WAFD, INC
This discussion should be read in conjunction with our Consolidated Financial
Statements and related notes in "Item 8. Financial Statements and Supplementary
Data" of this report. In the following discussion, unless otherwise noted,
references to increases or decreases in average balances in items of income and
expense for a particular period and balances at a particular date refer to the
comparison with corresponding amounts for the period or date for the previous
year.
37--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has determined that the only accounting policy critical to an
understanding of its consolidated financial statements relates to the
methodology for determining the amount of the allowance for credit losses
("ACL").
Management's determination of the amount of the ACL is a critical accounting
estimate as it requires significant reliance on the credit risk we ascribe to
individual borrowers, the use of estimates and significant judgment as to the
amount and timing of expected future cash flows on individually evaluated loans,
significant reliance on historical loss rates on homogenous portfolios,
consideration of our quantitative and qualitative evaluation of past events,
current conditions, and reasonable and supportable forecasts that affect the
collectability of the reported amounts.
Going forward, the methodology used to calculate the ACL will be significantly
influenced by the composition, characteristics and quality of our loan
portfolio, as well as the prevailing economic conditions and forecasts utilized.
Material changes to these and other relevant factors may result in greater
volatility to the allowance for credit losses, and therefore, greater volatility
in our reported earnings.
Select information regarding the ACL is below in "Allowance for Credit Losses."
For further details, see Note s A and E to the Consolidated
Financial Statements in "Item 8. Financial Statements and Supplementary
Data . "
38--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALLOWANCE FOR CREDIT LOSSES
The following table provides detail regarding the Company's allowance for credit
losses.
Twelve Months Ended September 30, 2021 2020 2019 2018 2017
(In thousands)
Beginning balance $ 166,955 $ 131,534 $ 129,257 $ 123,073 $ 113,494
Charge-offs:
Commercial loans
Multi-Family - - - - -
Commercial Real Estate - 111 428 36 11
Commercial & Industrial Loans 31 4,196 5,782 3,574 173
Construction - - - - -
Land - Acquisition & Development 2 11 107 13 280
Total commercial loans 33 4,318 6,317 3,623 464
Consumer loans
Single-Family Residential 106 131 268 1,142 1,229
Construction - Custom - - 1,973 50 16
Land - Consumer Lot Loans - 237 804 67 17
HELOC - - 1,086 668 90
Consumer 286 1,069 1,028 382 884
Total consumer loans 392 1,437 5,159 2,309 2,236
425 5,755 11,476 5,932 2,700
Recoveries:
Commercial loans
Multi-Family - 498 - - -
Commercial Real Estate 2,789 2,447 1,102 189 1,684
Commercial & Industrial Loans 92 443 3,443 714 1,833
Construction - 188 99 - -
Land - Acquisition & Development 622 2,070 7,457 14,223 11,038
Total commercial loans 3,503 5,646 12,101 15,126 14,555
Consumer loans
Single-Family Residential 2,026 1,394 1,020 757 653
Construction - Custom - - - - -
Land - Consumer Lot Loans 168 639 719 35 481
HELOC 52 95 46 71 21
Consumer 1,021 1,252 1,167 993 1,297
Total consumer loans 3,267 3,380 2,952 1,856 2,452
6,770 9,026 15,053 16,982 17,007
Net charge-offs (recoveries) (6,345) (3,271) (3,577) (11,050) (14,307)
ASC 326 Adoption Impact - 17,750 - - -
Provision (release) for loan losses
and transfers (2,000) 14,400 (1,300) (4,866) (4,728)
Ending balance (1) $ 171,300 $ 166,955 $ 131,534 $ 129,257 $ 123,073
Ratio of net charge-offs (recoveries)
to average loans outstanding (0.05) % (0.03) % (0.03) % (0.10) % (0.14) %
__________________
(1) This does not include a reserve for unfunded commitments of$27,500,000 ,$25,000,000 ,$6,900,000 ,$7,250,000 and$7,750,000 as ofSeptember 30, 2021 , 2020, 2019, 2018 and 2017 respectively. 39
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSThe following table shows changes in the Company's allowance for credit losses since the prior year.
September 30, 2021 September 30, 2020 $ Change % Change
(In thousands)
Allowance for credit losses:
Commercial loans
Multi-family $ 16,949 $ 13,853 $ 3,096 22 %
Commercial real estate 23,437 22,516 921 4 %
Commercial & industrial 45,957 38,665 7,292 19 %
Construction 25,585 24,156 1,429 6 %
Land - acquisition &
development 13,447 10,733 2,714 25 %
Total commercial loans 125,375 109,923 15,452 14 %
Consumer loans
Single-family residential 30,978 45,186 (14,208) (31) % Construction - custom 4,907 3,555 1,352 38 % Land - consumer lot loans 4,939 2,729 2,210 81 % HELOC 2,390 2,571 (181) (7) % Consumer 2,711 2,991 (280) (9) % Total consumer loans 45,925 57,032 (11,107) (19) % Total allowance for loan losses 171,300 166,955 4,345 3 % Reserve for unfunded commitments 27,500 25,000 2,500 10 %
Total allowance for credit losses $ 198,800 $ 191,955
4 %
The allowance for loan losses increased by $4,345,000 , or 2.60%, from
$166,955,000 as of September 30, 2020 , to $171,300,000 at September 30, 2021 . As
of September 30, 2021 , the allowance of $171,300,000 is for loans that are
evaluated on a pooled basis, which was comprised of $120,357,000 related to the
quantitative component and $50,943,000 related to management's qualitative
overlays.
The Company recorded a provision for credit losses of $500,000 in 2021, compared
to a provision of $21,750,000 for 2020. The significant provision in 2020 was
due to higher expected losses with the onset of the global pandemic. In 2021,
provisioning for net growth in the loan portfolio was mostly offset by releases
related to improvements in macroeconomic variables used in the forecast
component of the reserve. For the year ended September 30, 2021 , net recoveries
were $6,345,000 , compared to $3,271,000 in the prior year. No allowance was
recorded as of September 30, 2021 for the $305,162,000 of PPP loans, which are
included in the commercial & industrial loan category, due to the government
guarantee. The ratio of the total ACL to total gross loans decreased to 1.22% as
of September 30, 2021 , as compared to 1.33% as of September 30, 2020 . The
decrease was primarily related to improvements in macroeconomic variables used
in the forecast component of the ACL.
The reserve for unfunded loan commitments was $27,500,000 as of September 30,
2021 , compared to $25,000,000 as of September 30, 2020 .
Management believes the total ACL is sufficient to absorb estimated losses
inherent in the portfolio of loans and unfunded commitments.
40--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSThe following table sets forth the amount of the Company's allowance for loan losses by loan portfolio and class.
September 30, 2021 2020 2019 2018 2017 Loans to Loans to Loans to Loans to Loans to Total Loans Coverage Total Loans Coverage Total Loans Coverage Total Loans Coverage Total Loans Coverage Allowance (1) Ratio (2) Allowance (1) Ratio (2) Allowance (1) Ratio (2) Allowance (1) Ratio (2) Allowance (1) Ratio (2) ($ in thousands) Commercial loans Multi-family$ 16,949 16.3 % 0.8 %$ 13,853 11.8 % 0.9 %$ 7,391 11.7 % 0.5 %$ 8,329 11.9 % 0.6 %$ 7,862 11.8 % 0.6 % Commercial real estate 23,437 17.4 1.0 22,516 14.4 1.2 13,170 13.5 0.8 11,852 12.5 0.8 11,818 12.8 0.8 Commercial & industrial 45,957 16.3 2.0 38,665 16.5 1.8 31,450 10.5 2.5 28,702 9.8 2.5 28,524 9.9 2.6 Construction 25,585 7.9 2.3 24,156 10.5 1.8 32,304 9.6 2.8 31,317 9.1 3.0 24,556 7.2 3.1 Land - acquisition & development 13,447 1.3 7.5 10,733 1.2 7.0 9,155 1.3 5.7 7,978 1.1 6.5 6,829 1.0 6.5
Total commercial loans 125,375 109,923 93,470 88,178 79,589 Consumer loans Single-family residential 30,978 35.5 0.6
45,186 40.8 0.9 30,988 48.2 0.5 33,033 49.7 0.6 36,892 51.8 0.6
Construction - custom 4,907 2.5 1.4 3,555 2.3 1.2 1,369 2.1 0.5 1,842 2.5 0.6 1,944 2.5 0.7
Land - consumer lot loans 4,939 1.0 3.4 2,729 0.8 2.7 2,143 0.8 2.2 2,164 0.8 2.2 2,649 0.9 2.7
HELOC 2,390 1.2 1.5 2,571 1.1 1.8 1,103 1.2 0.8 781 1.1 0.6 855 1.3 0.6
Consumer 2,711 0.6 3.2 2,991 0.6 3.6 2,461 1.1 1.9 3,259 1.5 1.9 1,144 0.8 1.4
Total consumer loans 45,925 57,032 38,064 41,079 43,484
Total allowance for loan
losses (3) $ 171,300 100 % $ 166,955 100 % $ 131,534 100 % $ 129,257 100 % $ 123,073 100 %
___________________
(1)Represents the loans receivable for each respective loan class as a % of
total loans receivable.
(2)Represents the allowance for each respective loan class as a % of loans
receivable for that same loan class.
(3)This does not include a reserve for unfunded commitments of $27,500,000 ,
$25,000,000 , $6,900,000 , $7,250,000 and $7,750,000 as of September 30, 2021 ,
2020, 2019, 2018 and 2017, respectively.
41--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ASSET QUALITY
Troubled debt restructured loans ("TDRs"). TDRs are reserved for under the
Company's CECL methodology. Most TDRs are performing and accruing loans where
the borrower has proactively approached the Company about modifications due to
temporary financial difficulties. Each request is individually evaluated for
merit and likelihood of success. The concession for these loans is typically a
payment reduction through a rate reduction of 100 to 200 basis points for a
specific term, usually six to twelve months. Interest-only payments may also be
approved during the modification period.
Concessions for construction, land A&D and multi-family loans are typically an
extension of maturity combined with a rate reduction of normally 100 basis
points. Before granting approval to modify a loan in a TDR, a borrower's ability
to repay is considered by evaluating current income levels, debt-to-income
ratio, credit score, loan payment history and an updated evaluation of the
secondary repayment source.
If a loan is on non-accrual status before becoming a TDR, it will stay on
non-accrual status following restructuring until it has been performing for at
least six months, at which point it may be moved to accrual status. If a loan is
on accrual status before it becomes a TDR, and it is concluded that a full
repayment is highly probable, it will remain on accrual status following
restructuring. If the homogeneous restructured loan does not perform, it is
placed in non-accrual status when it is 90 days delinquent. For commercial
loans, six consecutive payments on newly restructured loan terms are required
prior to returning the loan to accrual status. After the required six
consecutive payments are made, a management assessment may conclude that
collection of the entire principal and interest due is still in doubt. In those
instances, the loan will remain on non-accrual. A loan that defaults and is
subsequently modified would impact the Company's delinquency trend, which is
part of the qualitative risk factors component of the CECL methodology. Any
modified loan that re-defaults and is charged-off would impact the quantitative
component of the CECL methodology.
Non-Performing Assets. When a borrower violates a condition of a loan, the Bank
attempts to cure the default by contacting the borrower. In most cases, defaults
are cured promptly. If the default is not cured within an appropriate time
frame, typically 90 days, the Bank may institute appropriate action to collect
the loan, such as making demand for payment or initiating foreclosure
proceedings on the collateral. If foreclosure occurs, the collateral will
typically be sold at public auction and may be purchased by the Bank.
Loans are placed on nonaccrual status when, in the judgment of management, the
probability of collecting interest or principal is deemed to be insufficient to
warrant further accrual. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is deducted from interest income. The Bank does not
accrue interest on loans 90 days past due or more. See Note A to the
Consolidated Financial Statements included in Item 8 hereof for additional
information.
The Bank will consider modifying the interest rate and terms of a loan if it
determines that a modification is deemed to be the best option available for
collection in full or to minimize the loss to the Bank. Most loans restructured
in TDRs are accruing and performing loans where the borrower has proactively
approached the Bank about a modification due to temporary financial
difficulties. Each request is individually evaluated for merit and likelihood of
success. The modification of these loans is typically a payment reduction
through a rate reduction of from 100 to 200 bps for a specific term, usually six
to twelve months. Interest-only payments may also be approved during the
modification period. Principal forgiveness generally is not an available option
for restructured loans. As of September 30, 2021 , single-family residential
loans comprised 92.1% of restructured loans. The Bank reserves for restructured
loans within its pool based general reserve methodology, except in instances
where management considers it appropriate to evaluate individually.
Real estate acquired by foreclosure or deed-in-lieu thereof ("REO" or "Real
Estate Owned") is classified as real estate held for sale. When property is
acquired, it is recorded at the fair market value less estimated selling costs
at the date of acquisition. Interest accrual ceases on the date of acquisition
and all costs incurred in maintaining the property from that date forward are
expensed as incurred. Costs incurred for the improvement or development of such
property is capitalized. See Note A to the Consolidated Financial Statements
included in Item 8 hereof for additional information.
42--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSThe following table sets forth information regarding the Company's restructured loans and non-performing assets.
September 30, 2021 2020 2019 2018 2017
(In thousands)
Performing restructured loans $ 63,655 $ 89,072 $ 116,659 $ 150,667 $ 202,272
Non-performing restructured loans 1,473 2,336 5,018 6,191 5,105
Total restructured loans 65,128 91,408 121,677 156,858 207,377
Non-accrual loans:
Commercial loans
Multi-family 475 - - 27,643 27,930
Commercial real estate 8,038 3,771 5,835 2,427 -
Commercial & industrial 365 329 1,292 - 91
Construction 505 1,669 - 920 296
Land - acquisition & development 2,340 - 169 787 605
Total commercial loans 11,723 5,769 7,296 31,777 28,922
Consumer loans
Single-family residential 19,320 22,431 25,271 - 139
Construction - custom - - - 8,971 11,815
Land - consumer lot loans 359 243 246 14,394 8,082
HELOC 287 553 907 523 531
Consumer 60 60 11 21 91
Total consumer loans 20,026 23,287 26,435 23,909 20,658
Total non-accrual loans (1) 31,749 29,056 33,731 55,686 49,580
Real estate owned 8,204 4,966 6,781 11,298 20,658
Other property owned 3,672 3,673 3,314 3,109 -
Total non-performing assets 43,625 37,695 43,826 70,093 70,238
Total non-performing assets and
performing restructured loans $ 107,280 $ 126,767 $ 160,485 $ 220,760 $ 272,510
Total non-performing assets and
restructured loans as a percent of
total assets 0.55 % 0.67 % 0.97 % 1.39 % 1.79 %
Total non-performing assets to total
assets 0.22 % 0.20 % 0.27 % 0.44 % 0.46 %
___________________
(1) For the year ended September 30, 2021 , the Company recognized $9,354,000 in
interest income on cash payments received from borrowers on non-accrual loans.
The Company would have recognized interest income of $1,373,000 for the same
period had these loans performed according to their original contract terms. The
recognized interest income may include more than twelve months of interest for
some of the non-accrual loans that were brought current or paid off. In addition
to the non-accrual loans reflected in the above table, the Company had
$355,151,000 of loans that were less than 90 days delinquent at September 30,
2021 but were classified as substandard for one or more reasons. If these loans
were deemed non-performing, the Company's ratio of total non-performing assets
and performing restructured loans as a percent of total assets would have
increased to 2.35% at September 30, 2021 . For a discussion of the Company's
policy for placing loans on non-accrual status, see Note A to the Consolidated
Financial Statements included in Item 8 of this report.
Non-performing assets increased 15.7% to $43,625,000 , or 0.22% of total assets,
at September 30, 2021 , compared to $37,695,000 , or 0.20% of total assets, at
September 30, 2020 . The increase was primarily a result of $2,693,000 higher
non-accrual loans and $3,238,000 higher real estate owned. Other property owned
of $3,672,000 as of September 30, 2021 is comprised of $896,000 of equipment
acquired through foreclosure on a commercial loan and a $2,776,000 government
guarantee related to that same loan.
43--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TDRs declined to $65,128,000 as of September 30, 2021 , from $91,408,000 as of
September 30, 2020 . As of September 30, 2021 , $63,655,000 or 97.7% of TDRs were
performing. Non-performing TDRs of $1,473,000 are included in NPAs. Total NPAs
and performing TDRs as a percent of total assets has declined to 0.55% as of
September 30, 2021 , from 0.67% as of September 30, 2020 . During 2021, there were
TDR additions of $1,511,000 and reductions of $27,790,000 due to prepayments and
transfers to REO. As of September 30, 2021 , 92.1% of TDRs are comprised of
single-family residential loans.
As of September 30, 2021 , real estate owned totaled $8,204,000 , an increase of
$3,238,000 , or 65.2%, from $4,966,000 as of September 30, 2020 , as new REO
properties were partially offset by sales of foreclosed properties. During 2021,
the Company sold real estate owned properties for total net proceeds of
$3,340,000 . The majority of REO properties are former bank premises that are
expected to be sold.
The ratio of the allowance for loan losses to non-accrual loans decreased to
540% as of September 30, 2021 , from 575% as of September 30, 2020 .
44--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents: Cash and cash equivalents increased to $2,090,809,000
at September 30, 2021 , as compared to $1,702,977,000 at September 30, 2020 . The
change was primarily due to the $1,762,488,000 increase in customer accounts,
the majority of which was used to fund growth in the loan portfolio and pay down
FHLB borrowings. Changes in investment securities balances discussed below also
contributed to growth in cash and cash equivalents.
Available-for-sale investment securities: Available-for-sale securities
decreased $111,233,000 , or 4.9%, during the year ended September 30, 2021 , to
$2,138,259,000 , primarily due to principal repayments of $646,532,000 and sales
of $1,499,000 , partially offset by purchases of $530,227,000 . As of September
30, 2021 , the Company had a net unrealized gain on available-for-sale securities
of $48,189,000 , which is recorded net of tax as part of shareholders' equity.
Substantially all of the Company's available-for-sale 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 remaining securities are issued
by highly-rated municipalities or corporate borrowers. The Company does not
believe that any of its available-for-sale debt securities have credit loss
impairment as of September 30, 2021 , therefore, no allowance was recorded. The
impact going forward will depend on the composition, characteristics, and credit
quality of the loan and securities portfolios as well as the economic conditions
at future reporting periods.
Held-to-maturity investment securities: Held-to-maturity securities decreased by
$339,813,000 , or 48.1%, during the year ended September 30, 2021 , to
$366,025,000 primarily due to principal repayments and maturities of
$332,001,000 . There were no held-to-maturity securities purchased or sold during
the year ended September 30, 2021 . Rising interest rates may cause these
securities to be subject to unrealized losses. As of September 30, 2021 , the net
unrealized gain on held-to-maturity securities was $13,522,000 , which management
attributes to the change of interest rates since acquisition.
Substantially all of the Company's held-to-maturity debt securities are issued
by U.S. government agencies or U.S. government-sponsored enterprises. These
securities carry the explicit and/or implicit guarantee of the U.S. government
and have a long history of zero credit loss. The Company did not record an
allowance for credit losses for held-to-maturity securities as of September 30,
2021 as the investment portfolio consists primarily of U.S. government agency
mortgage-backed securities that management deems to have immaterial risk of
loss. The impact going forward will depend on the composition, characteristics,
and credit quality of the loan and securities portfolios as well as the economic
conditions at future reporting periods.
The table below shows the available-for-sale and held-for-investment securities
portfolios categorized by maturity band.
Amortized
September 30, 2021 Cost Weighted Average Yield
($ in thousands)
Due in less than 1 year $ 17,851 0.49 %
Due after 1 year through 5 years 292,998 1.33
Due after 5 years through 10 years 177,854
2.61
Due after 10 years 1,967,392 1.93
$ 2,456,095 1.89 %
For further information on our investment portfolio, see Note C to the
Consolidated Financial Statements in "Item 8. Financial Statements and
Supplementary Data" of this report.
Loans receivable: Loans receivable, net of related contra accounts, increased
$1,041,253,000 , or 8.1%, to $13,833,570,000 at September 30, 2021 , from
$12,792,317,000 one year earlier. The increase resulted primarily from
originations of $8,184,733,000 and loan purchases of $488,147,000 , partially
offset by loan repayments of $6,797,043,000 and a $776,764,000 increase to
loans-in-process during the year ended September 30, 2021 . Commercial loan
originations accounted for 77.1% of
45--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
total originations and consumer originations were 22.9% as the Company continues
to focus on commercial lending, coupled with growing economies in all major
markets in which we operate.
The following table presents loan balances by category and the year-over-year
change.
September 30, 2021 September 30, 2020 Change
($ in thousands) ($ in thousands) $ %
Gross loans by category
Commercial loans
Multi-family $ 2,291,477 14.1 % $ 1,538,762 10.6 % $ 752,715 48.9%
Commercial real estate 2,443,845 15.0 1,895,086 13.1 548,759 29.0
Commercial & industrial (1) 2,314,654 14.2 2,132,160 14.7 182,494 8.6
Construction 2,888,214 17.7 2,403,276 16.6 484,938 20.2
Land - acquisition & development 222,457 1.4 193,745 1.3 28,712 14.8
Total commercial loans 10,160,647 62.4 8,163,029 56.4 1,997,618 24.5
Consumer loans
Single-family residential 4,951,627 30.4 5,304,689 36.7 (353,062) (6.7)
Construction - custom 783,221 4.8 674,879 4.7 108,342 16.1
Land - consumer lot loans 149,956 0.9 102,263 0.7 47,693 46.6
HELOC 165,989 1.0 139,703 1.0 26,286 18.8
Consumer 87,892 0.5 83,159 0.6 4,733 5.7
Total consumer loans 6,138,685 37.6 6,304,693 43.6 (166,008) (2.6)
Total gross loans 16,299,332 100 % 14,467,722 100 % 1,831,610 12.7%
Less:
Allowance for loan losses 171,300 166,955 4,345 2.6
Loans in process 2,232,836 1,456,072 776,764 53.3
Net deferred fees, costs and discounts 61,626 52,378 9,248 17.7
Total loan contra accounts 2,465,762 1,675,405 790,357 47.2
Net loans $ 13,833,570 $ 12,792,317 $ 1,041,253 8.1%
(1) Includes $311,795,000 of SBA Payroll Protection Program loans as of
September 30, 2021 .
The following table summarizes the Company's loan portfolio, due for the periods
indicated based on contractual terms to maturity or repricing.
46--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Less than 1 to 5 5 to 15 After 15
September 30, 2021 Total 1 Year Years Years Years
(In thousands)
Commercial loans
Multi-family $ 2,273,689 $ 928,690 $ 747,365 $ 527,430 $ 70,204
Commercial real estate 2,429,332 1,043,359 667,138 715,710 3,125
Commercial & industrial 2,303,927 1,592,157 461,975 177,085 72,710
Construction 1,117,227 900,783 90,282 115,509 10,653
Land - acquisition & development 192,416 185,076 3,509 3,831 -
Total commercial loans 8,316,591 4,650,065 1,970,269 1,539,565 156,692
Consumer loans
Single-family residential 4,937,064 184,093 66,294 374,794 4,311,883
Construction - custom 347,752 1,766 - 633 345,353
Land - consumer lot loans 148,534 10,432 44,496 11,230 82,376
HELOC 166,940 165,906 1,034 - -
Consumer 87,989 29,561 6,604 42,470 9,354
Total consumer loans 5,688,279 391,758 118,428 429,127 4,748,966
$ 14,004,870 $ 5,041,823 $ 2,088,697 $ 1,968,692 $ 4,905,658
The contractual loan payment period for residential mortgage loans originated by
the Company normally ranges from 15 to 30 years. Experience during recent years
has indicated that, because of prepayments in connection with refinancing and
sales of property, residential loans typically have a weighted average life of
approximately five years.
47--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following tables provide information regarding loans receivable by loan
class and geography.
Single -
Multi- Commercial Commercial Land - Family Construction - Land -
September 30, 2021 family Real Estate and Industrial Construction A & D Residential custom Lot Loans Consumer HELOC Total
(In thousands)
Washington $ 312,233 $ 514,868 $ 930,177 $
272,345
493,481 364,476 338,552 252,503 46,982 675,791 41,302 17,254 490 22,361 2,253,192
Arizona 517,654 324,489 87,312 128,715 1,275 535,542 38,593 20,815 437 16,976 1,671,808
Utah 257,637 169,745 98,612 138,014 15,143 389,384 32,460 5,405 13,600 8,803 1,128,803
Texas 235,973 475,454 342,093 196,871 7,645 146,399 2,011 161 75 1,640 1,408,322
New Mexico 146,089 222,526 43,069 32,295 16,577 177,535 5,512 2,973 786 9,131 656,493
Idaho 117,991 133,471 42,717 55,522 25,081 279,351 23,579 12,485 76 11,583 701,856
Nevada 96,422 150,751 40,849 28,159 1,144 211,592 6,065 7,321 10,843 3,287 556,433
Other 96,209 73,552 380,546 12,803 - 22,461 - 7 21,147 - 606,725
$ 2,273,689 $ 2,429,332 $ 2,303,927 $
1,117,227
Percentage by geographic area
Single -
September 30, Multi- Commercial Commercial Land - Family Construction - Land -
2021 family Real Estate and Industrial Construction A & D Residential
custom Lot Loans Consumer HELOC Total
As % of total gross loans
Washington 2.2 % 3.7 % 6.7 % 2.0 % 0.6 % 17.8 % 1.5 % 0.6 % 0.3 % 0.7 % 36.1 %
Oregon 3.5 2.6 2.4 1.8 0.3 4.8 0.3 0.1 - 0.1 15.9
Arizona 3.7 2.3 0.6 0.9 - 3.8 0.3 0.2 - 0.1 11.9
Utah 1.8 1.2 0.7 1.0 0.1 2.8 0.2 - 0.1 0.1 8.0
Texas 1.7 3.4 2.5 1.4 0.1 1.0 - - - - 10.1
New Mexico 1.0 1.6 0.3 0.2 0.1 1.3 - - - 0.1 4.6
Idaho 0.9 0.9 0.3 0.4 0.2 2.0 0.2 0.1 - 0.1 5.1
Nevada 0.7 1.1 0.3 0.2 - 1.5 - 0.1 0.1 - 4.0
Other 0.7 0.5 2.7 0.1 - 0.2 - - 0.1 - 4.3
16.2 % 17.3 % 16.5 % 8.0 % 1.4 % 35.2 % 2.5 % 1.1 % 0.6 % 1.2 % 100 %
Percentage by geographic area as a % of each loan type
Single -
September 30, Multi- Commercial Commercial Land - Family Construction - Land -
2021 family Real Estate and Industrial Construction A & D Residential custom
Lot Loans Consumer HELOC
As % of total gross loans
Washington 13.7 % 21.2 % 40.4 % 24.4 % 40.8 % 50.6 % 57.0 % 55.3 % 46.1 % 55.8 %
Oregon 21.7 15.0 14.7 22.6 24.4 13.7 11.9 11.6 0.6 13.4
Arizona 22.8 13.3 3.8 11.5 0.7 10.8 11.1 14.0 0.5 10.1
Utah 11.3 7.0 4.3 12.4 7.9 7.9 9.3 3.7 15.4 5.3
Texas 10.4 19.6 14.8 17.6 4.0 3.0 0.6 0.1 0.1 1.0
New Mexico 6.4 9.2 1.9 2.9 8.6 3.6 1.6 2.0 0.9 5.5
Idaho 5.2 5.5 1.8 5.0 13.0 5.7 6.8 8.4 0.1 6.9
Nevada 4.3 6.2 1.8 2.5 0.6 4.3 1.7 4.9 12.3 2.0
Other 4.2 3.0 16.5 1.1 - 0.4 - - 24.0 -
100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
48--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSThe following table shows the change in the geographic distribution by state of the loan portfolio since the prior year.
September 30, 2021 2020 Change
Washington 36.1 % 40.0 % (3.9)
Oregon 15.9 17.9 (2.0)
Arizona 11.9 11.7 0.2
Utah 8.0 6.5 1.5
Texas 10.1 8.1 2.0
New Mexico 4.6 5.6 (1.0)
Idaho 5.1 4.8 0.3
Nevada 4.0 3.3 0.7
Other (1) 4.3 2.1 2.2
100 % 100 %
(1) Includes loans from outside of our eight state footprint.
CARES Act and PPP Program: Pursuant to the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") passed by Congress , the Company offered payment
deferrals on consumer loans and commercial loans. The Company also made loans to
small businesses through the Small Business Administration Paycheck Protection
Program. For further information on these activities, see Note D to the
Consolidated Financial Statements in "Item 8. Financial Statements and
Supplementary Data" of this report.
Allowance for credit losses: For details, see the "Allowance for Credit Losses"
section above in this report.
Non-performing assets: For details, see the "Asset Quality" section above in this report.
Troubled debt restructured loans ("TDRs"): For details, see the "Asset Quality" section above in this report.
Real estate owned: For details, see the "Asset Quality" section above in this report.
Interest receivable: Interest receivable was$50,636,000 as ofSeptember 30, 2021 , a decrease of$3,163,000 , or 5.9%, sinceSeptember 30, 2020 . The decrease was primarily a result of payments on previously deferred amounts on CARES Act loan modifications. Bank Owned Life Insurance: Bank-owned life insurance increased to$233,263,000 as ofSeptember 30, 2021 from$227,749,000 as ofSeptember 30, 2020 , primarily as a result of increases in the cash surrender value of the policies. The investments in bank-owned life insurance serve to assist in funding growing employee benefit costs. Intangible assets: The Company's intangible assets totaled$310,019,000 atSeptember 30, 2021 compared to$309,906,000 as ofSeptember 30, 2020 . The balance atSeptember 30, 2021 is comprised of$303,457,000 of goodwill and the unamortized balance of the core deposit and other intangibles of$6,562,000 .
Customer accounts: As of
The following table shows customer deposits by account type.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
($ in thousands) September 30, 2021 September 30, 2020
Deposit Account As a % of Total Weighted Deposit Account As a % of Total Weighted
Balance Deposits Average Rate Balance Deposits Average Rate
Non-interest checking $ 3,122,397 20.1 % - % $ 2,164,071 15.7 % - %
Interest checking 3,566,322 22.9 0.20 3,029,576 22.0 0.23
Savings 1,039,336 6.7 0.11 872,087 6.3 0.11
Money market 4,379,970 28.2 0.19 3,740,698 27.1 0.30
Time deposits 3,434,087 22.1 0.54 3,973,192 28.8 1.17
Total $ 15,542,112 100 % 0.23 % $ 13,779,624 100 % 0.48 %
The following table shows the geographic distribution by state for customer
deposits.
($ in thousands) September 30, 2021 September 30, 2020 $ Change % Change
Washington $ 6,742,208 43.4 % $ 5,914,476 42.9 % $ 827,732 14.0 %
Oregon 3,006,222 19.3 2,627,720 19.1 378,502 14.4 %
Arizona 1,551,671 10.0 1,481,603 10.8 70,068 4.7 %
New Mexico 1,292,965 8.3 1,148,816 8.3 144,149 12.5 %
Idaho 1,067,834 6.9 949,920 6.9 117,914 12.4 %
Utah 1,027,317 6.6 988,498 7.2 38,819 3.9 %
Nevada 522,988 3.4 442,772 3.2 80,216 18.1 %
Texas 330,907 2.1 225,819 1.6 105,088 46.5 %
$ 15,542,112 100 % $ 13,779,624 100 % $ 1,762,488 12.8 %
The following table sets forth, by various interest rate categories, the amount of fixed-rate time deposits that mature during the periods indicated.
Maturing in
1 to 3 4 to 6 7 to 12 13 to 24 25 to 36 37 to 60
September 30, 2021 Months Months Months Months Months Months Total
(In thousands)
Fixed-rate time deposits:
Under 1.00% $ 1,083,314 $ 819,906 $ 870,801 $ 293,341 $ 13,138 $ 73,289 $ 3,153,789
1.00% to 1.99% 982 - - 101,548 56,380 70,683 229,593
2.00% to 2.99% 608 - - - 50,000 - 50,608
3.00% to 3.99% 97 - - - - - 97
Total $ 1,085,001 $ 819,906 $ 870,801 $ 394,889 $ 119,518 $ 143,972 $ 3,434,087
Historically, a significant number of time deposit account holders roll over
their balances into new time deposits of the same term at the Bank's then
current rate. To ensure a continuity of this trend, the Bank expects to continue
to offer market rates of interest. The ability to retain maturing time deposits
is difficult to project; however, the Bank believes that by competitively
pricing these certificates, levels deemed appropriate by management can be
achieved on a continuing basis.
At September 30, 2021 , the Bank had $607,245,000 of time deposits in amounts of
$250,000 or more outstanding, maturing as follows: $200,127,000 within 3 months;
$131,401,000 over 3 months through 6 months; $139,859,000 over 6 months through
12 months; and $135,858,000 thereafter.
Time deposits with a maturity of one year or less have penalties for premature
withdrawal equal to 90 days of interest. When the maturity is greater than one
year but less than four years, the penalty is 180 days of interest. When the
maturity is
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
greater than four years, the penalty is 365 days of interest. Early withdrawal
penalty fee income for the years ended 2021, 2020 and 2019 amounted to $198,000 ,
$539,000 and $895,000 , respectively.
For additional details on customer accounts, including uninsured deposits, see
Note K to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this report.
FHLB advances: FHLB advances declined to$1,720,000,000 as ofSeptember 30, 2021 , as compared to$2,700,000,000 atSeptember 30, 2020 . Strong growth in customer deposits allowed the Company to reduce FHLB borrowings. SinceSeptember 30, 2020 , cash flow hedges totaling$600,000,000 were terminated and the associated FHLB advances were paid off. An additional$150,000,000 of unhedged advances were repaid prior to maturity (resulting in a prepayment fee of$13,788,000 ) and the remaining$230,000,000 of unhedged borrowings were not renewed upon maturity. The weighted average rate for FHLB borrowings was 1.51% as ofSeptember 30, 2021 , versus 1.79% atSeptember 30, 2020 , the decrease being primarily due to repayment of advances with higher rates. The Company has entered into interest rate swaps to hedge interest rate risk and convert certain FHLB advances to fixed rate payments. Taking into account these hedges, the weighted average effective maturity of FHLB advances atSeptember 30, 2021 is 5.03 years. 51
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF 2021 RESULTS WITH 2020
Net Income: Net income increased $10,177,000 , or 5.9%, to $183,615,000 for the
year ended September 30, 2021 , as compared to $173,438,000 for the year ended
September 30, 2020 . The change was due to the factors described below.
Net Interest Income: For the year ended September 30, 2021 , net interest income
was $505,109,000 , an increase of $35,601,000 or 7.6% from the year ended
September 30, 2020 . The increase in net interest income from the prior year was
primarily due to average interest-earning assets increasing by $1,986,044,000 or
12.37% while average interest-bearing liabilities increased by $1,017,143,000 or
7.72%. During 2021, the average balance of loans receivable increased
$943,212,000 or 7.7%, while the combined average balances of mortgage backed
securities, other investment securities and cash increased by $1,054,758,000 or
28.9%. Average noninterest-bearing deposits grew by $809,741,000 over the same
period. The change in net interest income was also impacted by the average rate
earned on interest-earning assets declining by 58 basis points while the average
rate paid on interest-bearing liabilities declined by 54 basis points.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the years indicated. 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 average 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.
Twelve Months Ended September 30,
2021 vs. 2020 2020 vs. 2019 2019 vs. 2018
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total Volume Rate Total
(In thousands) (In thousands) (In thousands)
Interest income:
Loan portfolio $ 40,365 $ (48,413) $ (8,048) $ 21,197 $ (43,585) $ (22,388) $ 28,489 $ 23,800 $ 52,289
Mortgage-backed securities (16,011) (8,593) (24,604) (13,094) (12,079) (25,173) 298 3,780 4,078
Investments (1) 18,824 (15,827) 2,997 19,566 (22,206) (2,640) 3,878 4,138 8,016
All interest-earning assets 43,178 (72,833) (29,655) 27,669 (77,870) (50,201) 32,665 31,718 64,383
Interest expense:
Customer accounts 11,184 (69,183) (57,999) 9,781 (31,685) (21,904) 3,992 45,732 49,724
FHLB advances and other
borrowings (6,003) (1,254) (7,257) (35) (16,710) (16,745) 4,020 1,718 5,738
All interest-bearing liabilities 5,181 (70,437) (65,256) 9,746 (48,395) (38,649) 8,012 47,450 55,462
Change in net interest income $ 37,997 $ (2,396) $ 35,601 $ 17,923 $ (29,475) $ (11,552) $ 24,653 $ (15,732) $ 8,921
___________________
(1)Includes interest on cash equivalents and dividends on stock of the FHLB of
Provision (Release) for Credit Losses: The Company recorded a provision for credit losses of$500,000 in fiscal 2021, compared to provision of$21,750,000 in 2020. The significant provision in 2020 was due to higher expected losses with the onset of the global pandemic. In 2021, provisioning for net growth in the loan portfolio was mostly offset by releases related to improvements in macroeconomic variables used in the forecast component of the reserve. The Company had recoveries, net of 52
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
charge-offs, of
Other Income: Other income was$60,561,000 for the year endedSeptember 30, 2021 , a decrease of$26,399,000 , or 30.4%, from$86,960,000 for the year endedSeptember 30, 2020 . The decrease is primarily due to the recognition of a net gain of$30,700,000 in 2020 from the sale and valuation adjustments of fixed assets, including a branch property inBellevue, Washington . In 2021, a gain of$4,700,000 was recorded for equity investments based on updated valuations, a gain of$14,110,000 was recognized on the partial termination of an interest rate swap being used to hedge a FHLB borrowing, and these amounts were partially offset by a$13,788,000 loss on early repayment of a fixed-rate FHLB borrowing. Other Expense: Operating expense was$332,459,000 for the year endedSeptember 30, 2021 , an increase of$16,901,000 , or 5.4%, from the$315,558,000 for the year endedSeptember 30, 2020 . Compensation and benefits costs increased$28,510,000 or 19.3% year-over-year primarily due to annual merit increases, higher bonus compensation accruals related to strong deposit and loan growth, and strategic investments in top talent as well as contract staff to support strategic projects. Information technology costs decreased by$10,165,000 in 2021, as 2020 reflected larger investments in new hardware and software as well as a$5,900,000 impairment charge. InSeptember 2021 , the company recognized a$2,500,000 civil money penalty paid to theOffice of the Comptroller of the Currency ("OCC") related to the previously-disclosedFebruary 2018 , Consent Order for Anti-Money Laundering and Bank Secrecy Act ("AML/BSA") deficiencies. The Company's efficiency ratio was 58.8% for 2021 as compared to 56.7% for the prior year. The number of staff, including part-time employees on a full-time equivalent basis, was 2,082 and 2,080 atSeptember 30, 2021 and 2020, respectively. Total operating expense for the years endedSeptember 30, 2021 , and 2020 were 1.72% and 1.82%, respectively, of average assets. Gain (Loss) on Real Estate Owned: Net gain on real estate owned was$427,000 for the year endedSeptember 30, 2021 , compared to a net gain of$26,000 for the year endedSeptember 30, 2020 . This amount includes ongoing maintenance expense, periodic valuation adjustments, and gains (losses) on sales of REO. Income Tax Expense: Income tax expense was$49,523,000 for the year endedSeptember 30, 2021 , an increase of$3,775,000 , or 8.3%, from the$45,748,000 for the year endedSeptember 30, 2020 . The increase is mostly due to a 6.4% increase in pre-tax income. The effective tax rate for 2021 was 21.24% as compared to 20.87% for the year endedSeptember 30, 2020 . The effective tax rate of 21.24% for 2021 differs from the statutory rate mainly due to the effects of state taxes, bank-owned life insurance, tax credit investments, tax-exempt loans to municipal entities and other qualified borrowers as well as adjustments to deferred tax items. 53
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSCOMPARISON OF 2020 RESULTS WITH 2019
For management's review of the factors that affected our results of operations for the years endedSeptember 30, 2020 and 2019 refer to our Annual Report on Form 10-K for the year endedSeptember 30, 2020 , which was filed with theSecurities and Exchange Commission onNovember 20, 2020 . 54
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSLIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, borrowings, repayments and sales of investments 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. OnFebruary 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 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 afterApril 15, 2026 . The Company's shareholders' equity atSeptember 30, 2021 , was$2,126,064,000 , or 10.82% of total assets, as compared to$2,014,133,000 , or 10.72% of total assets, atSeptember 30, 2020 . The Company's shareholders' equity was impacted in the year by theFebruary 8, 2021 issuance of Series A Preferred Stock and the receipt of net proceeds, after underwriting discounts and expenses of$293,325,000 . Additionally, net income of$183,615,000 , the payment of$65,876,000 in common stock dividends, payment of$6,378,000 in preferred stock dividends,$348,651,000 of treasury stock purchases, as well as other comprehensive income of$52,832,000 impacted shareholders' equity. The Company paid out 38.1% of its 2021 earnings in cash dividends to common shareholders, compared with 38.5% last year. For the year endedSeptember 30, 2021 , the Company returned 226% of net income to shareholders in the form of cash dividends and share repurchases as compared to 103% for the year endedSeptember 30, 2020 . Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment. Share repurchases were temporarily suspended during the COVID-19 pandemic but resumed in 2021. The Company's share repurchase program may be modified, suspended or terminated at any time, and the timing and amount of share repurchases is subject to market conditions and the market price of the Company's common stock, as well as other factors. The Bank has a credit line with theFederal Home Loan Bank of Des Moines ("FHLB") up to 45% of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity if needed. Based on collateral pledged as ofSeptember 30, 2021 , the Bank had$2,267,319,000 of additional borrowing capacity at the FHLB. The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term advance agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB. The Bank is also eligible to borrow under theFederal Reserve Bank's primary credit program. The Company's cash and cash equivalents were$2,090,809,000 atSeptember 30, 2021 , which is a 22.8% increase from the balance of$1,702,977,000 as ofSeptember 30, 2020 . This increase was primarily due to the$1,762,488,000 increase in customer deposits, the majority of which was used to fund growth in the loan portfolio and paydown FHLB borrowings. See "Changes in Financial Condition" above and the "Statement of Cash Flows" included in the financial statements for additional details regarding this change. The following table presents the Company's significant fixed and determinable contractual obligations, within the categories described below, by contractual maturity or payment amount. 55
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Less than 1 to 5 Over 5
September 30, 2021 Total 1 Year Years Years
(In thousands)
Customer accounts (1) $ 15,542,112 $ 14,883,733 $ 657,534 $ 845
Debt obligations (2) 1,720,000 1,320,000 400,000 -
Operating lease obligations 32,270 6,197
17,758 8,315
$ 17,294,382 $ 16,209,930 $ 1,075,292 $ 9,160
(1) Includes non-maturing customer transaction accounts.
(2) Represents contractual maturities of FHLB advances. Taking into account cash
flow hedges, the weighted average effective maturity of FHLB advances at
September 30, 2021 is 5.03 years.
These obligations are included in the Consolidated Statements of Financial
Condition. The payment amounts of the operating lease obligations represent
those amounts contractually due.
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