Executive Summary / Key Takeaways

• WaFd, Inc. (WAFDP) operates WaFd Bank, a regional bank with a deep history in the Western U.S., currently undergoing strategic shifts including exiting single-family mortgage lending to focus on higher-margin commercial business and transaction deposits.
• Recent financial performance for the six months ended March 31, 2025, shows improved net income ($103.52M vs. $74.34M prior year period), driven by higher net interest income volume and reduced non-interest expenses, partly reflecting the impact of the Luther Burbank Corporation merger and subsequent restructuring.
• The company maintains a strong capital position, categorized as "well capitalized" by regulators, with a Common Equity Tier 1 ratio of 11.51% at March 31, 2025, providing flexibility despite a recent "Needs to Improve" CRA rating which could impact future expansion.
• WaFd leverages investments in technology to enhance customer experience and operational efficiency, positioning itself against larger national banks and fintech, though it faces challenges in scale and innovation speed compared to some rivals.
• Key risks include the potential impact of the CRA rating on strategic growth, the execution risk of exiting the single-family mortgage market, and ongoing exposure to interest rate fluctuations and credit quality in its commercial portfolio.

A Regional Bank's Evolving Story

WaFd, Inc., through its subsidiary Washington Federal Bank dba WaFd Bank, traces its roots back to 1917 in Ballard, Washington. For over a century, the bank has served communities across the Western United States, building a network that now spans 209 branches across nine states. Its core business revolves around providing essential banking services: lending to consumers, mid-sized to large businesses, and commercial real estate developers, alongside offering a range of deposit products and insurance services. This long history has cultivated a regional focus and deep customer relationships, forming a foundational strength in its operating markets.

The company's strategic path has not been static. A significant recent chapter was the merger with Luther Burbank Corporation, which closed on March 1, 2024. This transaction expanded WaFd's footprint and balance sheet, though it also introduced complexities, impacting the comparability of financial results and leading to the recognition of goodwill and intangible assets. More recently, in January 2025, WaFd announced a notable strategic pivot: exiting the single-family mortgage lending market. This decision was framed as a response to the commoditization of these loans, which had pressured profitability and increased interest rate risk due to easy refinancing. The move is anticipated to yield approximately $17 million in annual expense savings, signaling a sharper focus on other lending segments and deposit gathering.

Within the competitive landscape, WaFd operates alongside larger national players like US Bancorp (USB) and KeyCorp (KEY), as well as other regional banks such as Zions Bancorporation (ZION). While USB and KeyCorp benefit from national scale and often more advanced digital infrastructure, potentially offering faster transaction processing (e.g., USB's estimated 20-30% faster online processing), WaFd competes effectively through its regional density and customer loyalty. WaFd's investor presentations highlight high customer satisfaction scores (an A Score of 70+), which management believes contributes to lower customer acquisition costs and higher retention compared to more generic national approaches. Zions Bancorporation presents a closer regional competitor, with comparable branch networks and a focus on community banking. While ZION may hold an edge in operational efficiency (estimated 10-15% lower operating costs per unit), WaFd aims to differentiate through its specialized commercial real estate lending expertise and ongoing technology investments.

WaFd has emphasized investments in technology evolution over the past 15 years, aiming to enhance usability and efficiency. While specific, quantifiable metrics on the performance or cost advantages of its proprietary technology are not detailed beyond general statements about improved mobile banking and customer satisfaction, the strategic intent is clear: to leverage digital tools to improve the customer experience and streamline operations. This technological focus is crucial for maintaining competitiveness against rivals who are also heavily investing in digital transformation. However, compared to larger players like USB and KeyCorp, WaFd's smaller scale and potentially slower innovation cycles (estimated 10-20% longer product development) could pose a vulnerability, potentially leading to higher customer acquisition costs and market share pressure in digitally-driven segments.

Financial Performance Reflecting Strategic Shifts

Reviewing the financial results for the three and six months ended March 31, 2025, provides insight into the company's performance following these strategic actions. Net income for the three months ended March 31, 2025, was $56.25 million, a significant increase from $15.89 million in the prior year quarter. For the six months ended March 31, 2025, net income reached $103.52 million, up from $74.34 million in the same period of fiscal 2024. This improvement is largely attributable to the impact of the Luther Burbank merger, which closed partway through the prior year period, increasing the scale of operations, and a notable decrease in non-interest expenses in the current period.

Net interest income for the three months ended March 31, 2025, was $160.91 million, a modest increase from $158.59 million in the prior year quarter. For the six months, net interest income was $316.34 million, up from $310.83 million. While average interest-earning assets increased significantly due to the merger ($25.63 billion for Q2 2025 vs. $23.33 billion for Q2 2024 average), the net interest margin compressed. The net interest margin was 2.55% for the quarter ended March 31, 2025, down from 2.73% in the prior year quarter, and 2.47% for the six months, down from 2.81%. This compression reflects a lower average yield on interest-earning assets (5.32% for Q2 2025 vs. 5.50% for Q2 2024) despite a slight decrease in the cost of interest-bearing liabilities (3.29% for Q2 2025 vs. 3.32% for Q2 2024). The lower asset yield was primarily influenced by falling rates impacting adjustable-rate loans and cash deposits.

The loan portfolio, net of contra accounts, saw a slight increase of $3.65 million from September 30, 2024, to $20.92 billion at March 31, 2025. This was the net result of $1.84 billion in originations offset by $2.17 billion in principal repayments. Commercial loan originations constituted 74% of the total during the six months ended March 31, 2025, aligning with the strategic pivot away from single-family mortgages. Customer accounts also saw a modest increase, rising by $53.46 million (0.3%) to $21.43 billion, with transaction accounts contributing $36.80 million of this growth.

Asset quality metrics show some stabilization. The total allowance for credit losses (ACL) stood at $222.71 million, or 1.01% of gross loans, at March 31, 2025. The provision for credit losses was $2.75 million for the three months ended March 31, 2025, significantly lower than the $16.00 million provision in the prior year quarter, which included the initial ACL for Luther Burbank loans. Net charge-offs increased to $5.06 million for the quarter, compared to $0.15 million in the prior year quarter. Non-performing assets decreased to $70.88 million (0.26% of total assets) at March 31, 2025, down from $77.42 million (0.28% of total assets) at September 30, 2024, primarily due to a decrease in non-accrual loans. While delinquencies saw a slight uptick (0.27% of total loans at 3/31/25 vs. 0.25% at 9/30/24), the overall level of non-performing assets remains relatively low.

Non-interest income increased to $18.88 million for the quarter ended March 31, 2025, up from $13.39 million, driven by higher loan prepayment fees and increased commission income from the insurance subsidiary. Non-interest expense saw a substantial decrease, falling to $104.83 million for the quarter from $133.71 million in the prior year, largely due to reduced merger-related expenses and lower compensation costs following the restructuring associated with exiting the single-family mortgage business.

The balance sheet reflects these dynamics, with a decrease in cash and cash equivalents used to fund investment securities purchases and reduce borrowings. Total assets decreased by $415.69 million to $27.64 billion at March 31, 2025. Shareholders' equity increased by $32.32 million to $3.03 billion, representing 10.97% of total assets, supported by net income offset by dividends and share repurchases. The company maintains a strong capital position, comfortably exceeding regulatory minimums and categorized as "well capitalized."

Strategic Outlook and Navigating Challenges

WaFd's strategic direction is clearly focused on leveraging its regional strengths and shifting its business mix to enhance profitability and manage risk. The exit from single-family mortgage lending, while involving restructuring costs ($5.4 million charge mentioned in risk factors), is intended to free up resources and focus on commercial segments where the bank believes it has a competitive edge and can achieve better margins. The emphasis on growing transaction deposit accounts is also a key part of managing interest rate risk and funding the balance sheet more efficiently.

Interest rate risk remains a significant factor. While the company uses strategies like growing shorter-term loans and transaction deposits, and employing interest rate swaps to hedge certain exposures (e.g., $1.57 billion in mortgage loan fair value hedges, $400 million in MBS fair value hedges, $900 million in borrowings cash flow hedges), the balance sheet is still exposed to rate movements. The reported NPV sensitivity analysis shows potential material impacts from significant rate changes, highlighting the ongoing challenge of managing duration risk in the current environment.

A notable recent challenge is the "Needs to Improve" CRA rating received from the FDIC in December 2024. While the rating is under appeal, if upheld, it could restrict certain expansionary activities like mergers, acquisitions, and branch openings. This poses a potential constraint on future growth strategies and could negatively impact the bank's reputation and relationships with public entities. Management is actively working to address the issues that led to this rating, particularly concerning the Lending Test performance.

The competitive environment remains intense. While WaFd's regional focus and technology investments provide advantages, larger competitors like USB and KeyCorp possess greater scale and resources for technology development and market penetration. Fintech companies also continue to disrupt traditional banking services, particularly in payments and consumer finance. WaFd's ability to execute its strategic shift, enhance its digital offerings, and effectively manage credit quality in its targeted commercial segments will be critical to its success. The company's participation in LIHTC investments provides tax benefits (estimated $19.7 million this fiscal year) and supports CRA compliance, representing a stable, albeit smaller, component of its overall strategy. Share repurchase activity ($24.75 million in purchases YTD March 2025) and consistent dividend payments (including $0.27 per common share quarterly) demonstrate a commitment to returning capital to shareholders, supported by the strong capital position.

Conclusion

WaFd, Inc. is a regional bank with a long operating history currently navigating a period of strategic transformation. The decision to exit single-family mortgage lending marks a significant pivot towards higher-margin commercial business and transaction deposits, aimed at improving profitability and managing interest rate risk. Recent financial results show improved net income, benefiting from the integration of the Luther Burbank merger and reduced expenses. The bank maintains a robust capital position, providing a solid foundation. However, challenges remain, including the potential limitations imposed by the recent CRA rating, the execution risk of the strategic shift, and ongoing competitive pressures from both larger banks and fintech. For investors, the narrative centers on WaFd's ability to successfully execute its refined strategy, leverage its regional strengths and technology investments to drive efficient growth in its core markets, and effectively manage the identified risks to deliver sustainable value. The focus on commercial lending and transaction deposits, coupled with a strong capital base, positions WaFd to potentially enhance its financial performance, provided it can overcome regulatory hurdles and competitive dynamics.