Item 1A. Risk Factors
Ownership of our Common Stock involves risk. Investors should carefully consider, in addition to the other information
included in this Annual Report on Form 10-K, the following risk factors. The risks described below may adversely affect our
business, financial condition and results of operations. These risks are not the only risks we face; additional risks and
uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely affect
our business.
Operational Risks
Fluctuating interest rates could adversely affect our business.
Our earnings and cash flows are largely dependent upon our net interest income, which is significantly affected by
interest rates. Interest rates are highly sensitive to factors beyond our control, such as general economic conditions and policies
set by governmental and regulatory bodies. We principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. If we are unable to manage this risk effectively, our business, financial condition and
results of operations could be materially affected. Rapid changes in interest rates make it difficult for the Bank to balance its
loan and deposit portfolios, which may adversely affect our results of operations by, for example, reducing asset yields or
spreads, or having other adverse impacts on our business. Higher than expected inflation could lead to higher interest rates,
which could, in turn, increase the borrowing costs of our customers, making it more difficult for them to repay their loans or
other obligations. High interest rates could also push down asset prices and weaken economic activity. Conversely, falling rates
can initially reduce our net interest income as our floating-rate assets tend to be more immediately responsive to changes in
market rates than most deposit liabilities. In addition, a decline in market interest rates could increase loan prepayments, leading
to reinvestment in lower-yielding assets, reducing income.
Our net interest income is the difference (or “spread”) between the interest earned on loans, securities and other
interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. The level of net
interest income is a function of the average balances of interest-earning assets and interest-bearing liabilities and the spread
between the amounts of the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing
and the mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by such external factors as the
local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal
Reserve Board of Governors (the “FOMC”) and market interest rates. Furthermore, movements in interest rates, the pace at
which such movements occur and the volume and mix of our interest-bearing assets and liabilities influence the level of net
interest income. The cost of customer deposits is largely based on short-term interest rates, the level of which is driven by the
FOMC. However, the yields generated by long-term loans, such as single-family residential and multifamily mortgage loans,
and securities are typically driven by longer-term (10 year) interest rates, which are set by the market and vary from day to day.
Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing
liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate
spread, and, in turn, our profitability. For example, if interest rates on interest-earning assets decline more quickly than the rates
on interest-bearing liabilities, as we saw in our recent fiscal year, the result is a reduction in our net interest income and with it,
a reduction in earnings. The same could be true if the interest rates on interest-bearing liabilities increase at a faster pace than
the interest rates on interest-earning assets. In addition, changes in interest rates could affect the Bank's ability to originate loans
and attract and retain deposits; the fair values of its securities and other financial assets; the fair values of its liabilities; and the
average lives of its loan and securities portfolios. Decreases in interest rates could lead to increased loan refinancing activity,
which, in turn, would alter the balance of our interest-earning assets and impact net interest income. Increases in interest rates
could reduce loan refinancing activity, which could result in compression of the spread between loan yields and more quickly
rising funding rates. We may also be exposed to movements in market rates to a degree not experienced by other financial
institutions, as a result of our significant portfolio of fixed-rate single-family home loans, which are longer-term in nature than
the customer accounts and borrowed money that constitute our liabilities.
We are currently operating in an environment in which the Federal Reserve has shifted toward reducing interest rates,
although modestly, with cuts implemented in September and October 2025. However, the inflationary outlook remains
uncertain and if the Federal Reserve were to reverse course and rapidly increase the target federal funds rate, the increase in
rates could continue to constrain our interest rate spread and may adversely affect our business forecasts. On the other hand,
further rapid decreases in interest rates, may result in a change in the mix of noninterest and interest-bearing accounts. New
appointments to the Board of Governors at the Federal Reserve could result in a change in monetary policy and interest rates.
We are unable to predict changes in interest rates, which are affected by factors beyond our control, including inflation,
deflation, recession, unemployment, money supply and other changes in financial markets.
We are exposed to risks related to fraud and cyber-attacks.
Cybersecurity, and the continued development and enhancement of controls, processes, and practices designed to
protect customer information, systems, computers, software, data, and networks from attack, damage, or unauthorized access
remain a priority for the Company. As cybersecurity threats continue to evolve, we may be required to expend additional
resources to continue to enhance, modify, and refine our protective measures against these evolving threats.
We are continuously enhancing and expanding our digital products and services to meet customer and business needs
with desired outcomes. These digital products and services often include storing, transmitting, and processing confidential
customer, employee, financial, and business information. Due to the nature of this information, and the value it has for internal
and external threat actors, we, and our third-party service providers, continue to be subject to cyber-attacks and fraud activity,
including through the use of rapidly evolving AI technologies, that attempts to gain unauthorized access, misuse information
and information systems, steal information, disrupt or degrade information systems, spread malicious software, and other illegal
activities.
We believe we have robust preventive, detective, and administrative safeguards and security controls to minimize the
probability and magnitude of a material event. However, if we are unable to maintain them, we may fall victim to a material
adverse cybersecurity event. Because the tactics and techniques used by threat actors to bypass safeguards and security controls
change frequently, and often are not recognized until after an event has occurred, we may be unable to anticipate future tactics
and techniques, or to implement adequate and timely protective measures. The use of AI technologies by cybercriminals
continues to be a major concern, as deep-fake technologies continue to improve, allowing bad actors to manipulate or fabricate
visual and audio content and convincingly fake identities.
We are subject to additional risk with respect to third-party vendors that process or handle personal and financial data
of our customers, partners, suppliers or employees. These third-party vendors may themselves use other vendors to store or
process our data, which further elevates our risk exposure. Our third-party vendors have been, and may in the future be, subject
to security incidents, including those caused by computer viruses, malware, ransomware, phishing attempts, social engineering,
hacking or other means of unauthorized access. Control failures of security measures managed by our third-party service
providers could cause us to suffer damage to our reputation and could require us to incur substantial expenses, which could
have a materially adverse effect on our business, financial condition, and results of operations.
To date, we have no knowledge of a material cyber-attack or other material information security incident affecting the
systems we operate and control. However, our risk and exposure to these matters remains heightened because of, among other
things, the evolving nature of these threats, the continuation of a remote or hybrid work environment for our employees and
service providers, and our plans to continue to implement and expand digital banking services, expand operations, and use
third-party information systems that includes cloud-based infrastructure, platforms, and software. Recent instances of attacks
specifically targeting banks and financial services businesses indicate that the risk to our systems remains significant. We, and
our third-party providers, are regularly the subject of attempted attacks and the ability of the attackers and the method of their
attacks continues to grow in sophistication. Threat actors, including nation state attackers, could also use artificial intelligence
for malicious purposes, increasing the frequency and complexity of their attacks. Potential threats to our technologies, systems,
networks, and other devices, as well as those of our employees, third party vendors, and other third parties with whom we
interact, include Distributed Denial of Service ("DDoS") attacks, computer viruses, hacking, malware, ransomware, credential
stuffing, phishing, and other forms of social engineering. Such cyber-attacks and other security incidents are designed to lead to
various harmful outcomes, such as unauthorized transactions against our customers’ accounts, unauthorized or unintended
access to confidential information, or the release, gathering, monitoring, disclosure, loss, destruction, corruption, disablement,
encryption, misuse, modification or other processing of confidential or sensitive information (including personal information),
intellectual property, software, methodologies or business secrets, disruption, sabotage or degradation of service, systems or
networks, or other damage. These threats may derive from, among other things, error, fraud or malice on the part of our
employees, insiders, or third parties or may result from accidental technological failure. Any of these parties may also attempt
to fraudulently induce employees, service providers, customers, partners or other third-party users of our systems or networks to
disclose confidential or sensitive information (including personal information) in order to gain access to our systems, networks
or data or that of our customers, partners, or third parties with whom we interact, or to unlawfully obtain monetary benefit
through misdirected or otherwise improper payments or through the creation of false identifies. A cyber-attack or other security
incident on the systems we operate and control could cause us to suffer damage to our reputation, result in productivity losses,
require us to incur substantial expenses, including response costs associated with investigation and resumption of services,
remediation expenses costs associated with customer notification and credit monitoring services, increased insurance premiums,
regulatory penalties and fines, and costs associated with civil litigation, any of which could have a materially adverse effect on
our business, financial condition, and results of operations.
We also face additional costs when our customers become the victims of cyber-attacks. For example, various retailers
have reported that they have been the victims of a cyber-attack in which large amounts of their customers’ data, including debit
and credit card information, is obtained. Our customers may be the victims of phishing scams, providing cyber criminals access
to their accounts, or credit or debit card information. In these situations, we incur costs to replace compromised cards and
address fraudulent transaction activity affecting our customers, as well as potential increases to insurance premiums for policies
we may maintain to cover these losses.
Both internal and external fraud and theft are risks. If confidential customer, employee, monetary, or business
information were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and
financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties
who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or if such
information were to be intercepted or otherwise inappropriately taken by third parties, or if our own employees abused their
access to financial systems to commit fraud against our customers and the Company. These activities can occur in connection
with activities such as the origination of loans and lines of credit, ACH transactions, wire transactions, ATM transactions, and
checking transactions, and result in financial losses as well as reputational damage.
Operational errors can include information system misconfiguration, clerical or record-keeping errors, or disruptions
from faulty or disabled computer or telecommunications systems. Because the nature of the financial services business involves
a high volume of transactions, certain errors, which may be automated or manual, may be repeated or compounded before they
are discovered and successfully rectified. Because of the Company’s large transaction volume and its necessary dependence
upon automated systems to record and process these transactions, there is a risk that technical flaws, tampering, or manipulation
of those automated systems, arising from events wholly or partially beyond its control, may give rise to disruption of service to
customers and to financial loss or liability.
The occurrence of any of these risks could result in a diminished ability for us to operate our business, additional costs
to correct defects, potential liability to customers, reputational damage, and regulatory intervention, any of which could
adversely affect our business, financial condition and results of operations.
Changes in our business operations and divestitures of lines of business may not be successful, resulting in a negative
impact on our operating results and financial condition.
Our ability to compete depends on various factors, including our ability to develop and successfully execute strategic
plans and initiatives. However, we may not achieve some or all of our strategic objectives. Expected cost savings and revenue
growth from these initiatives may not materialize, and the costs of implementation may be greater than anticipated.
Additionally, changes in economic conditions beyond our control, such as fluctuations in interest rates, may affect our ability to
achieve our objectives. Failure to execute or achieve the anticipated outcomes of our strategic initiatives could negatively
impact market perceptions of our company and impede our growth and profitability.
In January 2025, we made a significant shift in focus to our business model and announced that WaFd Bank would be
exiting the single-family mortgage lending market to focus on commercial loans, including small business and SBA loans. We
made this determination for several reasons: first because home loans are seen as a commodity, with the majority of
originations sold to US government sponsored enterprises like Freddie Mac and Fannie Mae, which has caused our profitability
to decrease and credit risk to increase, and second, because technology has made it easy for consumers to refinance, increasing
our interest rate risk. While we have estimated annual expense savings of approximately $17 million from our exit from the
single-family mortgage business, this change involves a number of risks, including costs and expenses (including a $5.4 million
restructuring charge), the potential loss of customer relationships, community goodwill and revenues and earnings. Exiting this
business could impact future earnings if we are unable to offset the loss of revenue associated with the single-family mortgage
business against the anticipated expense savings. In addition, the shift in business focus to commercial loans will require
varying levels of management resources, which may divert our attention from other business operations. If we are unable to
realize the expected benefits of these types of changes in our business operations, or execute on other strategic plans and
initiatives, our consolidated financial position, results of operations and cash flows could be negatively impacted.
Current uncertain economic conditions pose challenges, and could adversely affect our business, financial condition and
results of operations.
We are operating in an uncertain and rapidly changing economic environment. Global trade tensions, AI impacts, and
inflation risks continue to affect the global economic environment. The recent U.S. government shutdown has negatively
impacted U.S. economic growth, and the suspension of government data collection and publication left policymakers without
access to the latest data on employment, inflation, and economic growth, increasing the risk that a wrong decision will be made.
An unpredictable or volatile political environment in the United States could negatively impact business and market conditions,
economic growth, financial stability, and business, consumer, investor, and regulatory sentiments, any one or more of which
could have a material adverse impact on our financial condition and results of operations. Deterioration in the U.S. credit and
financial markets could result in losses or significant deterioration in the fair value of our U.S. government issued, sponsored or
guaranteed investments. At September 30, 2025 , we had $3.5 billion invested in U.S. government and agency obligations, and
further downgrades could affect the stability of securities issued or guaranteed by the federal government and the valuation or
liquidity of our portfolio of such investment securities.
Economic uncertainty, or a recessionary or stagnant economy, could result in financial stress on the Bank's borrowers,
which could adversely affect our business, financial condition and results of operations. Deteriorating conditions in the regional
economies we serve, or in certain sectors of those economies, in excess of the reasonable and supportable forecasts we used to
estimate credit losses, could drive losses beyond those provided for in our allowance for loan losses. We could also face the
following risks in connection with the following events:
• Market developments and economic stagnation or slowdown may affect consumer confidence levels and may cause
adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit
facilities.
• The processes we use to estimate the allowance for credit losses and other reserves may prove to be unreliable. Such
estimates rely upon complex modeling inputs and judgments, including forecasts of economic conditions, which may
be rendered inaccurate and/or no longer subject to accurate forecasting.
• Our ability to assess the creditworthiness of our borrowers may be impaired if the models and approaches we use to
select, manage, and underwrite loans become less predictive of future charge-offs.
• Regulatory scrutiny of the industry could increase, leading to increased regulation of the industry that could lead to a
higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to litigation or
fines.
• Ineffective monetary policy or other market conditions could cause rapid changes in interest rates and asset values that
would have a materially adverse impact on our profitability and overall financial condition.
• Further erosion in the fiscal condition of the U.S. Treasury could lead to new taxes that would limit our ability to
pursue growth and return profits to shareholders.
If these conditions or similar ones continue to exist or worsen, we could experience continuing or increased adverse
effects on our financial condition.
Changes to monetary policy by the Federal Reserve could adversely impact our results of operations.
The Federal Reserve is responsible for regulating the supply of money in the United States, including open market
operations used to stabilize prices in times of economic stress, as well as setting monetary policies. These activities strongly
influence our rate of return on certain investments, our hedge effectiveness for mortgage servicing and our mortgage origination
pipeline, as well as our costs of funds for lending and investing. New appointments to the Board of Governors at the Federal
Reserve, or increased political pressures on the Federal Reserve, could impact monetary policy, which will directly, impact our
liquidity, results of operations, financial condition and capital position.
Unstable global economic conditions may have serious adverse consequences on our business, financial condition, and
operations.
The global credit and financial markets have from time-to-time experienced extreme volatility and disruptions,
including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, high rates of inflation, and uncertainty about economic stability. Changes in trade policies by
the United States or other countries, such as tariffs or retaliatory tariffs, may cause inflation which could impact the prices of
products sold or purchased by our borrowers or the demand for their products, negatively impacting their profitability and
making it difficult for our borrowers to repay their loans. The financial markets and the global economy may also be adversely
affected by the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, and the
evolving conflict in the Middle East. These events have increased and are expected to continue to increase volatility in
commodity and energy prices, including oil, and continuing hostilities raise the possibility of supply disruptions. Rising
tensions and global instability have the potential to affect consumer confidence in the U.S. and abroad, therefore having a
broader effect on financial markets. Changes in trade policies or sanctions imposed by the United States and other countries in
response to such conflict could further adversely impact the financial markets and the global economy, and any economic
countermeasures by the affected countries or others could exacerbate market and economic instability. Our general business
strategy may be adversely affected by any such economic downturn, volatile business environment, hostile third-party action or
continued unpredictable and unstable market conditions.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation rates remained above the FOMC’s target rate in 2025 and were above the target of 2% as of September 30,
2025. Inflation has led to increased costs for our customers, making it more difficult for them to repay their loans or other
obligations and increasing our credit risk. The inflationary outlook in the United States points to the probability of continued,
somewhat elevated inflation, with continued uncertainty around the impact of tariffs. Further reductions in interest rates by the
FOMC could exacerbate inflationary pressures. If heightened inflation continues, sustained higher interest rates by the FOMC
may be needed, which could push down asset prices and weaken economic activity. A deterioration in economic conditions in
the United States and our markets could result in a further increase in loan delinquencies and non-performing assets, decreases
in loan collateral values and a decrease in demand for our products and services, all of which, could adversely affect our
business, financial condition and results of operations.
The development and use of Artificial Intelligence (“AI”) presents risks and challenges that may adversely impact our
business.
The banking and financial services industry continually experiences technological changes, with frequent introductions
of new technology-driven products and services, including recent and rapid developments in AI, including with agentic AI. Our
future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products
and services that will satisfy client demands for convenience, as well as to assess the proper operation of AI models and
capabilities to create additional efficiencies in our operations. We may not be able to effectively implement new technology-
driven products and services or be successful in marketing these products and services to our clients. In addition, the
implementation of technological changes and upgrades to maintain current systems and integrate new ones may also create
service interruptions, transaction processing errors, and system conversion delays and may cause us to fail to comply with
applicable laws. There can be no assurance that we will be able to successfully manage the risks associated with our increased
dependency on technology. Failure to successfully keep pace with technological change affecting the banking and financial
services industry could negatively affect our revenue and profitability.
We or our third-party (or fourth party) vendors, customers or counterparties may develop or incorporate AI technology
in certain business processes, services, or products. The development and use of AI presents a number of risks and challenges to
our business. The legal and regulatory environment relating to AI is uncertain and rapidly evolving, both in the U.S. and
internationally, and includes regulatory schemes targeted specifically at AI as well as provisions in intellectual property,
privacy, consumer protection, employment, and other laws applicable to the use of AI. These evolving laws and regulations
could require changes in our implementation of AI technology and increase our compliance costs and the risks to us of non-
compliance. AI models, particularly generative or agentic AI models, may produce outputs or take action that is incorrect, that
reflects biases included in the data on which they are trained, that results in the release of private, confidential, or proprietary
information, that infringes on the intellectual property rights of others, or that is otherwise harmful. In addition, the complexity
of many AI models makes it difficult to understand why they are generating particular outputs. This limited transparency
increases the challenges associated with assessing the proper operation of AI models, understanding and monitoring the
capabilities of the AI models, reducing erroneous output, eliminating bias, and complying with regulations that require
documentation or explanation of the basis on which decisions are made. Further, we may rely on AI models developed by third
parties, and, to that extent, would be dependent in part on the manner in which those third parties develop and train their
models, including risks arising from the inclusion of any unauthorized material in the training data for their models and the
effectiveness of the steps these third parties have taken to limit the risks associated with the output of their models, matters over
which we may have limited visibility. Any of these risks could expose us to liability or adverse legal or regulatory
consequences and harm our reputation and the public perception of our business or the effectiveness of our security measures.
We are exposed to risks related to our operational, technological, and third-party provided technology infrastructure.
We rely extensively on the successful and uninterrupted functioning of information technology and
telecommunications systems to conduct our business. This includes internally developed systems, internally managed systems,
outsourced systems provided by third-party service providers, internet facing digital products and services, mobile technologies
and the on-going operational maintenance of each service. Any disruptions, failures, or inaccuracies of these systems, including
changes and improvements, could result in our inability to service customers, manage operations, manage risk, meet regulatory
obligations, or provide timely and accurate financial reporting which could damage our reputation, result in loss of customer
business, subject us to regulatory scrutiny, or expose us to civil litigation and possible financial liability.
In many instances, the Company’s products and services to customers are dependent upon third-party service
providers, who provide necessary, or critical, services and support. Any disruption of such services, or an unplanned
termination of a third-party license or service agreement related thereto, could adversely affect our ability to provide necessary
products and services for our customers.
In recent years, we have made a significant ongoing investment to enhance our technological capabilities with the
objectives of enhancing customer experience, growing revenue, and improving operating efficiency. There is a risk that these
investments may not provide the anticipated benefits and/or will prove significantly more costly and time consuming to
produce. If this occurs, we may see a loss of customers, and our financial results and ability to execute on our strategic plan
may be adversely impacted.
We are subject to complex state and federal laws, rules, regulations and standards regarding data privacy and
cybersecurity, which impact how we conduct our business.
We are subject to complex and evolving data privacy laws, rules, regulations, standards and contractual obligations
(collectively “data privacy laws”) that relate to the privacy and security of the personal information of customers, employees or
others. These data privacy laws require, among other things, that we make certain privacy disclosures, maintain a robust
security program, require disclosures and notifications during a cyber or information security incident, and regulate our
collection, use, sharing, retention, and safeguarding of consumer or employee information. State and federal regulators may
also hold us responsible for privacy and data protection obligations performed by our third-party service providers while
providing services to us, as well as disclosures and notifications during a cyber or information security incident. Consumers
also have the option to direct banks and other financial institutions not to share information about transactions and experiences
with affiliated companies for the purpose of marketing products or services.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and
regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity
programs and provide detailed requirements with respect to these programs, including data encryption requirements. Many
states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this
trend of state-level activity in those areas to continue and are continually monitoring developments in the states in which the
Company operates. As the regulatory environment becomes more rigorous, we anticipate that compliance with these
requirements will result in additional costs and expenses, and may impact the way we conduct business. Our failure to comply
with data privacy laws could result in potentially significant regulatory or governmental investigations, litigation, fines, or
sanctions, or cause damage to our reputation, which could have a material adverse effect on our business, financial condition or
results of operations.
Our allowance for credit losses ("ACL") may not be adequate to cover future loan losses, which could adversely affect
our financial condition and results of operations.
If our customers are unable to repay their loans according to the original terms, and the collateral securing the payment
of those loans is insufficient to pay any remaining loan balance, we will be required to characterize the loan as non-performing
or write it off as a loss. We maintain an ACL to provide for loan defaults and non-performance, however, losses may exceed the
value of the collateral securing the loans and the allowance may not fully cover any excess loss.
We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of
loans. Our ACL is based on these judgments, as well as historical loss experience and an evaluation of the other risks associated
with our loan portfolio, including but not limited to, economic trends and conditions, changes in underwriting standards,
management, competition, and trends in delinquencies, non-accrual and adversely classified loans, the size and composition of
the loan portfolio, current economic conditions and geographic concentrations within the portfolio. Banking regulatory
agencies, as part of their examination process, review our loans and ACL. If our assumptions and judgments used to determine
the ACL prove to be incorrect, if the value of the collateral securing the loans decreases substantially or if regulators disagree
with our judgments, we may need to increase the ACL in amounts that exceed our expectations. Material additions to the ACL,
or losses in excess of the ACL, would adversely affect our results of operations and financial condition.
Our risk management framework may not be effective in mitigating risks and losses to us.
Our risk management framework is comprised of various processes, systems and strategies designed to manage the
types of risks to which we are subject, including, among others, credit, market, liquidity, interest rate, cybersecurity and
compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and
judgment. Because we rely on assumptions and judgment calls, our risk management framework may not be effective under all
circumstances and may not adequately mitigate any risk of loss to us. If our framework is not effective, we could suffer
unexpected losses and our financial condition, operations or business prospects could be materially and adversely affected. We
may also be subject to potentially adverse regulatory consequences.
If we are not able to retain or attract key employees, or if we were to suffer the loss of a significant number of
employees, we could experience a disruption in our business.
If a key employee or a substantial number of employees depart or become unable to perform their duties, it may
negatively impact our ability to conduct business as usual. Unanticipated departures, including in connection with acquisition
activity, such as our recent acquisition of Luther Burbank, might require us to divert resources from other areas of our
operations, which could create additional stress for other employees, including those in key positions. The loss of qualified and
key personnel, or an inability to continue to attract, retain and motivate key personnel could adversely affect our business and
consequently impact our financial condition and results of operations.
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and
results of operations.
The effects of climate change continue to raise significant concerns about the state of the environment. However,
under the new administration, federal policy has shifted to reduce the emphasis on climate change initiatives and environmental
regulations. This includes scaling back federal participation in international agreements, and reducing regulatory pressures on
businesses, including banks, to address climate-related risks. Federal legislative and regulatory proposals aimed at combating
climate change have and may continue to face greater scrutiny or diminished priority. However, state and local regulations or
guidance relating to climate change, as well as changes in consumers’ and businesses’ behaviors and business preferences,
continue to affect our business operations.
Regardless of changes in federal policy, the effects of climate change and their unknown long-term impacts could still
have a material adverse effect on our financial condition and results of operations. The physical effects of climate change, such
as more frequent and severe weather disasters or other catastrophic events, could directly affect our business and those of our
customers, damaging or destroying our property, or the real property and other assets securing loans in our portfolios. Such
events may also interrupt the business operations of our customers, putting them in financial difficulty, and increasing the risk
of default. If our borrowers’ insurance is insufficient to cover these losses or if insurance becomes unavailable, the value of the
collateral securing our loans could be negatively affected, potentially impacting our financial condition and results of
operations. Moreover, climate change may adversely affect regional and local economic activity, harming our customers and
the communities in which we operate. In addition, our business, reputation and ability to attract and retain employees may also
be harmed if our response to climate change is perceived to be ineffective or insufficient.
Our business is subject to the risks of pandemics, earthquakes, tsunamis, floods, fires and other natural catastrophic
events and other events beyond our control.
A major catastrophe, such as an earthquake, tsunami, flood, fire, or other natural disaster, including those caused or
exacerbated by climate change, public health issues such as the COVID-19 or other pandemics, or other events beyond our
control, could result in a prolonged interruption of our business. For example, our headquarters is located in Seattle,
Washington and we have operations throughout the western United States, a geographical region that has been or may be
affected by earthquakes, wildfires, tsunamis, and flooding activity. Because we primarily serve individuals and businesses in
our nine-state footprint, a natural disaster likely would have a greater impact on our business, operations, and financial
condition than if our business were more geographically diverse throughout the United States. The occurrence of any of these
natural disasters could negatively impact our performance by disrupting our operations or the operations of our customers,
which could have a material adverse effect on our financial condition, results of operations, and cash flows.
Regulatory and Litigation Risks
Our “Needs to Improve” rating under the Community Reinvestment Act (“CRA”) may restrict our operations and limit
our ability to pursue certain strategic opportunities.
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. If our appeal is unsuccessful in changing the overall CRA rating, having a “Needs to Improve” rating will result
in restrictions on certain expansionary activity, including mergers and acquisitions and the establishment and relocation of bank
branches. This rating will also result in a loss of expedited processing of applications to undertake certain activities. It could
also have an impact on our relationships with certain states, counties, municipalities or other public agencies to the extent
applicable law, regulation or policy limits, restricts or influences whether such entity may do business with a company that has
a below “Satisfactory” rating and, in general, could negatively affect our reputation, business, financial condition and results of
operations. These restrictions, among others, will remain in place at least until the Bank’s next CRA rating is publicly released
by the FDIC following a subsequent CRA examination which is likely to occur in 2026. As a result of these limitations and
conditions, we may be unable or may fail to pursue, evaluate or complete transactions that might have been strategically or
competitively significant.
Non-Compliance with banking rules and regulations could result in fines or sanctions, and curtail our expansion
opportunities.
Financial institutions are required under the USA PATRIOT Act of 2001 (the “Patriot Act”) and Bank Secrecy Act
("BSA") to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities.
Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department's Office of
Financial Crimes Enforcement Network. These rules also require financial institutions to establish procedures for identifying
and verifying the identity of customers seeking to open new financial accounts. Failure to comply with applicable laws and
regulations can result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal
agreements and cease and desist orders. The Bank has in the past been subject to a Consent Order from the Office of the
Comptroller of the Currency (“OCC”) for its BSA program, which required the Bank to incur significant expenses to implement
an effective AML/CFT Program, including payment of a $2,500,000 civil money penalty. In addition, the Bank was previously
subject to two Consent Orders for violations of the reporting requirements under the Home Mortgage Disclosure Act
(“HMDA”) which included a total of $234,000 in civil money penalties. Our failure or our inability to comply with the Patriot
Act, BSA statutes and regulation, HMDA or other applicable regulations could have serious business, financial and reputational
consequences for the Bank, and could result in enforcement actions, additional fines or penalties, curtailment of expansion
opportunities, restrictions on our ability to pay dividends, intervention or sanctions by regulators and costly litigation or
expensive additional controls and systems.
We operate in a highly regulated industry, which limits the manner and scope of our business activities.
We are subject to extensive supervision, regulation and examination by the WDFI, the FDIC and the CFPB. In
addition, the Federal Reserve is responsible for regulating the holding company. This regulatory structure is designed primarily
for the protection of the deposit insurance funds and consumers and not to benefit our shareholders. This regulatory structure
also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and
examination policies to address not only compliance with applicable laws and regulations (including laws and regulations
governing consumer credit, CRA, and anti-money laundering and anti-terrorism laws), but also capital adequacy, asset quality
and risk, management ability and performance, earnings, liquidity, data reporting and various other factors. As part of this
regulatory structure, we are subject to policies and other guidance developed by the regulatory agencies with respect to capital
levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Under this structure the WDFI, the FDIC, the CFPB and the Federal Reserve have broad
discretion to impose restrictions and limitations on our operations if they determine, among other things, that our operations are
unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the
supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and
profitability of our operations. In particular, the FDIC has specific authority to take “prompt corrective action,” if the Bank’s
capital falls below its current “well capitalized” level, including limiting the Bank’s ability to take brokered deposits, requiring
the Bank to raise additional capital and subject it to progressively more severe restrictions on its operations, management and
capital distributions, and replacement of senior executive officers and directors. If the Bank ever became “critically
undercapitalized,” it would also be subject to the appointment of a conservator or receiver.
Changes in laws, regulations, government policy, oversight or increased enforcement activities by regulatory agencies
may increase our costs and adversely affect our business and operations.
New or amended laws, rules, regulations and policies to which we are subject, including those resulting from changes
in U.S. Presidential administration, could impact our operations, increase our capital requirements or substantially restrict our
growth and adversely affect our ability to operate profitably by making compliance more difficult or expensive, restricting our
ability to originate or sell loans, or impacting the amount of interest or other charges or fees earned on loans or other products.
New appointments to the Federal Reserve Board of Governors could also affect monetary policy and interest rates. Future
legislation, regulation, and changes in trade and fiscal policy, including uncertainty surrounding the ongoing operations of the
CFPB, could affect the banking industry as a whole, including our business and results of operations. It is difficult to predict
future changes in regulation or the competitive impact that any such changes would have on our business. Any new laws, rules
and regulations could make compliance more difficult, expensive, costly to implement or may otherwise adversely affect our
business, financial condition or growth prospects. Other changes to statutes, regulations, or regulatory policies, including
changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable
ways including subjecting us to additional costs, limiting the types of financial services and products we may offer, and
increasing the ability of non-banks to offer competing financial services and products.
Additionally, actions by regulatory agencies or significant litigation against us may lead to penalties that materially
affect us. These regulations, along with the current tax, accounting, securities, insurance, and monetary laws, regulations, rules,
standards, policies, and interpretations control the methods by which financial institutions conduct business, implement
strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules,
standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or
legislation or change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s
interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory
compliance and of doing business and/or otherwise adversely affect us and our profitability. Further, changes in accounting
standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
registered public accounting firm. Changes could materially impact, potentially even retroactively, how we report our financial
condition and results of our operations, as could our interpretation of those changes. We cannot predict what restrictions may be
imposed upon us with future legislation.
Our failure to comply with current, or adapt to new or changing, laws, regulations or policies could result in
enforcement actions and sanctions against us by regulatory agencies, civil money penalties and/or reputation damage, along
with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on our business,
financial condition and results of operations, and the value of our common stock.
Deposit insurance premiums could increase further in the future.
FDIC insurance premiums are risk based and, accordingly, higher premiums are charged to banks that have lower
capital ratios or higher risk profiles. As a result, a decrease in the Bank’s capital ratios, or a negative evaluation by the FDIC,
may increase the Bank’s net funding cost and reduce its earnings.
The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subjected to the payment of
FDIC deposit insurance assessments, which are determined in accordance with a defined calculation. The FDIC imposed a
special assessment to recover the losses in connection with the receiverships of Silicon Valley Bank and Signature Bank.
Increases in assessment rates or further special assessments may occur in the future, especially if there are significant additional
financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC
insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have
a material adverse effect on our business, financial condition and results of operations.
We are subject to various claims and litigation, which could result in significant expenses, losses and damage to our
reputation.
We are, from time to time, subject to claims and proceedings related to our operations. These claims and legal actions
could include supervisory or enforcement actions by our regulators, criminal proceedings by prosecutorial authorities, or civil
claims by our customers, former customers, contractual counterparties, and current and former employees. We may also face
class action lawsuits for, among other things, alleged violations of employment, state wage and hour and consumer protection
laws. These claims could involve large monetary demands, including civil money penalties or fines imposed by government
authorities, and significant defense costs. If such claims and legal actions are brought, and are not resolved in a manner
favorable to the Company, they could result in financial liability and/or reputational harm, which could have a material adverse
effect on our financial condition and results of operations.
Banking institutions are also increasingly the target of class action lawsuits, including claims alleging deceptive
practices or violations of account terms in connection with non-sufficient funds or overdraft charges and violations of the Fair
Labor Standards Act (“FLSA”). In 2022, the Bank paid $495,000 plus claims administrative expenses to settle a class action
lawsuit related to allegations of improper assessments of overdraft and insufficient funds fees. In May 2024, we received court
approval for the settlement of a class action claim related to alleged violations of the FLSA associated with claims for allegedly
unpaid wages and overtime for certain of our non-exempt employees under which the Bank ultimately paid approximately $2.1
million. If another class action lawsuit is filed or determined adversely to us, or we were to enter into a settlement agreement in
connection with such a matter, we could be exposed to monetary damages, reputational harm, or subject to limits on our ability
to operate our business, which could have an adverse effect on our financial condition, and operating results.
Our real estate lending also exposes us to the risk of environmental liabilities.
In the course of our business, it is necessary to foreclose and take title to real estate, which could subject us to
environmental liabilities with respect to these properties. Hazardous substances or waste, contaminants, pollutants or sources
thereof may be discovered on properties during our ownership or after a sale to a third party. We could be held liable to a
governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic
substances or chemical releases at such properties. The costs associated with investigation or remediation activities could be
substantial and could substantially exceed the value of the real property. In addition, as the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. We may be unable to recover costs from any third party. These
occurrences may materially reduce the value of the affected property, and we may find it difficult or impossible to use or sell
the property prior to or following any environmental remediation. If we ever become subject to significant environmental
liabilities, our business, financial condition and results of operations could be materially and adversely affected.
Market and Industry Risks
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer
confidence in the banking system.
The high-profile bank failures of 2023 generated significant market volatility among publicly traded bank holding
companies and, in particular, regional banks like the Company. These market developments also negatively impacted customer
confidence in the safety and soundness of regional banks. While the Department of the Treasury, the FRB, and the FDIC took
steps to ensure that depositors of the failed banks would have access to their deposits, including uninsured deposit accounts,
there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking
system more broadly. If other bank failures occur and financial institutions enter receivership or become insolvent in the future
due to financial conditions affecting the banking system and financial markets, it could disrupt the financial services industry
and customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed
income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest
margin, capital and results of operations.
If additional bank failures were to occur, we could face increased regulation of our industry, including increased
compliance costs and limitations on our ability to pursue business opportunities; significantly higher FDIC premiums or
additional special assessments; adverse impacts on our stock price and volatility of our Common Stock; and increased
competition for deposits due to a lack of consumer confidence in regional banks. If these conditions or similar ones continue to
exist or worsen, we could experience continuing or increased adverse effects on our financial condition.
A downturn in the real estate market would hurt our business.
The Bank’s business activities and credit exposure are concentrated in real estate lending, in particular commercial real
estate loans which are generally viewed as having more risk of default than residential real estate loans or certain other types of
loans or investments. The market for real estate is cyclical and the outlook for this sector is uncertain. A downturn in the real
estate market, accompanied by falling values and increased foreclosures would hurt our business because a large majority of our
loans are secured by real estate.
If a significant decline in real estate market values occurs, the collateral for loans will provide decreasing levels of
security. As a result, our ability to recover the principal amount due on defaulted loans by selling the underlying real estate will
be diminished, and we will be more likely to suffer losses on defaulted loans. Because our loan portfolio contains commercial
real estate loans with relatively large balances, the deterioration of these loans may cause a significant increase in our
nonperforming loans which could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an
increase in loan charge-offs, any of which would have an adverse impact, which could be material, on our business, financial
condition, and results of operations.
We own real estate as a result of foreclosures resulting from non-performing loans. If other lenders or borrowers
liquidate significant amounts of real estate in a rapid or disorderly fashion, or if the FDIC elects to dispose of significant
amounts of real estate from failed financial institutions in a similar fashion, it could have an adverse effect on the values of the
properties owned by the Company by depressing the value of these real estate holdings. In such a case, we may incur further
write-downs and charge-offs, which could, in turn, adversely affect our business, financial condition and results of operations.
Changes in retail distribution strategies and consumer behavior may adversely impact our business, financial condition
and results of operations.
We have significant investments in bank premises and equipment for our branch network as well as our retail work
force and other branch banking assets. Advances in technology, as well as changing customer preferences for accessing our
products and services, are requiring us to change our retail distribution strategy. As a result of the current market environment
and customer behavior, we have undertaken a branch optimization strategy that has led to the closure, consolidation or sale of
certain branches in our network. These actions could lead to losses on these assets or could adversely impact the carrying value
of other long-lived assets and may lead to increased expenditures to renovate and reconfigure remaining branches or to
otherwise further reform our retail distribution channel. In addition, any changes in our branch network strategy could adversely
impact our business, financial condition or operations if it results in the loss of customers or deposits which we rely on as a low
cost and stable source of funds for our loans and operations.
We may suffer losses in our loan portfolio due to inadequate or faulty underwriting and loan collection practices.
There are risks inherent in any loan portfolio, which we attempt to address by adhering to specific underwriting and
loan collection practices. Underwriting practices often include analysis of a borrower's prior credit history; financial statements;
tax returns; cash flow projections; valuation of collateral; personal guarantees of loans to businesses; and verification of liquid
assets. If the underwriting process fails to capture accurate information or proves to be inadequate, we may incur losses on
loans that appeared to meet our underwriting criteria, and those losses may exceed the amounts set aside as reserves in the
allowance for credit losses. Loan collection resources may be expanded to meet increases in nonperforming loans resulting
from economic downturns or to service any loans acquired, resulting in higher loan administration costs. We are also exposed
to the risk of improper documentation of foreclosure proceedings that would also increase the cost of collection.
Our operations are focused in the western United States, subjecting us to the risks of general economic conditions in
these market areas.
Substantially all of the Bank's loans are to individuals, businesses and real estate developers in the Pacific Northwest,
California, Arizona, Utah, Texas, New Mexico and Nevada. As a result, our business depends significantly on general
economic conditions in these market areas. A substantial increase in unemployment rates, or severe declines in housing prices
and property values in any of these primary market areas could have a material adverse effect on our business due to a number
of factors, including:
• Loan delinquencies may increase.
• Problem assets and foreclosures may increase.
• Demand for the Bank's products and services may decline.
• Collateral for loans made by the Bank, especially real estate, may decline in value, in turn reducing a customer's
borrowing power and reducing the value of assets and collateral associated with the loans.
• Natural disasters and catastrophic events such as wildfires, floods and earthquakes may damage or destroy collateral
for loans made by the Bank and negatively impact the collateral’s value and a customer’s ability to repay loans.
Impairment of goodwill may adversely impact future results of operations.
Accounting standards require that we account for acquisitions using a method that could result in goodwill. If the
purchase price of the acquired company exceeds the fair value of the acquired net assets, the excess will be included in the
Company's Statement of Financial Condition as goodwill. The Company has a significant goodwill balance and, in accordance
with GAAP, we evaluate it for impairment at least annually and more often if events or circumstances indicate the possibility of
impairment. Evaluations may be based on many factors, some of which are the price of our Common Stock, discounted cash
flow projections and data from comparable market acquisitions. A significant and sustained decline in our stock price and
market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business
climate or slower growth rates could result in impairment of our goodwill. Future evaluations of goodwill may result in the
impairment and write-down of our goodwill balance which could have a material adverse impact on our earnings and adversely
affect our operating results.
Competitive Risks
The Bank faces strong competition from other financial institutions and new market participants, offering services
similar to those offered by the Bank.
Many competitors, including fintech companies, offer the same types of loan and deposit services that the Company
offers. These competitors include national and multinational banks, other regional banks, savings associations, community
banks, credit unions, fintechs, and other financial intermediaries. In particular, our competitors include national banks and
major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain
numerous banking locations, launch new technologies and mount extensive promotional and advertising campaigns. The
effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.
Many of our competitors have substantially greater resources to invest in technological improvements than we do. Our future
success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and
services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. We may
not be able to effectively implement new technology-driven products and services or be successful in marketing these products
and services to our customers. In addition, the implementation of technological changes and upgrades to maintain current
systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion
delays and may cause us to fail to comply with applicable laws. There can be no assurance that we will be able to successfully
manage the risks associated with our increased dependency on technology. Additionally, recent technological breakthroughs
have made it possible for other non-traditional competitors to enter the marketplace and compete for traditional banking
services. Increased competition within our geographic market area may result in reduced loan originations and deposits.
Ultimately, competition from current and future competitors may affect our business materially and adversely.
We rely, in part, on external financing to fund our operations and the unavailability of such funding in the future could
adversely impact our growth and prospects.
We rely on customer deposits, advances from the FHLB and other borrowings to fund our operations. Core deposits
are a low cost and generally stable source of funding and a significant source of funds for our lending activities. Management
has historically been able to replace maturing deposits, if desired; however, we may not be able to replace such funds at any
given point in time if our financial condition or market conditions change or if the cost of doing so might adversely affect our
business, financial condition and results of operations. If we are forced to seek other sources of funds, such as additional
brokered deposits or borrowings from the FHLB, the interest expense associated with these other funding sources are now and
may be higher than the rates we are currently paying on our deposits, which would adversely impact our net income, and such
sources of funding may be more volatile and unavailable.
If we need additional funds for our liquidity needs, we may seek additional debt to achieve our long-term business
objectives. Such borrowings, if sought, may not be available to us or, if available, may not be on favorable terms. If additional
financing sources are unavailable or are not available on reasonable terms, our business, financial condition and results of
operations may be adversely affected.
We may not be able to continue to grow organically or through acquisitions.
Historically, we have expanded through a combination of organic growth and acquisitions. If market and regulatory
conditions change, we may be unable to grow organically or successfully compete for, complete, and integrate potential future
acquisitions at the same pace as we have achieved in recent years, or at all. We have historically used our strong stock currency
and capital resources to complete acquisitions. Downturns in the stock market and the market price of our stock, changes in our
capital position, and changes in our regulatory standing, including a “Needs to Improve” CRA rating, could each have a
negative impact on our ability to complete future acquisitions.
Our entry into California may present increased risk that may adversely impact our business, prospects and financial
condition.
The Merger with Luther Burbank resulted in the Bank’s initial entry into the state of California. We previously had no
operating experience in California, relied on the experience and expertise of Luther Burbank’s lending and business
development officers to help with our transition. The banking and financial services business in California is highly competitive
and we compete for loans, deposits and customers for financial services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions, fintechs, and other nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the
Company. As a result, there can be no assurance that we will be able to compete effectively in California, and if we are unable
to compete effectively in California, the benefits we were anticipating from the Merger may not be fully achieved, and our
results of operations and financial conditions could be materially and adversely affected.
Security Ownership Risks
The Company’s business or the value of its common shares could be negatively affected as a result of actions by activist
shareholders.
The Company values constructive input from shareholders, and our Board of Directors and management team are
committed to acting in the best interests of all of the Company’s shareholders. Activist shareholders who disagree with the
composition of the Board of Directors, the Company’s strategic direction, or the way the Company is managed may seek to
effect change through various strategies that range from private engagement to public filings, proxy contests, efforts to force
transactions not supported by the Board of Directors, and litigation. In recent months, activist investors have increasingly
targeted regional banking institutions, like the Bank, including campaigns at Comerica Incorporated and Eastern Bancshares,
Inc. Responding to some of these actions can be costly and time-consuming, may disrupt the Company’s operations and divert
the attention of the Board of Directors and management. Such activities could interfere with the Company’s ability to execute
its strategic plan and to attract and retain qualified executive leadership. The perceived uncertainty as to the Company’s future
direction resulting from activist strategies could also affect the market price and volatility of the Company’s common shares.
Our ability to pay dividends is subject to limitations that may affect our ability to continue to pay dividends to
shareholders.
The Company is a separate legal entity from the bank subsidiary and does not have significant operations of its own.
The availability of dividends from the Bank is limited by the Bank's earnings and capital, as well as various federal and state
statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Bank may
not be able to pay dividends to the Company. If the Bank is unable to pay dividends to the Company, then we may not be able
to pay dividends on our preferred or Common Stock to our shareholders. If the Bank's earnings are not sufficient to make
dividend payments to us while maintaining adequate capital levels, then our liquidity may be affected and our stock price may
be negatively affected by our inability to pay dividends, which will have an adverse impact on both the Company and our
shareholders.
Our 4.875% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) ranks senior
to our Common Stock, and we are prohibited from paying dividends on our Common Stock unless we have paid
dividends on our Series A Preferred.
Shares of our Series A Preferred Stock rank senior to our Common Stock with respect to the payment of dividends and
distributions of assets upon liquidation, dissolution or winding up. Holders of Series A Preferred Stock are entitled to receive,
when, as, and if declared by our Board of Directors (or a duly authorized committee of our Board of Directors), out of assets
legally available for the payment of dividends under Washington law, non-cumulative cash dividends based on the liquidation
preference of the Series A Preferred Stock at a rate equal to 4.875% per annum for each quarterly dividend period, beginning on
April 15, 2021. If we do not or are unable to pay quarterly dividends on our Series A Preferred Stock, we may not pay a
dividend to the holders of our Common Stock. Our stock price may be negatively affected by our inability to pay dividends,
which will have an adverse impact on both the Company and our shareholders.
In addition, if we fail to pay, or declare and set apart for payment, dividends on our Series A Preferred Stock for six
quarterly dividend periods, whether or not consecutive, the number of directors on our Board of Directors will automatically be
increased by two, and the holders of shares of Series A Preferred Stock will have the right to elect two additional members of
our Board of Directors (the “Preferred Stock Directors”) to fill such newly created directorships.
The market price for our Common Stock may be volatile.
The market price of our Common Stock could fluctuate substantially in the future in response to a number of factors,
including those discussed below. The market price of our Common Stock has in the past fluctuated significantly, including in
2023 as a result of the high-profile bank failures and in 2025 following the announcement of new tariff policies by the current
administration. We expect to see additional volatility in the financial markets due to the uncertainty caused by the continuing
global conflicts, U.S. trade policy, AI stock valuation corrections, interest rates and changing Federal Reserve policies. Some
additional factors that may cause the price of our Common Stock to fluctuate include:
• general conditions in the financial markets and real estate markets.
• macro-economic and political conditions in the U. S. and the financial markets generally.
• variations in the operating results of the Company and our competitors.
• events affecting other companies that the market deems comparable to the Company.
• changes in securities analysts' estimates of our future performance and the future performance of our competitors.
• announcements by the Company or our competitors of mergers, acquisitions and strategic partnerships.
• additions or departure of key personnel.
• the presence or absence of short selling of the Company's Common Stock.
• future sales by us of our Common Stock or debt securities.
The stock markets in general have experienced substantial price and trading fluctuations. These fluctuations have
resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating
performance. These broad market fluctuations are expected to continue for the near future, and may adversely affect the trading
price of our Common Stock.
There may be future sales or other dilution of the Company's equity, which may adversely affect the market price of our
Common Stock or depositary shares.
Our Board of Directors is authorized to cause the Company to issue one or more classes or series of preferred stock
junior to our Series A Preferred Stock from time to time without any action on the part of our shareholders, and our Board of
Directors also has the power, without shareholder approval, to set the terms of any such classes or series of preferred stock that
may be issued, including voting rights, dividend rights, and preferences over the Common Stock with respect to dividends or
upon our dissolution, winding up and liquidation and other terms.
The issuance of any additional shares of common or of preferred stock or convertible securities or the exercise of such
securities could be substantially dilutive to existing shareholders. As we did for the Merger with Luther Burbank, we may also
elect to use Common Stock to fund new acquisitions, which will further dilute existing shareholders. Holders of our Common
Stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or
series and, therefore, such sales or offerings could result in increased dilution to our shareholders.
A person holding our Common Stock could have the voting power of their shares of Common Stock on all matters
significantly reduced under Washington's anti-takeover statutes, if the person acquires 10% or more of the voting stock
of the Company.
We are incorporated in the state of Washington and subject to Washington state law. Some provisions of Washington
state law could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, Chapter
23B.19 of the Washington Business Corporation Act, with limited exceptions, prohibits a “target corporation” from engaging in
specified “significant business transactions” for a period of five years after the share acquisition by an acquiring person, without
complying with certain shareholder approval requirements. An acquiring person is defined as a person or group of persons that
beneficially own 10% or more of our voting securities. Such prohibited transactions include, among other things:
• certain mergers, or consolidations with, disposition of assets to, or issuances of stock to or redemption of stock from,
the acquiring person;
• termination of 5% or more of the employees of the target corporation as a result of the acquiring person's acquisition of
10% or more of the shares;
• allowing the acquiring person to receive any disproportionate benefit as a shareholder; and
• liquidating or dissolving the target corporation.
After the five-year period, certain “significant business transactions” are permitted, if they comply with certain “fair
price” provisions of the statute or are approved by a majority of the outstanding shares other than those of which the acquiring
person has beneficial ownership. As a Washington corporation, the Company is not permitted to “opt out” of this statute.
