SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Sep. 30, 2025

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Company and nature of operations. WaFd Bank, a federally-insured Washington state chartered commercial bank (the

"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, WaFd Bank.

The Company is headquartered in Seattle, Washington. The Bank conducts its activities through a network of 208 bank

branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico, California and Texas.

Basis of presentation and use of estimates. The Company’s accounting and financial reporting policies conform to accounting

principles generally accepted in the United States of America ("U.S. GAAP"). Inter-company balances and transactions have

been eliminated in consolidation. In preparing the consolidated financial statements, the Company makes estimates and

assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and

expenses during the reporting periods and related disclosures. The areas that require application of significant management

judgments often result in the need to make estimates about the effect of matters that are inherently uncertain and may change in

future periods. Actual results could differ materially from those estimates. Certain amounts in the financial statements from

prior periods have been reclassified to conform to the current financial statement presentation. In certain instances, amounts in

text are presented by rounding to the nearest thousand.

WaFd, Inc. closed its previously announced merger with Luther Burbank Corporation ("Luther Burbank" or "LBC"), a

California corporation, on March 1, 2024 (the "Merger Date"). Pursuant to the Merger Agreement, Luther Burbank merged with

and into the Company (the “Corporate Merger”), with the Company surviving the Corporate Merger. Promptly following the

Corporate Merger, Luther Burbank’s wholly-owned bank subsidiary, Luther Burbank Savings, merged with and into WaFd

Bank with WaFd Bank as the surviving institution (the “Bank Merger”). The Corporate Merger and the Bank Merger are

collectively referred to in this Annual Report on Form 10-K as the “Merger.”

The Merger was accounted for using the acquisition method of accounting and was effectively an all-stock transaction

accounted for as a business combination. The Company's financial results for any periods ended on and prior to February 29,

2024 reflect WaFd results only on a standalone basis. As a result, financial results for the years ended September 30, 2025 and

September 30, 2024 may not be directly comparable to prior reported periods. Refer to Note B - Business Combination for

further details.

The Company's fiscal year end is September 30. All references to 2025, 2024 and 2023 represent balances as of September 30,

2025, September 30, 2024, and September 30, 2023, or activity for the fiscal years then ended.

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

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

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

these fair values. This method often involves estimates based on third party valuations based on discounted cash flow analyses

or other valuation techniques, all of which are inherently subjective. Any excess of the purchase price over the fair value of net

assets and other identifiable intangible assets acquired is recorded as goodwill. Assets acquired and liabilities assumed from

contingencies must also be recognized at fair value if the fair value can be determined during the measurement period.

Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. Fair values are subject to

refinement over the measurement period, not to exceed one year after the closing date.

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.

Cash and cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, overnight investments

and repurchase agreements with an initial maturity of three months or less.

Restricted cash balances. The Company was not required to maintain cash reserve balances with the Federal Reserve bank as

of September 30, 2025. As of September 30, 2025 and September 30, 2024, the Bank held counterparty cash collateral of

$118,400,000 and $168,200,000, respectively, related to derivative contracts.

Equity investments. The Company records equity investments within Other assets in its Consolidated Statements of Financial

Condition. These equity investments are accounted for under different methods.

•Low-income housing tax credit ("LIHTC") investments are accounted for under the proportional amortization method.

Under this method, the initial book value (gross commitment amount) of the investment is amortized over time in

proportion to the projected tax benefits to be received. This amortization is a component of income tax expense. See

Note N for more information about the Company's LIHTC investments.

•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 non-interest income in the Consolidated Statements of Operations.

•For certain nonmarketable equity 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 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 net asset value ("NAV") expedient for fair value

measurement. Under this method, the NAV is determined by the fund as fair value for the investment. At September

30, 2025, equity investments held by the Company and recorded at NAV had a carrying amount of $35,564,000 and a

remaining unfunded commitment of $13,388,000. These NAV based investments cannot be transferred without

consent and we do not have redemption rights except in certain transformational events. Equity investments measured

at NAV are not classified in the fair value hierarchy.

Debt securities, including mortgage-backed securities. The Company accounts for debt securities in two categories: held-to-

maturity ("HTM") and available-for-sale ("AFS"). Premiums and discounts on debt securities are deferred and recognized into

income over the contractual life of the asset using the effective interest method.

HTM securities are accounted for at amortized cost, but the Company must have both the positive intent and the ability to hold

those securities to maturity. There are very limited circumstances under which securities in the HTM category can be sold

without jeopardizing the cost basis of accounting for the remainder of the securities in this category.

Available-for-sale securities are accounted for at fair value. Gains and losses realized on the sale of these securities are

accounted for based on the specific identification method. Unrealized gains and losses for AFS securities are excluded from

earnings and reported net of the related tax effect in the accumulated other comprehensive income component of shareholders'

equity.

Allowance for Credit Losses (HTM Debt Securities). For HTM debt securities, the Company is required to utilize the current

expected credit loss methodology ("CECL") 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. Therefore, the Company did not

record an allowance for credit losses for these securities. As of September 30, 2025, the Company determined that the expected

credit loss on its corporate and municipal bonds was immaterial, and therefore, an allowance for credit losses was not recorded.

See Note C "Investment Securities" and 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 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. As of September 30, 2025, the Company determined that the unrealized loss positions in AFS securities were not the

result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note C "Investment Securities" and

Note F "Fair Value Measurements" for more information about AFS debt securities.

Loans receivable. Loans that are performing in accordance with their contractual terms are carried at the unpaid principal

balance, net of premiums, discounts and net deferred loan fees. Net deferred loan fees include non-refundable loan origination

fees less direct loan origination costs. Net deferred loan fees, premiums and discounts are amortized into interest income using

either the interest method or straight-line method over the terms of the loans, adjusted for actual prepayments. The straight-line

method is only utilized for construction and other interest-only loans where the interest method isn't applicable. In addition to

fees and costs for originating loans, various other fees and charges related to existing loans may occur, including prepayment

charges, late charges and assumption fees.

When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the

borrower. Contact is made after a payment is 30 days past its grace period. In most cases, deficiencies are cured promptly. If the

delinquency is not cured within 90 days, the Bank may institute appropriate action to foreclose on the property. If foreclosed,

the property is sold at a public sale and may be purchased by the Bank.

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. CECL requires an estimate of the credit losses expected over the life of an exposure (or

pool of exposures). See Note E "Allowance for Losses on Loans" for details.

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 most of our 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

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. These loans typically represent collateral dependent loans, but may also include

other non-performing loans.

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; agricultural

land; and vacant land.

Modifications to Borrowers Experiencing Financial Difficulties. The Company will consider modifying the interest rates

and terms of a loan if it determines that a modification is a better alternative to foreclosure. Most loan modifications to

borrowers experiencing financial difficulty are accruing and performing loans where the borrower has approached the Company

about modifications due to temporary financial difficulties. Each request 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 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 could be offered 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 disclosed within Note D - Loans Receivable though many of these modifications are made

in the normal course of business and not as a result of the borrower's difficulties.

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.

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 Company 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 Company 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.

Accrued interest receivable. The Company has 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 our 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. We believe accrued interest receivable

recorded as of September 30, 2025 is collectible.

Off-balance-sheet credit exposures. Off-balance-sheet credit exposures for the Company include unfunded loan commitments

and letters of credit from the Federal Home Loan Banks of both Des Moines and San Francisco ("FHLB-DM" and "FHLB-SF",

respectively), which may be used as collateral for public funds deposits and as confirming letters of credit on letters of credit

issued by the Bank. 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 N "Commitments and Contingencies" for details.

Derivatives. The Company enters into derivative transactions to manage various risks and to accommodate the business

requirements of its customers. The fair value of derivative instruments is recognized as either assets or liabilities on the

consolidated balance sheet. All derivatives are evaluated at inception as to whether or not they are hedge accounting or non-

hedge accounting relationships. For derivative instruments designated as non-hedge accounting activities, the change in fair

value is recognized currently in earnings. The Company formally assesses, both at the hedge's inception and on an ongoing

basis, whether the derivative instruments that are designated are highly effective in offsetting changes in fair values or cash

flows of the hedged items.

The Company has entered into commercial loan hedges, mortgage loan portfolio hedges and mortgage-backed securities hedges

using interest rate swaps. These hedges qualify as fair value hedges under ASC 815 and provide for matching of the recognition

of the gains and losses on the interest rate swap and the related hedged item to current earnings. The Company has also entered

into interest rate swaps to convert a series of future short-term borrowings to fixed-rate payments. These interest rate swaps

qualify as cash flow hedging instruments under ASC 815 so gains and losses are recorded in Other Comprehensive Income to

the extent the hedge is effective. Gains and losses on the interest rate swaps are reclassified from OCI to earnings in the period

the hedged transaction affects earnings and are included in the same income statement line item that the hedged transaction is

recorded.

The Company also executes interest rate swaps with certain customers who desire to convert their obligations from variable to

fixed interest rates. Under these agreements, the Bank enters into a variable-rate loan agreement with a customer in addition to a

swap agreement and then enters into a corresponding swap agreement with a third party in order to offset its exposure on the

customer swap agreement. As the interest rate swap agreements with the customers and third parties are not designated as

accounting hedges under ASC 815, the instruments are marked to market in earnings. The change in fair value of the offsetting

swaps are included in other non-interest income and there is minimal impact on net income. There is fee income earned on the

swaps that is included in loan fee income.

Premises and equipment. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed

on the straight-line method over the estimated useful lives of the respective assets. Costs for improvements are capitalized.

Charges for ordinary maintenance and repairs are expensed to operations as incurred.

Business segments. As the Company manages its business and operations on a consolidated basis, management has determined

that there is one operating and one reportable business segment. The Company's chief operating decision maker ("CODM") is

the Chief Executive Officer who assesses performance and decides how to allocate resources based on consolidated net income.

The CODM uses consolidated net income to evaluate income generation from segment assets in making decisions about the

allocation of resources. The CODM is regularly provided with expense information at a level consistent with the Company's

consolidated statements of income. The significant segment expenses are those presented within the consolidated statement of

operations.

Real estate owned. Real estate properties acquired through foreclosure of loans or through acquisitions are recorded initially at

fair value less selling costs and are subsequently recorded at lower of cost or fair value. Costs for improvements are capitalized.

Any gains (losses) and maintenance costs are recorded in Gain (loss) on real estate owned, net.

Intangible assets. Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets

acquired. Other intangibles, including core deposit intangibles, are acquired assets that lack physical substance but can be

distinguished from goodwill. Goodwill is not amortized but is evaluated for potential impairment on an annual basis and

between tests if circumstances such as material adverse changes in legal, business, regulatory and economic factors exist. We

have determined our goodwill balance is all related to a single reporting unit and perform a quantitative impairment assessment.

An impairment loss is recorded when the carrying amount of goodwill exceeds its implied fair value. If circumstances indicate

that the carrying value of the assets may not be recoverable, an impairment charge could be recorded. Other intangible assets

are amortized over their estimated lives and are subject to impairment testing when events or circumstances change.

The Company performed its annual impairment assessment as of August 31, 2025 and concluded the fair value of our single

reporting unit exceeded its respective carrying value and did not result in impairment for the reporting unit. When performing

the quantitative assessment of goodwill impairment, we estimated the fair value of our reporting unit using the market

capitalization approach, based on our stock price, adjusted for the effect of a control premium.

The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in

determining fair value. While the Company believes the judgments and assumptions used in the goodwill impairment test is

reasonable, different assumptions or changes in general industry, market and macro-economic conditions could change the

estimated fair values and, therefore, future impairment charges could be required, which could be material to the consolidated

financial statements.

As a result of the Merger, the Company recorded $107,890,000 in goodwill and $37,022,000 in core deposit intangible assets.

Additional information on the Merger and purchase price allocation is provided in Note B "Business Combination". The core

deposit intangible asset value was determined by an analysis of the cost differential between the core deposits acquired,

inclusive of estimated servicing costs, and alternative funding sources for those deposits. The core deposit intangible asset

recorded is amortized on an accelerated basis over 6 years. In addition to the effects of the Merger, the Company added a small

amount of intangibles during fiscal 2024 and 2025 as the result of acquisitions made by subsidiary WAFD Insurance Group,

Inc. No impairment losses separate from the scheduled amortization have been recognized in the periods presented.

The table below provides detail regarding the Company's intangible assets.


	Goodwill	Core Deposit and Other Intangibles	Total
	(In thousands)
Balance at September 30, 2023	$304,750	$5,869	$310,619
Additions	106,610	38,939	145,549
Amortization	—	(7,743)	(7,743)
Balance at September 30, 2024	411,360	37,065	448,425
Additions	3,362	180	3,542
Amortization	—	(9,874)	(9,874)
Balance at September 30, 2025	$414,722	$27,371	$442,093

The table below presents the estimated future amortization expense of other intangibles for the next five years.


Fiscal Year		Expense
		(In thousands)
2026		$7,332
2027		5,582
2028		5,220
2029		5,127
2030		2,343

Income taxes. Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred

tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

Under this method, a deferred tax asset or liability is determined based on the temporary differences between the financial

statement and corresponding tax treatment of income, gains, losses, deductions or credits using enacted tax rates in effect for

the year in which the differences are expected to reverse. The provision for income taxes includes current and deferred income

tax expense based on net income adjusted for temporary and permanent differences such as depreciation, loan loss reserve, tax-

exempt interest, and affordable housing tax credits. Reserves for uncertain tax positions, together with any related interest and

penalties, if applicable, and amortization of affordable housing tax credit investments are recorded within income tax expense.

Accounting for stock-based compensation. We recognize in the statement of operations the grant-date fair value of stock

options and other equity-based forms of compensation issued to employees over the employees' requisite service period

(generally the vesting period). The requisite service period may be subject to performance conditions. Stock options and

restricted stock awards generally vest ratably over two to five years and are recognized as expense over that same period of

time. The exercise price of each option equals the market price of the Company's Common Stock on the date of the grant, and

the maximum term is ten years.

Certain grants of restricted stock are subject to performance-based and market-based vesting as well as other approved vesting

conditions and cliff vest based on those conditions. Compensation expense is recognized over the service period to the extent

restricted stock awards are expected to vest. See Note Q "Stock Award Plans" for additional information.

Regulatory matters. On October 9, 2013, the CFPB entered a Consent Order against the Bank that required the Bank to pay a

civil money penalty of $34,000, and to adopt an enhanced compliance program related to reporting Home Mortgage Disclosure

Act ("HMDA") data. On October 27, 2020 the CFPB entered a second Consent Order against the Bank for violations related to

the Bank’s HMDA reporting obligations. The 2020 Consent Order required the Bank to pay a $200,000 civil money penalty

and develop and implement a HMDA compliance management system. Both HMDA Consent Orders were closed by the CFPB

in September 2025.

On December 27, 2024, the Bank received an overall CRA rating from the FDIC of “Needs to Improve” for the period covering

June 3, 2020 to March 26, 2024. Based on its performance on the individual components of the CRA tests, the Bank received a

“High Satisfactory” rating on both the Investment Test and the Service Test and a “Needs to Improve” rating on the Lending

Test, which resulted in the overall “Needs to Improve” rating. The Bank disagrees with the overall CRA rating and has

appealed the decision.

New Accounting Pronouncements. In October 2023, the FASB issued ASU 2023-06 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 SEC. 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 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses. This accounting standards

update will require public companies to disclose, in the notes to financial statements, specified information about certain costs

and expenses at each interim and annual reporting period. As clarified by the FASB in ASU 2025-01, the amendments of ASU

2024-03 are effective for fiscal years beginning after December 15, 2026, and for quarterly reporting beginning after December

15, 2027. Early adoption is permitted. The Company does not expect this ASU to have a material effect on our consolidated

financial statements.

In September 2025, the FASB issued ASU 2025-06, Targeted Improvements to the Accounting for Internal-use Software. This

ASU eliminates the concept of a software development project stage to better address an agile method of development and

introduces a new threshold for cost capitalization. The standard also provides factors to consider when determining whether

significant development uncertainty exists. The amendments of ASU 2024-03 are effective for annual reporting periods

beginning after December 15, 2027. Early adoption is permitted as of the beginning of the annual period. The Company does

not expect this ASU to have a material effect on our consolidated financial statements.