WAFD INC

Previous wording

•risks related to the Company's pending merger with Luther Burbank Corporation;

Current wording

•impacts of the merger with Luther Burbank Corporation;

Previous wording

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 66% of total deposits as of December 31, 2023 while the composition of the investment securities portfolio is 47% variable and 53% 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 $415,079,000 of mortgage-backed securities that it has designated as HTM and are carried at amortized cost. As of December 31, 2023, the net unrealized loss on these securities was $44,137,000. The Company has $2,018,445,000 of AFS securities that are carried at fair value. As of December 31, 2023, the net unrealized loss on these securities was $82,869,000. 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 December 31, 2023 was $143,846,000. All of the above are pre-tax net unrealized gains or losses.

Current wording

Based on management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term loans and transaction deposit accounts, to reduce its interest rate risk profile. The mix of transaction and savings accounts is 58% of total deposits as of March 31, 2024 while the composition of the investment securities portfolio is 52% variable and 48% fixed rate. When interest rates rise, the fair value of the investment securities with fixed rates will decrease and vice versa when interest rates decline. The Company has $457,882,000 of mortgage-backed securities that it has designated as HTM and are carried at amortized cost. As of March 31, 2024, the net unrealized loss on these securities was $50,421,000. The Company has $2,438,114,000 of AFS securities that are carried at fair value. As of March 31, 2024, the net unrealized loss on these securities was $85,022,000. The Company has executed interest rate swaps to hedge interest rate risk on certain FHLB borrowings. The unrealized gain on these interest rate swaps as of March 31, 2024 was $154,588,000. All of the above are pre-tax net unrealized gains or losses.

Previous wording

As of December 31, 2023, 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 decrease by 1.0% in the next year. This compares to an estimated decrease of 2.0% as of the September 30, 2023 analysis. It is noted that a flattening yield curve where the spread between short-term rates 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 0.2% in the first year and increase of 0.1% in the second year assuming a constant balance sheet and no management intervention. Alternatively, in the event of an immediate and parallel decrease of 100 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 3.47%.

Current wording

As of March 31, 2024, in the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 9.3% in the next year. This compares to an estimated decrease of 2.0% as of the September 30, 2023 analysis. The current results reflect the assumed redeployment of the funds received from the loans held for sale balance. Further, a flattening yield curve where the spread between short-term and long-term rates decreases would likely result in lower net interest income and vice versa for a steepening yield curve. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long-term rates over two years would result in a net interest income increase of 3.1% in the first year and increase of 8.1% in the second year assuming a constant balance sheet and no management intervention. Alternatively, in the event of an immediate and parallel decrease of 100 basis points in both short and long-term interest rates, the model estimates that net interest income would decrease by 0.16%.

Previous wording

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 December 31, 2023, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $678,000,000 or 27.37% and the NPV to total assets ratio to decline to 8.79% from a base of 11.46%. 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 12.42%. 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 three months ended December 31, 2023. Prepayment speeds continue to be low at December 31, 2023 but increasing with the Bank's conditional payment rate ("CPR") for single family mortgages at 6.60%, up from 6.30% the year before.

Current wording

NPV Sensitivity - NPV is an estimate of the market value of shareholders' equity. NPV is calculated as the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of NPV to changes in interest rates provides a view of interest rate risk as it incorporates all future expected cash flows. As of March 31, 2024, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $609,000,000 or 19.14% and the NPV to total assets ratio to decline to 9.22% from a base of 10.90%. As of September 30, 2023, the NPV in the event of a 200 basis point increase in rates was estimated to decrease by $723,000,000 or 27.41% and the NPV to total assets ratio to decline to 9.50% from a base of 12.40%. The change in the sensitivity of the NPV ratio to this assumed change in interest rates is primarily due to the flattening of the yield curve and changes in balance sheet mix during the six months ended March 31, 2024. Prepayment speeds continue to be low at March 31, 2024 with the Bank's conditional payment rate ("CPR") for single family mortgages at 4.80%, down from 5.80% the year before.

Previous wording

As of December 31, 2023, in the event of an immediate and parallel decrease of 100 basis points in interest rates is estimated to increase NPV by $360,000,000 or 14.54% and the NPV to total assets ratio to grow to 12.74% from a base of 11.46%.

Current wording

As of March 31, 2024, in the event of an immediate and parallel decrease of 100 basis points in interest rates is estimated to increase NPV by $114,000,000 or 3.60% and the NPV to total assets ratio to grow to 11.12% from a base of 10.90%.

Previous wording

Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 2.91% for the quarter ended December 31, 2023 compared to 3.69% for the quarter ended December 31, 2022. The yield on interest-earning assets increased 76 basis points to 5.47% and the cost of interest-bearing liabilities increased 185 basis points to 3.16% 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.

Current wording

Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 2.73% for the quarter ended March 31, 2024 compared to 3.51% for the quarter ended March 31, 2023. The yield on interest-earning assets increased 38 basis points to 5.50% and the cost of interest-bearing liabilities increased 129 basis points to 3.32% over that same period. The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable-rate assets and cash. The higher rate in interest-bearing liabilities resulted primarily from customer deposits repricing and higher rates on borrowings.

Previous wording

As of December 31, 2023, total assets had increased by $165,447,000 to $22,640,122,000 from $22,474,675,000 at September 30, 2023. During the three months ended December 31, 2023, loans receivable increased $108,072,000 and FHLB stock increased by $11,120,000 while cash and cash equivalents increased by $164,125,000 and investment securities increased by $14,841,000.

Current wording

As of March 31, 2024, total assets had increased by $7,665,613,000 to $30,140,288,000 from $22,474,675,000 at September 30, 2023 primarily due to the addition of $7,676,343,000 of LBC assets at fair value in connection with the Merger. During the six months ended March 31, 2024, loans receivable increased $3,318,709,000 and FHLB stock increased by $33,997,000 while cash and cash equivalents increased by $525,122,000 and investment securities increased by $477,313,000.

Previous wording

Cash and cash equivalents of $1,144,774,000 and shareholders’ equity of $2,452,004,000 as of December 31, 2023 provide management with flexibility in managing interest rate risk going forward.

Current wording

Cash and cash equivalents of $1,505,771,000 and shareholders’ equity of $2,921,906,000 as of March 31, 2024 provide management with flexibility in managing interest rate risk going forward.

Previous wording

The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") of up to 45% of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity. 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 loan 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 is also eligible to borrow under the Federal Reserve Bank's primary credit program. The Bank has 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. On January 24, 2024, the Federal Reserve announced the BTFP will cease making new loans on March 11, 2024.

Current wording

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.

Previous wording

The Company's cash and cash equivalents totaled $1,144,774,000 at December 31, 2023, an increase from $980,649,000 at September 30, 2023. These amounts include the Bank's operating cash.

Current wording

The Company's cash and cash equivalents totaled $1,505,771,000 at March 31, 2024, an increase from $980,649,000 at September 30, 2023. These amounts include the Bank's operating cash and $627,403,000 in cash obtained in the Merger.

Previous wording

The Company’s shareholders' equity at December 31, 2023 was $2,452,004,000, or 10.83% of total assets. This is an increase of $25,578,000 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 three months ended December 31, 2023 by net income of $58,453,000, the payment of $15,989,000 in common stock dividends, payment of $3,656,000 in preferred stock dividends, treasury stock purchases of $17,065,000, as well as the other comprehensive loss of $93,000. The ratio of tangible capital to tangible assets at December 31, 2023 was 9.59%. 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.

Current wording

The Company’s shareholders' equity at March 31, 2024 was $2,921,906,000, or 9.69% of total assets. This is an increase of $495,480,000 from September 30, 2023 when shareholders' equity was $2,426,426,000, or 10.80% of total assets. The Company’s shareholders' equity was impacted in the six months ended March 31, 2024 by the stock consideration paid in the Merger of $465,504,000, net income of $74,341,000, the payment of $32,472,000 in common stock dividends, payment of $7,312,000 in preferred stock dividends, treasury stock purchases of $17,304,000, as well as other comprehensive income of $5,014,000. The ratio of tangible capital to tangible assets at March 31, 2024 was 8.31%. Management believes the Company's strong equity position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment.

Previous wording

Available-for-sale and held-to-maturity investment securities - AFS securities increased $23,348,000, or 1.2%, during the three months ended December 31, 2023, mostly due to securities purchases of $49,380,000 and unrealized gains during the period of $40,570,000 offset by principal repayments and maturities of $64,120,000. During the same period, the balance of HTM securities decreased by $8,507,000 primarily due to principal pay-downs and maturities of $8,438,000. As of December 31, 2023, the Company had a total net unrealized loss on AFS securities of $82,869,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

Current wording

Available-for-sale and held-to-maturity investment securities - AFS securities increased $443,017,000, or 22.2%, during the six months ended March 31, 2024, mostly due to the addition of LBC's AFS investments. During this time the Bank also had securities purchases of $214,707,000 and unrealized gains during the period of $2,244,000 offset by principal repayments and maturities of $150,666,000. During the same period, the balance of HTM securities increased by $34,296,000 primarily due to the purchase of $47,670,000 of HTM securities. There were also principal pay-downs and maturities of $15,800,000 during the period. As of March 31, 2024, the Company had a total net unrealized loss on AFS securities of $85,022,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

Previous wording

Loans receivable - Loans receivable, net of related contra accounts, increased by $108,072,000 to $17,584,622,000 at December 31, 2023, compared to $17,476,550,000 at September 30, 2023. The increase was primarily the net result of originations of $871,446,000, a decrease to loans-in-process of $379,418,000, offset by loan principal repayments of $1,153,510,000. Commercial loan originations accounted for 75% of total originations and consumer loan originations were 25% during the period. The Company continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate.

Current wording

Loans receivable - Loans receivable, net of related contra accounts, increased by $3,318,709,000 to $20,795,259,000 at March 31, 2024, compared to $17,476,550,000 at September 30, 2023. The increase was primarily the addition of loans obtained in the Merger. Additionally, the balance reflects originations of $1,697,179,000, a decrease to loans-in-process of $212,544,000, and principal repayments of $2,136,858,000. Commercial loan originations accounted for 76% of total originations and consumer loan originations were 24% during the six months ended March 31, 2024. The Company continues to focus on commercial lending and growing operations in all major markets in which we operate.

Previous wording

Non-performing assets - Non-performing assets decreased $2,536,000 during the three months ended December 31, 2023 to $55,388,000 from $57,924,000 at September 30, 2023. The change is primarily due to a $5,164,000 decrease in non-accrual loans offset by a $2,671,000 increase in real estate owned as a result of the addition of former branch properties for sale. Non-performing assets as a percentage of total assets was 0.24% at December 31, 2023 compared to 0.26% at September 30, 2023.

Current wording

Non-performing assets - Non-performing assets increased $10,437,000 during the six months ended March 31, 2024 to $68,361,000 from $57,924,000 at September 30, 2023. The change is primarily due to a $13,487,000 increase in non-accrual loans acquired in the Merger. Given that the overall assets grew with the Merger, non-performing assets as a percentage of total assets was 0.23% at March 31, 2024 compared to 0.26% at September 30, 2023.

Previous wording

For the three months ended December 31, 2023, the Company recognized $511,000 in interest income on cash payments received from borrowers on non-accrual loans. Recognized interest income on loans for the three months ended December 31, 2023 was higher than what otherwise would have been recognized in the period due to the collection of past due amounts. The Company would have recognized interest income of $625,000 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 $263,973,000 of loans that were less than 90 days delinquent at December 31, 2023 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 1.41% at December 31, 2023.

Current wording

For the six months ended March 31, 2024, the Company recognized $435,000 in interest income on cash payments received from borrowers on non-accrual loans. Recognized interest income on loans for the six months ended March 31, 2024 was lower than what otherwise would have been recognized in the period due to the collection of past due amounts. The Company would have recognized interest income of $1,347,000 for the same period had these loans performed according to their original contract terms. In addition to the non-accrual loans reflected in the above table, the Company had $259,164,000 of loans that were less than 90 days delinquent at March 31, 2024 but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs as a percent of total assets would have increased to 1.09% at March 31, 2024.

Previous wording

Management believes the allowance for credit losses of $201,820,000, or 1.04% 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 December 31, 2023 and September 30, 2023.

Current wording

Management believes the allowance for credit losses of $225,077,000, or 1.00% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. See Note E and Note I for further details of the allowance for loan losses and reserve for unfunded commitments as of and for the period ended March 31, 2024 and September 30, 2023.

Previous wording

Real estate owned ("REO") - REO increased during the three months ended December 31, 2023 by $2,671,000 to $6,820,000. The increase was due to the addition of former branch properties for sale offset by existing REO sales.

Current wording

Real estate owned ("REO") - REO increased during the six months ended March 31, 2024 by $96,000 to $4,245,000. The increase was due to the addition of former branch properties for sale offset by existing REO sales.

Previous wording

Intangible assets - Intangible assets increased to $311,103,000 as of December 31, 2023 from $310,619,000 as of September 30, 2023 as the result of an acquisition made by subsidiary, WaFd Insurance Group.

Current wording

Intangible assets - Intangible assets increased to $453,539,000 as of March 31, 2024 from $310,619,000 as of September 30, 2023 primarily as the result of the Merger. The increase included goodwill of $106,276,000 and core deposit intangibles of $37,462,000.

Previous wording

Shareholders' equity - The Company’s shareholders' equity at December 31, 2023 was $2,452,004,000, or 10.83% of total assets. This is an increase of $25,578,000 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 three months ended December 31, 2023 by net income of $58,453,000, the payment of $15,989,000 in common stock dividends, payment of $3,656,000 in preferred stock dividends, treasury stock purchases of $17,065,000, as well as changes in other comprehensive income of $93,000.

Current wording

Shareholders' equity - The Company’s shareholders' equity at March 31, 2024 was $2,921,906,000, or 9.69% of total assets. This is an increase of $495,480,000 from September 30, 2023 when shareholders' equity was $2,426,426,000, or 10.80% of total assets. The Company’s shareholders' equity was impacted in the six months ended March 31, 2024 by the stock consideration paid in the Merger of $465,504,000, net income of $74,341,000, the payment of $32,472,000 in common stock dividends, payment of $7,312,000 in preferred stock dividends, treasury stock purchases of $17,304,000, as well as changes in other comprehensive income of $5,014,000.

Previous wording

Net Income - The Company recorded net income of $58,453,000 for the three months ended December 31, 2023 compared to $79,509,000 for the prior year quarter. The changes are due to the factors described below.

Current wording

Net Income - The Company recorded net income of $15,888,000 for the three months ended March 31, 2024 compared to $65,934,000 for the prior year quarter, a decrease of 75.90%. The Company recorded net income of $74,341,000 for the six months ended March 31, 2024 compared to $145,443,000 for the prior year same period. The changes are due to the factors described below.

Previous wording

Net Interest Income - For the three months ended December 31, 2023, net interest income was $152,237,000, which is $30,562,000 lower than the same quarter of the prior year. Net interest margin was 2.91% for the quarter ended December 31, 2023 compared to 3.69% for the quarter ended December 31, 2022. The decrease in net interest income is mostly due to rising deposit costs. The average rate earned on interest-earning assets grew by 76 basis points to 5.47% while the average rate paid on interest-bearing liabilities increased by 185 basis points to 3.16%. Additionally, average interest-earning assets increased by $1,187,344,000 from the same quarter last year while average interest-bearing liabilities increased by $1,659,381,000.

Current wording

Net Interest Income - For the three months ended March 31, 2024, net interest income was $158,597,000, which is a decline of $16,441,000, or 9.39%, compared with the same quarter of the prior year. Net interest margin was 2.73% for the quarter ended March 31, 2024 compared to 3.51% for the quarter ended March 31, 2023. The decrease in net interest income is largely due to rising deposit costs. The average rate earned on interest-earning assets grew by 38 basis points to 5.50% while the average rate paid on interest-bearing liabilities increased by 129 basis points to 3.32%. Additionally, average interest-earning assets increased by $3,076,964,000 from the same quarter last year while average interest-bearing liabilities increased by $3,374,684,000. For the six months ended March 31, 2024, net interest income was $310,834,000, which is a decline of $47,003,000 from the same period of the prior year. Net interest margin was 2.81% for the six months ended March 31, 2024 compared to 3.60% for the prior year same period.

Previous wording

Gain (Loss) on Real Estate Owned - Results for the three months ended December 31, 2023 include a net gain on REO of $1,826,000, compared to a net loss of $112,000 for the prior year quarter. The gain during the three months ended December 31, 2023 was due to property sales.

Current wording

Gain (Loss) on Real Estate Owned - Results for the three months ended March 31, 2024 include a net loss on REO of $1,315,000, compared to a net loss of $199,000 for the prior year quarter. The loss during the three months ended March 31, 2024 was due to property sales at less than carrying value for a former branch property held for sale. Results for the six months ended March 31, 2024 include a net gain on REO of $511,000, compared to a net loss of $311,000 for the prior year same period.

Previous wording

Income Tax Expense - Income tax expense totaled $13,237,000 for the three months ended December 31, 2023, compared to $22,424,000 for the prior year quarter. The effective tax rate was 18.46% and 22.00% for the three months ended December 31, 2023 and December 31, 2022, respectively. The Company’s effective tax rate varies from the statutory rate mainly due to state taxes, tax-exempt income, tax-credit investments miscellaneous non-deductible expenses and discrete tax adjustments for prior periods.

Current wording

Income Tax Expense - Income tax expense totaled $5,074,000 for the three months ended March 31, 2024, compared to $18,596,000 for the prior year quarter. The effective tax rate was 24.21% and 22.00% for the three months ended March 31, 2024 and March 31, 2023, respectively. Income tax expense totaled $18,311,000 for the six months ended March 31, 2024, compared to $41,020,000 for the prior year same period. The effective tax rate was 19.76% and 22.00% for the six months ended March 31, 2024 and March 31, 2023, respectively. The Company’s effective tax rate varies from the statutory rate mainly due to state taxes, tax-exempt income, tax-credit investments miscellaneous non-deductible expenses and discrete tax adjustments for prior periods.