QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34654
WAFD, INC.
(Exact name of registrant as specified in its charter)
Washington
91-1661606
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
425 Pike Street
Seattle
Washington
98101
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code (206) 624-7930
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
WAFD
NASDAQ Stock Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 4.875% Fixed Rate Series A Non-Cumulative Perpetual Preferred Stock
WAFDP
NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had outstanding 64,736,916 shares of common stock as of January 30, 2024.
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8
Table of Contents
WAFD, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – Summary of Significant Accounting Policies
Company and Nature of Operations - Washington Federal Bank, a federally-insured Washington state chartered 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” or 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. The Bank conducts its activities through a network of 198 bank branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico and Texas.
Basis of Presentation - The Company has prepared the consolidated unaudited interim financial statements included in this report. All intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation are reflected in the interim financial statements.
The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes contained in the Company's 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on November 17, 2023 ("2023 Annual Financial Statements"). Interim results are not necessarily indicative of results for a full year.
Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2023 Annual Financial Statements. There have not been any significant changes in the Company's significant accounting policies compared to those contained in its 2023 Annual Financial Statements.
Preferred Stock - On February 8, 2021, in connection with an underwritten public offering, the Company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock (“Series A Preferred Stock”). Net proceeds, after underwriting discounts and expenses, were $293,325,000. The public offering consisted of the issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series A Preferred Stock, at a public offering price of $25.00 per depositary share. Holders of the depositary shares are entitled to all proportional rights and preferences of the Series A Preferred Stock (including dividend, voting, redemption and liquidation rights). The depositary shares are traded on the NASDAQ Global Select Market under the symbol "WAFDP." The Series A Preferred Stock is redeemable at the option of the Company, subject to all applicable regulatory approvals, on or after April 15, 2026.
Restricted Cash Balances - Based on the level of vault cash on hand, the Company was not required to maintain cash reserve balances with the Federal Reserve Bank as of December 31, 2023. As of December 31, 2023 and September 30, 2023, the Company held counterparty cash collateral of $229,100,000 and $326,750,000, respectively, related to derivative contracts.
Equity Securities - The Company records equity securities within Other assets in its Consolidated Statements of Financial Condition. These equity investments are accounted for under different methods.
•Low-income housing tax credit investments are accounted for under the proportional amortization method.
•For equity investments where the Company has significant influence, the Company applies the equity method of accounting, which adjusts the carrying value of the investment to recognize a proportionate share of the financial results of the investment entity, regardless of whether any distribution is made. Any adjustments to the fair value of these investments are recorded in Other income in the Consolidated Statements of Operations.
•For investments in certain nonmarketable equity securities investments where the equity method of accounting is not applicable, the Company applies the fair value method. Any adjustments to the fair value of these investments are recorded in Other income in the Consolidated Statements of Operations. Fair value is determined by reference to readily determinable market values, if applicable. As these investments do not have readily determinable fair values, they are generally accounted for at cost minus impairment, if any, plus or minus changes resulting from observable
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
transactions involving the same or similar investments from the same issuer. This practice is referred to as the measurement alternative.
•Equity investments in qualified real estate funds can use the NAV expedient for fair value measurement. Under this method, the net asset value (NAV) is determined by the fund as fair value for the investment. At December 31, 2023, equity investments held by the Company and recorded at NAV had a carrying amount of $36,708,000 and a remaining unfunded commitment of $5,578,000. These NAV based investments cannot be transferred without consent and we do not have redemption rights. Equity investments measured at NAV are not classified in the fair value hierarchy.
Allowance for Credit Losses (Loans Receivable) - The Company maintains an allowance for credit losses (“ACL”) for the expected credit losses of the loan portfolio as well as unfunded loan commitments. The amount of ACL is based on ongoing, quarterly assessments by management. The current expected credit loss methodology (“CECL”) requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).
The ACL consists of the allowance for loan losses and the reserve for unfunded commitments. The estimate of expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period that historical experience was based for each loan type. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ACL. The Company has designated two loan portfolio segments, commercial loans and consumer loans. These loan portfolio segments are further disaggregated into classes, which represent loans of similar type, risk characteristics, and methods for monitoring and assessing credit risk. The commercial loan portfolio segment is disaggregated into five classes: multi-family, commercial real estate, commercial and industrial, construction, and land acquisition and development. The risk of loss for the commercial loan portfolio segment is generally most indicated by the credit risk rating assigned to each borrower. Commercial loan risk ratings are determined by experienced senior credit officers based on specific facts and circumstances and are subject to periodic review by an independent internal team of credit specialists. The consumer loan portfolio segment is disaggregated into five classes: single-family-residential mortgage, custom construction, consumer lot loans, home equity lines of credit, and other consumer. The risk of loss for the consumer loan portfolio segment is generally most indicated by delinquency status and general economic factors. Each commercial and consumer loan portfolio class may also be further segmented based on risk characteristics.
For the majority of the Company's loan portfolio classes, the historical loss experience is determined using a cohort methodology. This method pools loans into groups (“cohorts”) sharing similar risk characteristics and tracks each cohort’s net charge-offs over the lives of the loans to calculate a historical loss rate. The historical loss rates for each cohort are then averaged to calculate an overall historical loss rate which is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class. For certain loan portfolio classes, the Company determined there was not sufficient historical loss information to calculate a meaningful historical loss rate using the cohort methodology. For any such loan portfolio class, the weighted-average remaining maturity (“WARM”) methodology is being utilized until sufficient historical loss data is obtained. The WARM method multiplies an average annual loss rate by the expected remaining life of the loan pool to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class.
The Company also considers qualitative adjustments to the historical loss rate for each loan portfolio class. The qualitative adjustments for each loan class consider the conditions over the period from which historical loss experience was based and are split into two components: 1) asset or class specific risk characteristics or current conditions at the reporting date related to portfolio credit quality, remaining payments, volume and nature, credit culture and management, business environment or other management factors and 2) reasonable and supportable forecast of future economic conditions and collateral values.
The Company performs a quarterly asset quality review which includes a review of forecasted gross charge-offs and recoveries, nonperforming assets, criticized loans, risk rating migration, delinquencies, etc. The asset quality review is performed by management and the results are used to consider a qualitative overlay to the quantitative baseline. The second qualitative adjustment noted above, economic conditions and collateral values, encompasses a one-year reasonable and supportable
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
forecast period. The overlay adjustment for the reasonable and supportable forecast assumes an immediate reversion after the one-year forecast period to historical loss rates for the remaining life of the respective loan pool.
The Company may establish a specific reserve for individually evaluated loans that do not share similar risk characteristics with the loans included in each respective loan pool if management deems it appropriate. If this occurs, these individually evaluated loans are removed from their respective pools and typically represent collateral dependent loans but may also include other non-performing loans.
Allowance for Credit Losses (Held-to-Maturity Debt Securities) - For held-to-maturity (“HTM”) debt securities, the Company is required to utilize a CECL methodology to estimate expected credit losses. Substantially all of the Company’s HTM 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. See Note F "Fair Value Measurements" for more information about HTM debt securities.
Allowance for Credit Losses (Available-for-Sale Debt Securities) - The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL methodology applied for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision for (or recapture of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.See Note F "Fair Value Measurements" for more information about AFS debt securities.
Accrued Interest Receivable - The Company made the following elections regarding accrued interest receivable (“AIR”):
•Presenting accrued interest receivable balances separately from their underlying instruments within the consolidated statements of financial condition.
•Excluding accrued interest receivable that is included in the amortized cost of financing receivables from related disclosure requirements.
•Continuing the Company's policy to write off accrued interest receivable by reversing interest income in cases where the Company does not reasonably expect to receive payment.
•Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above.
Non-Accrual Loans - Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest 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 or more past due. If payment is made on a loan so that the loan becomes less than 90 days past due, and the Bank expects full collection of principal and interest, the loan is returned to full accrual status. Any interest ultimately collected is credited to income in the period of recovery. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet contractual obligations.
If a consumer loan is on non-accrual status before being modified, 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. For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. In some instances, after the required six consecutive payments are made, management will conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual status.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Collateral-Dependent Loans - A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans and leases deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral consists of various types of real estate including residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.
Off-balance-sheet credit exposures - The only material off-balance-sheet credit exposures are unfunded loan commitments, which had a combined balance of $3,180,001,000 and $3,625,333,000 at December 31, 2023 and September 30, 2023, respectively. The reserve for unfunded commitments is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized through provision for credit losses in the consolidated statements of income. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class. See Note I “Commitments and Contingencies” for more information.
Subsequent events - On January 30, 2024, the Company announced that it had received all regulatory approvals needed for Luther Burbank Corporation (NASDAQ: LBC, "Luther Burbank") to be merged with and into WaFd, Inc. The approval is based on the terms and subject to the conditions of the Agreement and Plan of Reorganization dated November 13, 2022 (the "Merger Agreement"). The merger is expected to be completed by February 29, 2024, subject to the satisfaction or waiver of the remaining closing conditions set forth in the Merger Agreement. The Company announced the merger in November 2022 and obtained shareholder approval on May 4th, 2023. This transaction will expand the Company's footprint to nine western states with the addition of branches in California.
NOTE B – New Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323). The amendments in this ASU expand the population of tax credit investments for which an investor may elect to apply the proportional amortization method ("PAM") and require certain disclosures for tax credit investments. For public companies amendments in this ASU are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company has utilized PAM for low income housing tax credit investments. The Company does not expect this ASU to have a material effect on our consolidated financial statements.
In October 2023, the FASB issued ASU 2023-6 Disclosure Improvements: Codification Amendments In Response to the SEC's Disclosure Update and Simplification Initiative to clarify or improve disclosure and presentation requirements on a variety of topics and align the requirements in the FASB accounting standard codification with the Securities and Exchange Commission regulations. The amendments will be effective for the Company only if the SEC removes the related disclosure requirement from its existing regulations no later than June 30, 2027. If the SEC timely removes such a related requirement from its existing regulations, the corresponding amendments within the ASU will become effective for the Company on the same date with early adoption permitted. The Company does not expect the amendments in this update to have a material impact on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting - Improvements to Reportable Segment Disclosures (Topic 280) to improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. For public companies amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted. The Company does not expect this ASU to have a material effect on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Tax - Improvements to Income Tax Disclosures (Topic 740) which requires reporting companies to break out their income tax expense and tax rate reconciliation in more detail. For public
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
companies, the requirements will become effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not expect this ASU to have a material effect on our consolidated financial statements.
NOTE C – Dividends and Share Repurchases
On December 8, 2023, the Company paid a regular dividend on common stock of $0.25 per share, which represented the 163rd consecutive quarterly cash dividend. Dividends per share were $0.25 and $0.24 for the quarters ended December 31, 2023 and 2022, respectively.
For the three months ended December 31, 2023, the Company repurchased 697,893 shares at an average price of $24.45. As of December 31, 2023, there are 1,861,290 remaining shares authorized to be repurchased under the current Board approved share repurchase program.
The Company pays a cash dividend, if declared by the Board, of $12.1875 per share on its Series A Preferred Stock quarterly on January 15, April 15, July 15 and October 15. This dividend equals $0.30468750 per depositary share (each dividend, a "Series A Preferred Dividend"). The Company paid a Series A Preferred Dividend on October 15, 2023 and January 15, 2024.
NOTE D – Loans Receivable
For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies" above.
The Company's loans held for investment are divided into two portfolio segments, commercial loans and consumer loans, with each of those segments further split into loan classes for purposes of estimating the allowance for credit losses.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table is a summary of loans receivable by loan portfolio segment and class.
December 31, 2023
September 30, 2023
Gross loans by category
(In thousands)
(In thousands)
Commercial loans
Multi-family
$
3,054,426
15.8
%
$
2,907,086
14.8
%
Commercial real estate
3,351,113
17.3
3,344,959
17.0
Commercial & industrial
2,371,393
12.3
2,321,717
11.8
Construction
2,868,207
14.8
3,318,994
16.9
Land - acquisition & development
190,732
1.0
201,538
1.0
Total commercial loans
11,835,871
61.2
12,094,294
61.6
Consumer loans
Single-family residential
6,535,073
33.8
6,451,270
32.8
Construction - custom
543,748
2.8
672,643
3.4
Land - consumer lot loans
119,735
0.6
125,723
0.6
HELOC
243,742
1.2
234,410
1.2
Consumer
74,884
0.4
70,164
0.4
Total consumer loans
7,517,182
38.8
7,554,210
38.4
Total gross loans
19,353,053
100
%
19,648,504
100
%
Less:
Allowance for credit losses on loans
179,320
177,207
Loans in process
1,516,522
1,895,940
Net deferred fees, costs and discounts
72,589
98,807
Total loan contra accounts
1,768,431
2,171,954
Net loans
$
17,584,622
$
17,476,550
The Company elected to exclude accrued interest receivable from the amortized cost basis of loans for disclosure purposes and from the calculations of estimated credit losses. As of December 31, 2023, and September 30, 2023, AIR for loans totaled $77,760,000 and $77,349,000, respectively, and is included in the Interest receivable line item balance on the Company’s consolidated statements of financial condition.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loans in the amount of $10,493,301,000 and $8,941,201,000 at December 31, 2023 and September 30, 2023, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") as part of the Company's liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.
The following table sets forth the amortized cost basis of non-accrual loans and loans 90 days or more past due and accruing.
December 31, 2023
September 30, 2023
(In thousands, except ratio data)
Non-accrual
Non-accrual with no ACL
90 days or more past due and accruing
Non-accrual
Non-accrual with no ACL
90 days or more past due and accruing
Commercial loans
Multi-family
$
132
$
—
$
—
$
5,127
$
—
$
—
Commercial real estate
24,283
—
—
23,435
—
—
Commercial & industrial
4,437
—
—
6,082
—
—
Construction
—
—
—
—
—
—
Land - acquisition & development
—
—
—
—
—
—
Total commercial loans
28,852
—
—
34,644
—
—
Consumer loans
Single-family residential
15,396
—
—
14,918
—
—
Construction - custom
88
—
—
88
—
—
Land - consumer lot loans
57
—
—
9
—
—
HELOC
603
—
—
736
—
—
Consumer
262
—
—
27
—
—
Total consumer loans
16,406
—
—
15,778
—
—
Total non-accrual loans
$
45,258
$
—
$
—
$
50,422
$
—
$
—
% of total loans
0.25
%
0.29
%
The Company recognized interest income on non-accrual loans of approximately $511,000 in the three months ended December 31, 2023 as a result of the collection of past due amounts. If these loans had been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $625,000 for the three months ended December 31, 2023. Interest cash flows collected on non-accrual loans vary from period to period as those loans are brought current or are paid off.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the accounting guidance on troubled debt restructurings ("TDRs") and requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. This guidance was applied on a prospective basis. These modified balances are included in their segment cohort based on loan type for the purpose of calculating historical loss rates as described in Note A.
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, modifications could be any of the above-listed modification types available or a mix thereof. Modifications to extend the term, lower the payment amount or delay payment are made for the purposes of providing borrowers additional time to return to compliance with the terms of their loans. Renewals of commercial lines to borrowers experiencing financial difficulty are included within the disclosures below though many of these are made in the normal course of business.
For consumer loans, modifications typically consist of minor payment delays or deferrals and may include a modification of the existing contractual rate or extension of the maturity date, or both, when it is determined the borrowers are likely to successfully maintain compliance with these modified loan terms.
The following table presents the amortized basis of loans that were modified to borrowers experiencing financial difficulty during the period by loan class and modification type. All such modifications during the quarter were term extensions.
Three Months Ended December 31, 2023
Loan Class
Term Extension
% of Total Loan Class Balance
Wtd. Avg. Term Extension
( in thousands)
(in months)
Commercial real estate
$
143
—
%
20
Commercial & industrial
7,814
0.33
4
Construction
346
0.02
4
Total commercial loans
8,303
0.09
Total Loans
$
8,303
0.05
%
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of modification efforts. Only one loan modified in the three months ended December 31, 2023 was 31 days past due, all others were current. This loan had an amortized cost of $1,659,000 at December 31, 2023 and belonged to the commercial & industrial class. None of the loans above have defaulted after modification.
The Company evaluates the credit quality of its loans based on regulatory risk ratings and also consider other factors. Based on this evaluation, the loans are assigned a grade and classified as follows:
•Pass – the credit does not meet one of the definitions below.
•Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
•Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.
•Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
•Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible. Partial charge-off versus full charge-off may be taken if the collateral offers some identifiable protection.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present by primary credit quality indicator, loan class, and year of origination, the amortized cost basis of loans receivable as of December 31, 2023 and September 30, 2023. There were no commercial loans classified as Doubtful or Loss as of either date.
December 31, 2023
Term Loans Amortized Cost Basis by Origination Year
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E – Allowance for Losses on Loans
For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies."
The following tables summarize the activity in the allowance for loan losses by loan portfolio segment and class.
Three Months Ended December 31, 2023
Beginning Allowance
Charge-offs
Recoveries
Provision & Transfers(1)
Ending Allowance
(In thousands)
Commercial loans
Multi-family
$
13,155
$
—
$
—
$
636
$
13,791
Commercial real estate
28,842
—
2
163
29,007
Commercial & industrial
58,773
(62)
32
2,093
60,836
Construction
29,408
—
—
(545)
28,863
Land - acquisition & development
7,016
(18)
50
(390)
6,658
Total commercial loans
137,194
(80)
84
1,957
139,155
Consumer loans
Single-family residential
28,029
—
120
407
28,556
Construction - custom
2,781
—
—
(519)
2,262
Land - consumer lot loans
3,512
—
9
(176)
3,345
HELOC
2,859
—
1
113
2,973
Consumer
2,832
(213)
192
218
3,029
Total consumer loans
40,013
(213)
322
43
40,165
Total ACL - loans
$
177,207
$
(293)
$
406
$
2,000
$
179,320
(1) Provision & transfer amounts within the table do not include provision recapture from unfunded commitments of $2,000,000.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Provision & transfer amounts within the table do not include provision recapture from unfunded commitments of $1,000,000
The Company recorded no provision for credit losses for the three months ended December 31, 2023, compared with a provision for credit losses of $2,500,000 for the three months ended December 31, 2022. The lack of provision in the three months ended December 31, 2023 was primarily due to a stable loan receivable balance and continued strong credit performance. The increase in the overall ACL was offset by the equal decrease in the reserve for unfunded commitments. The provision for the three months ended December 31, 2022 was primarily due to reserving for growth in loans receivable and changes in composition of the loan portfolio. Recoveries, net of charge-offs, totaled $113,000 for the three months ended December 31, 2023, compared to $489,000 during the three months ended December 31, 2022.
Non-performing assets were $55,388,000, or 0.24% of total assets, at December 31, 2023, compared to $57,924,000, or 0.26% of total assets, at September 30, 2023. Non-accrual loans were $45,258,000 at December 31, 2023, compared to $50,422,000 at September 30, 2023. Delinquencies, as a percent of total loans, were 0.33% at December 31, 2023, compared to 0.36% at September 30, 2023.
The Company has an asset quality review function that analyzes its loan portfolio and reports the results of the review to its Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as described in Note D "Loans Receivable."
The following tables provide the amortized cost of loans receivable based on risk rating categories as previously defined.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F – Fair Value Measurements
FASB ASC 820, Fair Value Measurement ("ASC 820") defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company has established and documented the process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis.
Measured on a Recurring Basis
Available-for-Sale Securities and Derivative Contracts
Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges are measured using the closing price in an active market and are considered a Level 1 input method.
The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges, mortgage pool hedges and borrowings hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third-party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present the balance and level in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis (with the exception of those measured using the NAV practical expedient).
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as collateral dependent loans and real estate owned ("REO"). REO consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral or REO property.
When management determines that the fair value of the collateral or the REO requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the collateral dependent loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2023 included loans for which an allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as real estate owned where the fair value of the property was less than the cost basis.
The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at December 31, 2023 and December 31, 2022, and the total gains (losses) resulting from those fair value adjustments during the respective periods. The estimated fair value measurements are shown gross of estimated selling costs.
December 31, 2023
Three Months Ended December 31, 2023
Level 1
Level 2
Level 3
Total
Total Gains (Losses)
(In thousands)
(In thousands)
Loans (1)
$
—
$
—
$
781
$
781
$
(158)
Real estate owned (2)
—
—
—
—
—
Balance at end of period
$
—
$
—
$
781
$
781
$
(158)
(1)The gains (losses) represent re-measurements of collateral-dependent loans.
(2)The gains (losses) represent aggregate write-downs and charge-offs on real estate owned.
December 31, 2022
Three Months Ended December 31, 2022
Level 1
Level 2
Level 3
Total
Total Gains (Losses)
(In thousands)
(In thousands)
Loans (1)
$
—
$
—
$
—
$
—
$
(123)
Real estate owned (2)
—
—
—
—
—
Balance at end of period
$
—
$
—
$
—
$
—
$
(123)
(1)The gains (losses) represent re-measurements of collateral-dependent loans.
(2)The gains (losses) represent aggregate write-downs and charge-offs on real estate owned.
At December 31, 2023, there was $121,000 in foreclosed residential real estate properties held as REO. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $3,338,000.
Fair Values of Financial Instruments
FASB ASC 825, Financial Instruments ("ASC 825") requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2023
September 30, 2023
Level in Fair Value Hierarchy
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
($ in thousands)
Financial assets
Cash and cash equivalents
1
$
1,144,774
$
1,144,774
$
980,649
$
980,649
Available-for-sale securities
U.S. government and agency securities
2
232,359
232,359
217,053
217,053
Asset-backed securities
2
561,304
561,304
588,016
588,016
Municipal bonds
2
35,206
35,206
34,662
34,662
Corporate debt securities
2
248,813
248,813
242,522
242,522
Mortgage-backed securities
Agency pass-through certificates
2
940,763
940,763
912,844
912,844
Total available-for-sale securities
2,018,445
2,018,445
1,995,097
1,995,097
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates
2
415,079
370,942
423,586
355,188
Total held-to-maturity securities
415,079
370,942
423,586
355,188
Loans receivable
3
17,584,622
16,876,965
17,476,550
16,559,758
FHLB stock
2
137,940
137,940
126,820
126,820
Other assets - client swap program hedges
2
55,631
55,631
78,797
78,797
Other assets - commercial fair value loan hedges
2
2,061
2,061
3,405
3,405
Other assets - mortgage loan fair value hedges
2
22,244
22,244
46,396
46,396
Other assets - borrowings cash flow hedges
2
143,846
143,846
184,373
184,373
Financial liabilities
Time deposits
2
5,380,723
5,363,731
5,305,016
5,232,689
Borrowings
2
3,875,000
3,867,812
3,650,000
3,653,229
Other liabilities - client swap program hedges
2
56,392
56,392
79,668
79,668
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities that are exchange traded are considered a Level 1 input method.
Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base price, with further loan level pricing adjustments made based on individual loan characteristics such as FICO score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using a discount rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as an annual loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
FHLB stock – The fair value is based upon the par value of the stock that equates to its carrying value.
Time deposits – The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits with similar remaining maturities.
Borrowings – The fair value of FHLB advances and FRB borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest rate swaps – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counterparty to offset its interest rate risk. The Company also uses interest rate swaps for various fair value hedges and cash flow hedges. The fair value of these interest rate swaps is estimated by a third-party pricing service using a discounted cash flow technique.
The following tables provide details about the amortized cost and fair value of available-for-sale and held-to-maturity securities.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2023
Amortized Cost
Gross Unrealized
Fair Value
Yield
Gains
Losses
($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
Within 1 year
$
3,501
$
—
$
(36)
$
3,465
6.06
%
1 to 5 years
18,894
—
(563)
18,331
4.70
%
5 to 10 years
87,922
177
—
88,099
5.76
Over 10 years
106,340
831
(13)
107,158
5.84
Asset-backed securities
1 to 5 years
18,579
—
(715)
17,864
6.06
5 to 10 years
36,875
2
(99)
36,778
6.11
Over 10 years
539,911
578
(7,115)
533,374
6.35
Corporate debt securities due
1 to 5 years
151,893
895
(1,787)
151,001
5.14
5 to 10 years
113,221
—
(21,700)
91,521
3.87
Municipal bonds due
5 to 10 years
5,720
—
(701)
5,019
3.00
Over 10 years
29,832
361
(550)
29,643
5.85
Mortgage-backed securities
Agency pass-through certificates
1,005,928
66
(93,150)
912,844
3.39
2,118,616
2,910
(126,429)
1,995,097
4.64
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates
423,586
—
(68,398)
355,188
2.88
423,586
—
(68,398)
355,188
2.88
$
2,542,202
$
2,910
$
(194,827)
$
2,350,285
4.35
%
The Company purchased $49,380,000 of AFS investment securities during the three months ended December 31, 2023 and purchased $115,909,000 of AFS securities during the three months ended December 31, 2022. Sales of AFS securities totaled $2,624,000 during the three months ended December 31, 2023 compared to no sales during the prior year same period. For HTM investment securities, there were no purchases during the three months ended December 31, 2023 and no purchases during the three months ended December 31, 2022. There were no sales of HTM investment securities during the three months ended December 31, 2023 or December 31, 2022. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 25 years.
The Company elected to exclude AIR from the amortized cost basis of debt securities disclosed throughout this footnote. For AFS securities, AIR totaled $8,270,000 and $8,641,000 as of December 31, 2023 and September 30, 2023, respectively. For HTM debt securities, AIR totaled $992,000 and $1,013,000 as of December 31, 2023 and September 30, 2023, respectively. AIR for securities is included in the Interest receivable line item balance on the Company’s consolidated statements of financial condition.
The following tables show the gross unrealized losses and fair value of securities as of December 31, 2023 and September 30, 2023, by length of time that individual securities in each category have been in a continuous loss position. There were 220 and 231 securities with an unrealized loss as of December 31, 2023 and September 30, 2023, respectively.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2023
Less than 12 months
12 months or more
Total
Unrealized Gross Losses
Fair Value
Unrealized Gross Losses
Fair Value
Unrealized Gross Losses
Fair Value
(In thousands)
Available-for-sale securities
Corporate debt securities
$
—
$
—
$
(16,611)
$
174,074
$
(16,611)
$
174,074
Municipal bonds
—
—
(423)
15,111
(423)
15,111
U.S. government and agency securities
(181)
134,687
(310)
13,720
(491)
148,407
Asset-backed securities
—
—
(7,291)
522,583
(7,291)
522,583
Mortgage-backed securities
(72)
18,243
(60,056)
756,173
(60,128)
774,416
(253)
152,930
(84,691)
1,481,661
(84,944)
1,634,591
Held-to-maturity securities
Mortgage-backed securities
—
—
(44,164)
369,265
(44,164)
369,265
$
(253)
$
152,930
$
(128,855)
$
1,850,926
$
(129,108)
$
2,003,856
September 30, 2023
Less than 12 months
12 months or more
Total
Unrealized Gross Losses
Fair Value
Unrealized Gross Losses
Fair Value
Unrealized Gross Losses
Fair Value
(In thousands)
Available-for-sale securities
Corporate debt securities
$
—
$
—
$
(23,487)
$
167,452
$
(23,487)
$
167,452
Municipal bonds due
—
—
(1,250)
14,302
(1,250)
14,302
U.S. government and agency securities
(13)
14,917
(599)
21,795
(612)
36,712
Asset-backed securities
(2,142)
86,800
(5,788)
445,454
(7,930)
532,254
Mortgage-backed securities
(2,030)
142,235
(91,120)
744,010
(93,150)
886,245
(4,185)
243,952
(122,244)
1,393,013
(126,429)
1,636,965
Held-to-maturity securities
Mortgage-backed securities
(15)
1,424
(68,383)
353,764
(68,398)
355,188
$
(4,200)
$
245,376
$
(190,627)
$
1,746,777
$
(194,827)
$
1,992,153
The decline in fair value since purchase is attributable to changes in interest rates. Substantially all of the Company’s HTM 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. Therefore, the Company did not record an allowance for credit losses for these securities as of December 31, 2023 or September 30, 2023. The Company does not consider AFS or HTM investments to have any credit impairment.
The Company does not believe that the AFS debt securities that were in an unrealized loss position have any credit loss impairment as of December 31, 2023 or September 30, 2023. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is more likely than not the Company will not be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. AFS debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Corporate debt securities and municipal bonds are considered to have an issuer of high credit quality and the decline in fair value is due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G – Derivatives and Hedging Activities
The following tables present the fair value, notional amount and balance sheet classification of derivative assets and liabilities at December 31, 2023 and September 30, 2023.
December 31, 2023
Derivative Assets
Derivative Liabilities
Interest rate contract purpose
Balance Sheet Location
Notional
Fair Value
Balance Sheet Location
Notional
Fair Value
(In thousands)
(In thousands)
Client swap program hedges
Other assets
$
896,485
$
55,631
Other liabilities
$
896,485
$
56,392
Commercial loan fair value hedges
Other assets
37,042
2,061
Other liabilities
—
—
Mortgage loan fair value hedges
Other assets
970,000
22,244
Other liabilities
—
—
Borrowings cash flow hedges
Other assets
1,000,000
143,846
Other liabilities
—
—
$
2,903,527
$
223,782
$
896,485
$
56,392
September 30, 2023
Derivative Assets
Derivative Liabilities
Interest rate contract purpose
Balance Sheet Location
Notional
Fair Value
Balance Sheet Location
Notional
Fair Value
(In thousands)
(In thousands)
Client swap program hedges
Other assets
$
806,744
$
78,797
Other liabilities
$
806,744
$
79,668
Commercial loan fair value hedges
Other assets
39,661
3,405
Other liabilities
—
—
Mortgage loan fair value hedges
Other assets
670,000
46,396
Other liabilities
—
—
Borrowings cash flow hedges
Other assets
1,000,000
184,373
Other liabilities
—
—
$
2,516,405
$
312,971
$
806,744
$
79,668
The Company enters into interest rate swaps to hedge interest rate risk. These arrangements include hedges of individual fixed rate commercial loans and also hedges of a specified portion of pools of prepayable fixed rate mortgage loans under the "portfolio layer" method. These relationships qualify as fair value hedges under FASB ASC 815, Derivatives and Hedging ("ASC 815"), which provides for offsetting of the recognition of gains and losses of the respective interest rate swap and the hedged items. Gains and losses on interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.
Upon electing to apply ASC 815 fair value hedge accounting, the carrying value of the hedged item is adjusted to reflect the cumulative impact of changes in fair value attributable to the hedged risk. The hedge basis adjustment remains with the hedged item until the hedged item is de-recognized from the balance sheet. The following tables present the impact of fair value hedge accounting on the carrying value of the hedged items at December 31, 2023 and September 30, 2023.
(In thousands)
December 31, 2023
Balance sheet line item in which hedged item is recorded
Carrying value of hedged items
Cumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items
Loans receivable (1) (2)
$
6,246,208
$
(23,255)
$
6,246,208
$
(23,255)
(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are a portfolio layer expected to be remaining at the end of the hedging relationships. At December 31, 2023, the amortized cost basis of the closed loan portfolios used in the hedging relationships was
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$6,211,195,000, the cumulative basis adjustment associated with the hedging relationships was $(21,277,000), and the amount of the designated hedged items was $970,000,000.
(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At December 31, 2023, the amortized cost basis of the hedged commercial loans was $35,013,000 and the cumulative basis adjustment associated with the hedging relationships was $(1,978,000).
(In thousands)
September 30, 2023
Balance sheet line item in which hedged item is recorded
Carrying value of hedged items
Cumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items
Loans receivable (1) (2)
$
1,816,870
$
(48,865)
$
1,816,870
$
(48,865)
(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At September 30, 2023, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $1,780,503,000, the cumulative basis adjustment associated with the hedging relationships was $(45,622,000), and the amount of the designated hedged items was $670,000,000.
(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At September 30, 2023, the amortized cost basis of the hedged commercial loans was $36,367,000 and the cumulative basis adjustment associated with the hedging relationships was $(3,243,000).
The Company has entered into interest rate swaps to convert certain short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of changes in future cash flows resulting from increasing interest rates. For qualifying cash flow hedges under ASC 815, gains and losses on the interest rate swaps are recorded in accumulated other comprehensive income ("AOCI") and then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line item as the hedged cash flows. As of December 31, 2023, the maturities for hedges of adjustable rate borrowings ranged from one year to six years, with the weighted average being 5.3 years.
The following table presents the impact of derivative instruments (cash flow hedges on borrowings) on AOCI for the periods presented.
(In thousands)
Three Months Ended December 31,
Amount of gain/(loss) recognized in AOCI on derivatives in cash flow hedging relationships
2023
2022
Interest rate contracts:
Pay fixed/receive floating swaps on borrowings cash flow hedges
$
(40,527)
$
(6,806)
Total pre-tax gain/(loss) recognized in AOCI
$
(40,527)
$
(6,806)
The following tables present the gain (loss) on derivative instruments in fair value and cash flow accounting hedging relationships under ASC 815 for the periods presented.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended December 31, 2023
Three Months Ended December 31, 2022
Interest income on loans receivable
Interest expense on FHLB advances
Interest income on loans receivable
Interest expense on FHLB advances
(In thousands)
(In thousands)
Interest income/(expense), including the effects of fair value and cash flow hedges
$
245,792
$
(37,938)
$
203,946
$
(18,974)
Gain/(loss) on fair value hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives
$
5,493
$
3,167
Recognized on derivatives
(25,496)
(2,849)
Recognized on hedged items
25,610
3,132
Net income/(expense) recognized on fair value hedges
$
5,607
$
3,450
Gain/(loss) on cash flow hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives
$
11,847
$
7,274
Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense
—
—
Net income/(expense) recognized on cash flow hedges
$
11,847
$
7,274
The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The interest rate swaps are derivatives under ASC 815, with changes in fair value recorded in earnings. The impact to the statement of operations for the three months ended December 31, 2023 was an increase in other income of $109,000. There was no net impact to the statement of operations for the three months ended December 31, 2022 as the changes in fair value of the receive fixed swap and pay fixed swap offset each other.
The following tables present the impact of derivative instruments (client swap program) that are not designated in accounting hedges under ASC 815 for the periods presented.
(In thousands)
Three Months Ended December 31,
Derivative instruments
Classification of gain/(loss) recognized in income on derivative instrument
2023
2022
Interest rate contracts:
Pay fixed/receive floating swap
Other noninterest income
$
(28,709)
$
(3,878)
Receive fixed/pay floating swap
Other noninterest income
28,818
3,878
$
109
$
—
NOTE H – Revenue from Contracts with Customers
Since net interest income on financial assets and liabilities is outside the scope of ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"), a significant majority of Company revenues are not subject to that guidance.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue streams that are within the scope of ASC 606 are presented within non-interest income and are, in general, recognized as revenue at the same time the Company's obligation to the customer is satisfied. Most of the Company's customer contracts that are within the scope of the new guidance are cancelable by either party without penalty and are short-term in nature. These sources of revenue include depositor and other consumer and business banking fees, commission income, as well as debit and credit card interchange fees. In scope revenue streams represented approximately 3.6% of Company total revenue for the three months ended December 31, 2023, compared to 3.9% for the three months ended December 31, 2022. As this standard is immaterial to the consolidated financial statements, the Company has omitted certain disclosures in ASC 606, including the disaggregation of revenue table. Sources of non-interest income within the scope of the guidance include the following:
Deposit related and other service charges (recognized in Deposit fee income) - The Company's deposit accounts are governed by standardized contracts customary in the industry. Revenues are earned at a point in time or over time (monthly) from account maintenance fees and charges for specific transactions such as wire transfers, stop payment orders, overdrafts, debit card replacements, check orders and cashier’s checks. The Company’s performance obligation related to each of these fees is generally satisfied, and the related revenue recognized, at the time the service is provided (point in time or monthly). The Company is principal in each of these contracts.
Debit and Credit Card Interchange Fees (recognized in Deposit fee income) - The Company receives interchange fees from the debit card or credit card payment network based on transactions involving debit or credit cards issued by the Company, generally measured as a percentage of the underlying transaction. Interchange fees from debit and credit card transactions are recognized as the transaction processing services are provided by the network. The Company acts as an agent in the card payment network arrangement, so the interchange fees are recorded net of any expenses paid to the principal (the card payment network in this case).
Insurance Agency Commissions (recognized in Other income) - WAFD Insurance Group, Inc. is a wholly owned subsidiary of Washington Federal Bank that operates as an insurance agency, selling and marketing property and casualty insurance policies for a small number of high-quality insurance carriers. WAFD Insurance Group, Inc. earns revenue in the form of commissions paid by the insurance carriers for policies that have been sold. In addition to the origination commission, WAFD Insurance Group, Inc. may also receive contingent incentive fees based on the volume of business generated for the insurance carrier and based on policy renewal rates.
NOTE I – Commitments and Contingencies
Lease Commitments - The Company’s lease commitments consist primarily of real estate property for branches and office space under various non-cancellable operating leases that expire between 2024 and 2070. The majority of the leases contain renewal options and provisions for increases in rental rates based on a predetermined schedule or an agreed upon index.
Financial Instruments with Off-Balance Sheet Risk - The only material off-balance-sheet credit exposures are unfunded loan commitments, which had a combined balance of $3,180,001,000 and $3,625,333,000 at December 31, 2023 and September 30, 2023, respectively. The reserve was $22,500,000 as of December 31, 2023, which is a decrease from $24,500,000 at September 30, 2023. See Note A "Summary of Significant Accounting Policies" for details regarding the reserve methodology.
Legal Proceedings- The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
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 pending merger with Luther Burbank Corporation;
•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;
•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 Company’s shareholders will have less influence as a shareholder of the combined company than as a shareholder of Company, if the merger with Luther Burbank obtains regulatory approval;
•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.
Washington Federal Bank, a federally-insured state-charted commercial bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 24, 1917 in Ballard, Washington and is engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate. Washington Federal, Inc., a Washington corporation was formed as the Bank’s holding company in November, 1994. On September 27, 2023, Articles of Amendment were filed with the Washington Secretary of State, to change the name of Washington Federal, Inc. to WaFd, Inc. This change was effective on September 29, 2023. As used throughout this document, the terms “WaFd,” the “Company” or “we” or “us” and “our” refer to the WaFd, Inc. and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank dba WaFd Bank. The Company is headquartered in Seattle, Washington.
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 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.
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.
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 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%.
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.
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 $360,000,000 or 14.54% and the NPV to total assets ratio to grow to 12.74% from a base of 11.46%.
Period-End Interest Rates - The Company measures the difference between the rate on total interest-earning assets and the rate on interest-bearing liabilities at the end of each period. This period-end interest rate spread was 2.42% at December 31, 2023 and 2.61% at September 30, 2023. As of December 31, 2023, the weighted average period-end rate on interest-earning assets increased by 2 basis points to 5.09% compared to September 30, 2023, while the weighted average period-end rate on interest-bearing liabilities increased by 21 basis points to 2.67%. The period-end interest rate spread decreased to 2.42% at December 31, 2023 from 3.17% at December 31, 2022 as the weighted average period-end rate on interest-earning assets increased by 63 basis points while the weighted average period-end rate on interest-bearing liabilities increased by 138 basis points.
Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 2.91% for the quarter ended December 31, 2023 compared to 3.69% for the quarter ended December 31, 2022. The yield on interest-earning assets increased 76 basis points to 5.47% and the cost of interest-bearing liabilities increased 185 basis points to 3.16% over that same period. The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable rate assets and cash. The higher rate in interest-bearing liabilities resulted primarily from customer deposits repricing and higher rates on borrowings.
The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago.
Three Months Ended December 31, 2023
Three Months Ended December 31, 2022
Average Balance
Interest
Average Rate
Average Balance
Interest
Average Rate
($ in thousands)
($ in thousands)
Assets
Loans receivable
$
17,533,944
$
245,792
5.58
%
$
16,580,235
$
203,946
4.88
%
Mortgage-backed securities
1,337,174
11,266
3.35
1,368,759
10,613
3.08
Cash & Investments
1,851,301
27,354
5.88
1,592,201
17,486
4.36
FHLB stock
124,019
2,434
7.81
117,899
1,374
4.62
Total interest-earning assets
20,846,438
286,846
5.47
%
19,659,094
233,419
4.71
%
Other assets
1,535,021
1,500,892
Total assets
$
22,381,459
$
21,159,986
Liabilities and Equity
Interest-bearing customer accounts
$
13,248,450
$
96,671
2.90
%
$
12,611,624
$
31,646
1.00
%
Borrowings
3,718,207
37,938
4.06
2,695,652
18,974
2.79
Total interest-bearing liabilities
16,966,657
134,609
3.16
%
15,307,276
50,620
1.31
%
Noninterest-bearing customer accounts
2,654,982
3,245,264
Other liabilities
312,240
304,240
Total liabilities
19,933,879
18,856,780
Shareholders' equity
2,447,580
2,303,206
Total liabilities and equity
$
22,381,459
$
21,159,986
Net interest income/interest rate spread
$
152,237
2.32
%
$
182,799
3.40
%
Net interest margin (NIM)
2.91
%
3.69
%
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.
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.
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 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.
Customer account balances have remained stable, decreasing only $31,542,000, or 0.2%, to $16,038,787,000 at December 31, 2023 compared with $16,070,329,000 at September 30, 2023. Total borrowings were $3,875,000,000 as of December 31, 2023 an increase from $3,650,000,000 at September 30, 2023.
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.
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.
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.
As of December 31, 2023 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
December 31, 2023
Common Equity Tier I risk-based capital ratio:
The Company
$
1,794,192
10.74
%
4.50
%
NA
The Bank
2,021,794
12.10
%
4.50
%
6.50
%
Tier I risk-based capital ratio:
The Company
2,094,192
12.53
%
6.00
%
NA
The Bank
2,021,794
12.10
%
6.00
%
8.00
%
Total risk-based capital ratio:
The Company
2,296,012
13.74
%
8.00
%
NA
The Bank
2,223,614
13.31
%
8.00
%
10.00
%
Tier 1 Leverage ratio:
The Company
2,094,192
9.44
%
4.00
%
NA
The Bank
2,021,794
9.12
%
4.00
%
5.00
%
September 30, 2023
Common Equity Tier 1 risk-based capital ratio:
The Company
$
1,769,170
10.37
%
4.50
%
NA
The Bank
1,982,943
11.63
%
4.50
%
6.50
%
Tier I risk-based capital ratio:
The Company
2,069,170
12.12
%
6.00
%
NA
The Bank
1,982,943
11.63
%
6.00
%
8.00
%
Total risk-based capital ratio:
The Company
2,270,877
13.31
%
8.00
%
NA
The Bank
2,184,650
12.81
%
8.00
%
10.00
%
Tier 1 Leverage ratio:
The Company
2,069,170
9.39
%
4.00
%
NA
The Bank
1,982,943
9.10
%
4.00
%
5.00
%
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents - Cash and cash equivalents were $1,144,774,000 at December 31, 2023, an increase of $164,125,000, or 16.7%, since September 30, 2023. This increase served to ensure sufficient balance sheet liquidity and was funded by the increase in borrowings.
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).
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 December 31, 2023 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 December 31, 2023 or September 30, 2023, therefore, no allowance was recorded.
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 $1,153,510,000. Commercial loan originations accounted for 75% of total originations and consumer loan originations were 25% during the period. The Company continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate.
The following table shows the loan portfolio by category and the change.
December 31, 2023
September 30, 2023
Change
($ in thousands)
($ in thousands)
$
%
Commercial loans
Multi-family
$
3,054,426
15.8
%
$
2,907,086
14.8
%
$
147,340
5.1
%
Commercial real estate
3,351,113
17.3
3,344,959
17.0
6,154
0.2
Commercial & industrial
2,371,393
12.3
2,321,717
11.8
49,676
2.1
Construction
2,868,207
14.8
3,318,994
16.9
(450,787)
(13.6)
Land - acquisition & development
190,732
1.0
201,538
1.0
(10,806)
(5.4)
Total commercial loans
11,835,871
61.2
12,094,294
61.6
(258,423)
(2.1)
Consumer loans
Single-family residential
6,535,073
33.8
6,451,270
32.8
83,803
1.3
Construction - custom
543,748
2.8
672,643
3.4
(128,895)
(19.2)
Land - consumer lot loans
119,735
0.6
125,723
0.6
(5,988)
(4.8)
HELOC
243,742
1.2
234,410
1.2
9,332
4.0
Consumer
74,884
0.4
70,164
0.4
4,720
6.7
Total consumer loans
7,517,182
38.8
7,554,210
38.4
(37,028)
(0.5)
Total gross loans
19,353,053
100
%
19,648,504
100
%
(295,451)
(1.5)
Less:
Allowance for credit losses on loans
179,320
177,207
2,113
1.2
Loans in process
1,516,522
1,895,940
(379,418)
(20.0)
Net deferred fees, costs and discounts
72,589
98,807
(26,218)
(26.5)
Total loan contra accounts
1,768,431
2,171,954
(403,523)
(18.6)
Net loans
$
17,584,622
$
17,476,550
$
108,072
0.6
%
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 $2,671,000 increase in real estate owned as a result of the addition of former branch properties for sale. Non-performing assets as a percentage of total assets was 0.24% at December 31, 2023 compared to 0.26% at September 30, 2023.
The following table sets forth information regarding non-performing assets.
December 31, 2023
September 30, 2023
($ in thousands)
Non-accrual loans:
Multi - family
$
132
0.3
%
$
5,127
10.2
%
Commercial real estate
24,283
53.7
23,435
46.5
Commercial & industrial
4,437
9.8
6,082
12.1
Construction
—
—
—
—
Land - acquisition & development
—
—
—
—
Single-family residential
15,396
34.0
14,918
29.6
Construction - custom
88
0.2
88
0.2
Land - consumer lot loans
57
0.1
9
—
HELOC
603
1.3
736
1.5
Consumer
262
0.6
27
0.1
Total non-accrual loans
45,258
100
%
50,422
100
%
Real estate owned
6,820
4,149
Other property owned
3,310
3,353
Total non-performing assets
$
55,388
$
57,924
Total non-performing assets and performing restructured loans as a percentage of total assets
0.24
%
0.26
%
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.
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.
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.
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.
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.
Customer accounts - Customer accounts decreased $31,542,000, or 0.2%, to $16,038,787,000 at December 31, 2023 compared with $16,070,329,000 at September 30, 2023. Transaction accounts decreased by $107,249,000 or 1.0% during that period, while time deposits increased $75,707,000 or 1.4%.
The following table shows the composition of the Bank’s customer accounts by deposit type.
Borrowings - Total borrowings were $3,875,000,000 as of December 31, 2023 an increase from $3,650,000,000 as of September 30, 2023. This increase was driven by loan growth combined with relatively flat customer deposits. The weighted average rate for borrowings was 3.99% as of December 31, 2023 and 3.98% at September 30, 2023.
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.
RESULTS OF OPERATIONS
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.
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 $1,659,381,000.
The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis:
Comparison of Three Months Ended 12/31/2023 and 12/31/2022
($ in thousands)
Volume
Rate
Total
Interest income:
Loans receivable
$
11,982
$
29,864
$
41,846
Mortgage-backed securities
(249)
902
653
Investments (1)
3,206
7,722
10,928
All interest-earning assets
14,939
38,488
53,427
Interest expense:
Customer accounts
1,698
63,327
65,025
Borrowings
8,605
10,359
18,964
All interest-bearing liabilities
10,303
73,686
83,989
Change in net interest income
$
4,636
$
(35,198)
$
(30,562)
___________________
(1)Includes interest on cash equivalents and dividends on FHLB stock.
Provision for Credit Losses - The Company recorded no provision for credit losses for the three months ended December 31, 2023, compared with a provision for credit losses of $2,500,000 for the three months ended December 31, 2022. The lack of provision in the three months ended December 31, 2023 was primarily due to a stable loan receivable balance and continued strong credit performance. The increase in overall ACL was offset by the equal decrease in the reserve for unfunded commitments. Recoveries, net of charge-offs, totaled $113,000 for the three months ended December 31, 2023, compared to $489,000 during the three months ended December 31, 2022.
Other Income - The three months ended December 31, 2023 results include total other income of $14,167,000 compared to $14,024,000 for the same period one year ago, a $143,000 increase. The small increase is primarily due to increased interchange fees as a result of transaction volume.
Other Expense - Total other expense was $96,540,000 for the three months ended December 31, 2023, an increase of $4,262,000 from $92,278,000 for the prior year quarter. FDIC premiums increased $2,895,000 compared to the same period last year and product delivery costs increased by $1,388,000 as a result of volume-related interchange costs. Total other expense for the three months ended December 31, 2023 and December 31, 2022 equaled 1.73% and 1.74%, respectively, of average assets.
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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since September 30, 2023. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2023 Form 10-K.
PART I – Financial Information
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting. During the period to which this report relates, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.
The Company and its consolidated subsidiaries are involved in legal proceedings occurring in the ordinary course of business that in the aggregate are believed by management to be immaterial to the financial statements of the Company.
Item 1A. Risk Factors
In addition to other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the Company's Form 10-K for the year ended September 30, 2023. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases of Common Stock made by or on behalf of the Company of the Company’s common stock during the three months ended December 31, 2023 under the Company's stock repurchase plan.
Period
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan (1)
Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period
October 1, 2023 to October 31, 2023
654,203
$
24.41
654,203
1,904,980
November 1, 2023 to November 30, 2023
41,535
24.81
41,535
1,863,445
December 1, 2023 to December 31, 2023
2,155
31.09
2,155
1,861,290
Total
697,893
$
24.45
697,893
1,861,290
(1)The Company's stock repurchase program was publicly announced by its Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 76,956,264 shares were authorized for repurchase. This includes the 10,000,000 additional shares authorized by the Board of Directors on January 26, 2021.
The Company’s ability to pay dividends is subject to bank regulatory requirements, including (but not limited to) the capital adequacy regulations and policies established by the Board of Governors of the Federal Reserve System. The Company’s Board of Directors' dividend policy is to review our financial performance, capital adequacy, regulatory compliance and cash resources on a quarterly basis, and, if such review is favorable, to declare and pay a quarterly cash dividend to common shareholders. The Company’s 4.875% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred”), ranks senior to the Company’s common stock with respect to payment of dividends, and dividends (if declared) accrue and are payable on the Series A Preferred a rate of 4.875% per annum, payable quarterly, in arrears. While the Series A Preferred is outstanding, unless the full dividend for the preceding quarterly period is paid in full, or declared and a sum set aside, no dividend may be declared or paid on the Company’s common stock.
Trading Arrangements - During the period covered by this Quarterly Report on 10-Q, no director or executive officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
January 31, 2024
/S/ BRENT J. BEARDALL
BRENT J. BEARDALL President & Chief Executive Officer
January 31, 2024
/S/ KELLI J. HOLZ
KELLI J. HOLZ Executive Vice President and Chief Financial Officer
January 31, 2024
/S/ BLAYNE A. SANDEN
BLAYNE A. SANDEN Senior Vice President and Principal Accounting Officer