to $980,649,000 at September 30, 2023.

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

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

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

Available-for-sale investment securities :

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

Available-for-sale securities increased $577,612,000, or 29.0%, during the year ended September 30, 2024, to $2,572,709,000, due to the addition of $516,308,000 in AFS investments obtained in the Merger combined with normal investing activity.

During this time, the Bank had purchases of $549,159,000 offset by principal repayments and maturities of $386,564,000 and sales of $182,682,000.

As of September 30, 2024, the Company had a net unrealized loss on available-for-sale securities of $44,168,000, which is recorded net of tax within AOCI, compared to an unrealized loss of $123,519,000 as of September 30, 2023.

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

Substantially all of the Company’s AFS debt securities are issued by U.S.

government agencies or U.S.

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The remaining securities are issued by highly-rated municipalities or corporate borrowers.

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

The Company does not believe that any of its AFS debt securities have credit loss impairment as of September 30, 2024, therefore, no allowance was recorded.

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

Held-to-maturity investment securities :

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

Held-to-maturity securities increased by $13,386,000 to $436,972,000, or 3.2%, during the year ended September 30, 2024, largely due to the purchase of $47,092,000 of HTM securities.

These purchases were offset by principal repayments and maturities of $36,013,000 during the period.

The increase also included $2,570,000 in HTM securities obtained in the Merger.

There were no held-to-maturity securities sold during the year ended September 30, 2024.

As of September 30, 2024, the net unrealized loss on held-to-maturity securities was $35,926,000, compared to $68,398,000 the year prior, which management attributes to the change in interest rates since acquisition.

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

Substantially all of the Company’s HTM debt securities are issued by U.S.

government agencies or U.S.

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

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

government and have a long history of zero credit loss, thus the Company did not record an allowance for credit losses for HTM securities as of September 30, 2024.

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

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

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

September 30, 2024 Amortized

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Loans receivable, net of related contra accounts, increased $3,439,804,000, or 19.7%, to $20,916,354,000 at September 30, 2024, from $17,476,550,000 one year earlier.

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

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

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

The increase resulted primarily from the addition of loans obtained in the Merger.

The balance change also reflects originations of $3,632,071,000, a decrease to loans-in-process of $886,142,000 and principal repayments of $4,302,359,000 during the year ended September 30, 2024.

Commercial loan originations

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

accounted for 72.5% of total originations and consumer originations were 27.5% as the Bank continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate.

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

September 30, 2024 September 30, 2023 Change

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Net loans $ 20,916,354 $ 17,476,550 $ 3,439,804 19.7%

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

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

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

September 30, 2024 Total Less than

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$ 21,120,107 $ 6,397,897 $ 5,229,927 $ 2,889,008 $ 6,603,275

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

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

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

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

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

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Nevada 170,191 173,063 61,007 37,756 4,487 305,732 12,832 5,647 2,041 10,844 783,600

California 1,137,134 223,589 134,347 29,131 — 1,503,510 — — 9,498 397 3,037,606

Other 94,843 190,086 117,011 39,735 — 24,497 — — 6,329 5,017 477,518

18 unchanged sentences

Nevada 0.8 0.8 0.3 0.2 — 1.4 0.1 — — 0.1 3.7

California 5.4 1.1 0.6 0.1 — 7.2 — — — — 14.4

Other 0.4 0.9 0.6 0.2 — 0.2 — — — — 2.3

18 unchanged sentences

Nevada 3.7 4.6 2.6 2.6 2.8 3.7 7.0 5.2 2.8 4.0

California 25.0 6.0 5.8 2.0 — 18.1 — — 12.8 0.1

Other 2.1 5.1 5.0 2.8 — 0.3 — — 8.5 1.9

11 unchanged sentences

Nevada 3.7 4.1 (0.4)

California 14.4 1.5 12.9

Other (1) 2.3 2.3 —

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

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

Allowance for credit losses :

2 unchanged sentences

For details, see the “Asset Quality" section above in this report.

Troubled debt restructured loans ("TDRs") :

For details, see the “Asset Quality" section above in this report.

Real estate owned :

2 unchanged sentences

Interest receivable was $102,827,000 as of September 30, 2024, an increase of $15,824,000, or 18.2%, since September 30, 2023.

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

The increase was the result of a 19.7% increase in loans receivable combined with the increase in interest rates.

Bank Owned Life Insurance :

Bank-owned life insurance increased to $242,919,000 as of September 30, 2023 from $237,931,000 as of September 30, 2022, primarily as a result of increases in the cash surrender value of the policies.

Bank-owned life insurance increased to $267,633,000 as of September 30, 2024 from $242,919,000 as of September 30, 2023, primarily as a result of policies obtained in the Merger.

The investments in bank-owned life insurance serve to assist in funding growing employee benefit costs.

Intangible assets :

The Company's intangible assets totaled $310,619,000 at September 30, 2023 compared to $309,009,000 as of September 30, 2022.

The Bank's intangible assets totaled $448,425,000 at September 30, 2024 compared to $310,619,000 as of September 30, 2023.

The increase is largely the result of the Merger which created $104,707,000 in Goodwill and a Core Deposit Intangible balance of $37,022,000.

The balance at September 30, 2024 is comprised of $411,360,000 of goodwill and the unamortized balance of the core deposit and other intangibles of $37,065,000.

Customer accounts :

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

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

As of September 30, 2024, customer deposits totaled $21,373,970,000 compared with $16,070,329,000 at September 30, 2023, a $5,303,641,000, or 33.0%, increase largely due to deposits obtained in the Merger.

During 2024, transaction accounts increased by $1,051,872,000 or 9.8% while time deposits increased by $4,251,769,000 or 80.1% as 66% of the LBC customer accounts were time deposits.

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

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Texas 398,736 1.9 381,576 2.4 17,160 4.5 %

California 4,448,018 20.8 — — — — %

$ 21,373,970 100 % $ 16,070,329 100 % $ 855,623 5.3 %

18 unchanged sentences

The ability to retain maturing time deposits is difficult to project;

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

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

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

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Financial Statements and Supplementary Data” of this report.

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

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

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

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

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

Total borrowings decreased to $3,267,589,000 as of September 30, 2024, as compared to $3,650,000,000 at September 30, 2023.

The weighted average rate for borrowings was 3.93% as of September 30, 2024, versus 3.98% at September 30, 2023, the decrease being primarily due to higher rates on new short-term borrowings.

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

Taking into account these hedges, the weighted average effective maturity of FHLB advances at September 30, 2024 was 2.34 years.

RESULTS OF OPERATIONS

COMPARISON OF 2024 RESULTS WITH 2023

Net income increased $21,096,000, or 8.9%, to $257,426,000 for the year ended September 30, 2023, as compared to $236,330,000 for the year ended September 30, 2022.

Net income decreased $57,385,000, or 22.3%, to $200,041,000 for the year ended September 30, 2024, as compared to $257,426,000 for the year ended September 30, 2023.

The change was due to the factors described below.

Net Interest Income :

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

For the year ended September 30, 2024, net interest income was $660,832,000, a decrease of $29,402,000 or 4.3% from the year ended September 30, 2023.

Net interest margin was 2.69% for the year ended September 30, 2024 compared to 3.40% in the prior year.

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

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

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

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

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

The decrease was the result of the combination of greater growth in interest-bearing liabilities balances than in interest-paying assets and a larger increase in the rate paid on those liabilities compared to the rates earned on interest-earning assets.

Average interest-bearing liabilities grew by 27.2% while average interest-earning assets grew by 20.8%.

Rates on interest-bearing liabilities increased by 128 basis points outpacing the 46 basis points increase in the average rate on interest-earning assets.

Rate/Volume Analysis

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Twelve Months Ended September 30,

Increase (Decrease) Due to

Increase (Decrease) Due to 2023 vs.

Increase (Decrease) Due to 2022 vs.

Increase (Decrease) Due to

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Customer accounts 75,680 219,521 295,201 570 193,622 194,192 2,170 (1,442) 728

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

Borrowings 38,609 24,347 62,956 38,084 48,675 86,759 (9,002) (6,457) (15,459)

All interest-bearing liabilities 114,289 243,868 358,157 38,654 242,297 280,951 (6,832) (7,899) (14,731)

Change in net interest income $ 117,829 $ (147,231) $ (29,402) $ 41,271 $ 54,374 $ 95,645 $ 69,094 $ 20,386 $ 89,480

___________________

(1) Includes interest on cash equivalents and dividends on stock of the FHLB of Des Moines and FRB of San Francisco.

Provision (Release) for Credit Losses :

(1) Includes interest on cash equivalents and dividends on stock of the FHLB of Des Moines, the FHLB of San Francisco and FRB of San Francisco.

Provision for Credit Losses :

The Company recorded a provision for credit losses of $17,500,000 in 2024, compared to a provision of $41,500,000 for 2023.

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

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

Other Income :

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

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

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

Other Expense :

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

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

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

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

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

In 2024, the provision included the initial provision of $16,000,000 recorded on LBC loans acquired, as well as adjustments resulting from qualitative considerations such as prolonged and intensified borrower sensitivity to high interest rates and operating costs due to inflationary pressures.

For the year ended September 30, 2024, net charge-offs were $1,356,000, compared to $45,101,000 in the prior year.

Non-interest Income :

Non-interest income was $60,692,000 for the year ended September 30, 2024, an increase of $8,491,000, or 16.3%, from $52,201,000 for the year ended September 30, 2023.

The increase in other income is primarily due to increased income from the Company's subsidiary, WAFD Insurance Group combined with a decrease in unrealized losses recorded for certain equity method investments in fiscal 2024 compared to the prior year.

The reduced losses on the equity method investment made up $2,371,000 of the overall increase.

Non-interest Expense :

Total non-interest expense was $448,272,000 for the year ended September 30, 2024, an increase of $72,237,000, or 19.2%, from the $376,035,000 for the year ended September 30, 2023.

Compensation and benefits costs increased $37,614,000 or 19.1% year-over-year primarily due to Merger-related retention, severance and change-in-control expenses combined with a larger post-Merger workforce.

FDIC premiums increased $8,845,000 in 2024 compared to the prior year as a result of both the FDIC's special assessment and the Company's increased size post-Merger.

Information technology costs increased by $3,859,000 in 2024 as compared to 2023 due to increased telephone and data lines combined with conversion costs and termination fees related to the Merger.

Other expense increased by $18,449,000 and included Merger-related expenses of $8,873,000, a $2,000,000 charitable donation and $6,626,000 in amortization expense related to the core deposit intangible asset created in the Merger.

The Company’s efficiency ratio was 62.1% for 2024 as compared to 50.7% for the prior year.

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Gain on Real Estate Owned :

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

Gain on real estate owned, net was $304,000 for the year ended September 30, 2024, compared to of $176,000 for the year ended September 30, 2023.

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

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Income Tax Expense :

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

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

Income tax expense was $56,015,000 for the year ended September 30, 2024, a decrease of $11,635,000, or 17.2%, from the $67,650,000 for the year ended September 30, 2023.

The decrease is mostly due to an 21.2% decrease in pre-tax income.

The effective tax rate for 2024 was 21.88% as compared to 20.81% for the year ended September 30, 2023.

The effective tax rate of 20.81% for 2023 differs from the statutory rate of 21% mainly due to the effects of state taxes, tax exempt income, tax credit investments and certain differences in book and tax deductions.

The Company's effective tax rate varies from the Federal statutory rate of 21% mainly due to state taxes, tax-exempt income and tax-credit investments.

For the current year, income tax was also impacted by the LBC Merger and consideration of California State and Local taxes.

COMPARISON OF 2023 RESULTS WITH 2022

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The Company's shareholders' equity at September 30, 2024, was $3,000,300,000, or 10.69% of total assets, as compared to $2,426,426,000, or 10.80% of total assets, at September 30, 2023.

The Company's shareholders' equity was impacted in the year by net income of $257,426,000, the payment of $63,792,000 in Common Stock dividends, payment of $14,625,000 in preferred stock dividends, $30,463,000 of treasury stock purchases, as well as other comprehensive loss of $5,560,000.

The Company's shareholders' equity was greatly impacted in the year by the stock issued in the Merger valued at $465,504,000.

Other items affecting shareholders' equity were net income of $200,041,000, the payment of $74,267,000 in Common Stock dividends, payment of $14,625,000 in preferred stock dividends, $27,069,000 of treasury stock purchases, as well as other comprehensive loss of $8,930,000.

The Company paid out 41.2% of its 2024 earnings in cash dividends to common shareholders, compared with 26.6% last year.

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

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

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

Based on collateral pledged as of September 30, 2023, the Bank had $2,357,588,000 of additional borrowing capacity at the FHLB.

The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term advance agreements.

All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB.

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

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

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

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

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

pledge of single-family residential mortgages that are specifically identified.

Based on collateral pledged as of September 30, 2024, the Bank had $6,029,890,000 of additional borrowing capacity at the FHLB - DM.

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 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's cash and cash equivalents were $2,381,102,000 at September 30, 2024, which is a 142.8% increase from the balance of $980,649,000 as of September 30, 2023.

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

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

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

During the year, the Company completed the sale of approximately $2,800,000,000 in multifamily loans and approximately $400,000,000 in single-family loans from the acquired LBC loan portfolio.

The proceeds from the sales have increased liquidity adding approximately $1 billion in cash after paying down borrowings.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis