Executive Summary / Key Takeaways

• WaFd, Inc. (WAFD) is undergoing a significant strategic transformation, exiting the commoditized single-family mortgage market to sharpen its focus on higher-margin commercial and business banking, a move expected to yield $17 million in annual expense savings.
• The company's Q3 2025 results show early signs of this pivot, with net interest margin expanding to 2.69% and non-interest expenses declining by $5.75 million year-over-year, driven by restructuring efforts.
• Despite these operational improvements, WAFD faces challenges including a "Needs to Improve" CRA rating, which could restrict future expansion, and rising credit quality concerns evidenced by increased net charge-offs and non-performing assets.
• WAFD maintains a robust balance sheet with strong capital ratios and stable customer deposits, supported by a strategic shift towards transaction accounts and reduced reliance on borrowings.
• The investment thesis hinges on successful execution of the commercial banking pivot and effective management of credit quality and regulatory hurdles, leveraging its regional presence and community-focused approach against larger, more diversified competitors.

A Regional Bank in Transition: Setting the Scene

WaFd, Inc., formerly Washington Federal, Inc., has cultivated a deep-rooted presence in the Western United States since its founding in Ballard, Washington, in 1917. Operating through 208 branches across nine states, including Washington, Oregon, California, and Texas, WaFd has historically served a diverse clientele spanning consumers, mid-sized to large businesses, and commercial real estate developers. A pivotal moment in its recent history was the all-stock merger with Luther Burbank Corporation (LBC) on March 1, 2024, which significantly expanded its scale and market footprint, adding approximately $107.89 million in goodwill and $37.02 million in core deposit intangible assets to its balance sheet.

This expansion, however, has coincided with a period of profound strategic reorientation. In January 2025, WaFd Bank announced a decisive exit from the single-family mortgage lending market. This strategic pivot was driven by the commoditization of home loans, where nearly 70% of originations were sold to government-sponsored enterprises, leading to diminishing profitability and increased credit risk. Furthermore, technological advancements have simplified refinancing for consumers, exacerbating interest rate risk for the bank. This move underscores a broader industry trend where regional banks are refining their focus to compete effectively against larger, more diversified national players and agile fintech disruptors.

The Strategic Pivot: Reshaping the Core Business

WaFd's decision to shed its single-family mortgage business marks a clear strategic shift towards higher-value commercial lending and relationship-based business banking. Management anticipates approximately $17 million in annual expense savings from this restructuring, signaling a commitment to enhancing efficiency and profitability. This reorientation aims to leverage WaFd's established regional relationships and expertise in commercial real estate, multi-family, and commercial & industrial lending, where it can offer more tailored solutions and potentially capture better margins.

However, this strategic shift is not without its immediate challenges. On December 27, 2024, the Bank received a "Needs to Improve" rating under the Community Reinvestment Act (CRA) from the FDIC, primarily due to its performance on the Lending Test. While the Bank is appealing this rating, an unsuccessful appeal could impose significant restrictions on its expansionary activities, including future mergers and acquisitions and the establishment of new branches. These restrictions are expected to remain in place until at least the next CRA examination in 2026, potentially hindering the company's ability to capitalize on growth opportunities in its target commercial markets.

Technological Engagement and Operational Efficiency

Unlike many financial institutions that boast proprietary technological moats, WaFd's strategic approach to technology appears to be more reactive and efficiency-focused. The company explicitly cited technology's role in making consumer refinancing easier as a key driver for exiting the single-family mortgage market, indicating that it views certain technological trends as disruptive to its traditional business lines rather than as inherent competitive advantages to be built upon in all segments. This perspective suggests a pragmatic allocation of resources, prioritizing operational efficiency and risk mitigation over broad-based technological innovation in commoditized areas.

Despite this, WaFd makes ongoing investments in information technology, with non-interest expenses for IT totaling $15.02 million in Q3 2025 and $43.70 million for the nine months ended June 30, 2025. These investments are likely aimed at enhancing core banking operations, improving customer experience in its chosen commercial and business banking segments, and strengthening its digital infrastructure to support its refined strategy. The company's focus on growing transaction deposit accounts also implies an emphasis on digital convenience and service quality to attract and retain business clients, where efficient digital platforms are increasingly essential.

Competitive Landscape: Carving a Niche

WaFd operates in a highly competitive banking landscape, facing off against national giants like Bank of America (BAC) and Wells Fargo (WFC), as well as formidable regional players such as U.S. Bancorp (USB) and KeyCorp (KEY). WAFD's competitive positioning is largely defined by its regional focus and community-oriented approach, which allows for more personalized service and deeper local relationships compared to the broader, often more impersonal, offerings of national banks.

When comparing financial performance, WAFD's latest TTM Net Profit Margin of 15.57% trails that of Wells Fargo (16%) and U.S. Bancorp (15%), but it is comparable to Bank of America (14%).

WAFD's Debt/Equity ratio of 0.66 is notably lower than BAC's (2.23), WFC's (1.57), and USB's (1.26), indicating a more conservative capital structure.

However, WAFD's smaller scale can lead to higher operating costs and potentially slower innovation speed compared to its larger rivals, who benefit from economies of scale and substantial investments in digital transformation. For instance, BAC and WFC are known for more advanced digital tools, which could give them an edge in customer acquisition and operational efficiency.

WAFD's strength lies in its ability to foster strong customer loyalty in its core Western markets, potentially leading to better pricing power in local niches. This localized expertise helps it capture opportunities that larger banks might overlook or serve less effectively. However, the company's smaller scale makes it more vulnerable to regional economic downturns and limits its strategic adaptability compared to more diversified competitors like USB. The ongoing industry trend of digital banking adoption further emphasizes the need for WAFD to continuously enhance its digital offerings to remain competitive, even if it doesn't aim for a proprietary technological moat.

Financial Performance: Early Signs of Transformation

WaFd's financial results for the three months ended June 30, 2025, reflect a company in the midst of a strategic pivot. Net income decreased to $61.95 million from $64.56 million in the prior year quarter. However, the net interest margin (NIM) showed improvement, expanding to 2.69% from 2.56% year-over-year. This expansion occurred despite a 36 basis point decrease in the yield on interest-earning assets (to 5.30%), offset by a more significant 50 basis point decrease in the cost of interest-bearing liabilities (to 3.13%). Management attributed the lower asset yield to falling interest rates affecting adjustable-rate loans and hedging program settlements.

The provision for credit losses increased to $2.00 million for the quarter, up from $1.50 million, driven by "increasing trends in negative migration of criticized and nonperforming loans, and net charge-offs." Net charge-offs significantly rose to $5.44 million, compared to $1.25 million in the prior year quarter. Non-performing assets also increased by $19.74 million to $97.16 million, representing 0.36% of total assets. This trend in credit quality will require close monitoring as the company executes its strategic shift.

On a positive note, non-interest income increased by $1.02 million to $18.27 million, primarily due to higher loan prepayment fees and other fees. Non-interest expense decreased by $5.75 million to $104.33 million, largely due to reduced compensation costs from the single-family mortgage exit and lower FDIC premiums. For the nine months ended June 30, 2025, the provision for credit losses was $4.75 million, a substantial decrease from $17.50 million in the prior year, which included a $16.00 million initial provision related to the Luther Burbank merger.

Balance Sheet Strength and Liquidity

WaFd maintains a robust balance sheet, providing a solid foundation for its strategic initiatives. As of June 30, 2025, total assets stood at $26.73 billion, a decrease of $1.33 billion from September 30, 2024, primarily due to reduced loans and cash used to pay down borrowings and purchase investments. Cash and cash equivalents decreased by $1.57 billion to $809.25 million, reflecting these capital allocation decisions.

Customer account balances remained stable at $21.39 billion, with a strategic shift evident: transaction accounts increased by $151.94 million (1.3%), while time deposits decreased by $139.34 million (1.5%). This aligns with management's goal to reduce reliance on higher-cost time deposits. Total borrowings significantly decreased to $1.94 billion from $3.27 billion, further improving the cost of funds.

Shareholders' equity increased to $3.01 billion, representing 11.28% of total assets, up from 10.69% at September 30, 2024. The tangible capital to tangible assets ratio was a healthy 9.78%. WaFd and its banking subsidiary continue to meet all "well capitalized" regulatory capital requirements, underscoring their financial stability. The Bank also benefits from substantial liquidity through FHLB credit lines and participation in the FRB of San Francisco Borrower-in-Custody program, enhancing its ability to manage contingent liquidity needs.

Outlook and Key Sensitivities

WaFd's forward outlook is shaped by its strategic reorientation and the prevailing interest rate environment. The anticipated $17 million in annual expense savings from the single-family mortgage exit is a key driver for future profitability. The company also expects to recognize approximately $19.70 million in tax benefits and $16.10 million in amortization expense from its LIHTC investment portfolio during the current fiscal year.

Interest rate sensitivity analysis indicates that WaFd is asset-sensitive. A 200 basis point increase in interest rates could lead to a 7.14% ($52.56 million) increase in net interest income over 12 months, while a 200 basis point decrease could result in a 2.32% ($17.08 million) decrease. Similarly, Net Portfolio Value (NPV) shows sensitivity, with a 200 basis point rate increase potentially boosting NPV by 18.95% ($570.65 million), and a 200 basis point decrease potentially reducing it by 21.96% ($661.28 million). These sensitivities highlight the importance of interest rate management and the potential for upside in a rising rate environment, or downside in a falling rate environment.

The "Needs to Improve" CRA rating remains a near-term hurdle, with restrictions on expansion likely until the next examination in 2026. Management's ability to successfully appeal this rating or demonstrate improved performance will be critical for unlocking future growth avenues.

Conclusion

WaFd, Inc. stands at a pivotal juncture, executing a bold strategic pivot away from commoditized single-family mortgage lending towards a more focused and potentially higher-margin commercial and business banking model. This transformation, underscored by the Luther Burbank merger and recent operational restructuring, aims to leverage the company's regional strengths and community-centric approach. While early financial indicators show promise in margin expansion and expense reduction, the path forward is not without its complexities.

The company must adeptly manage the execution risks associated with its business model shift, including potential revenue impacts and the critical task of improving credit quality trends. The "Needs to Improve" CRA rating presents a tangible constraint on immediate expansion, requiring diligent attention and a successful appeal or demonstrated improvement. WaFd's robust capital position and strategic liquidity management provide a solid foundation, but its ability to differentiate through personalized service and effective technology adoption in its chosen commercial segments will be paramount. For investors, WAFD represents a compelling story of a regional bank actively reshaping its destiny, with the success of its strategic reorientation and its ability to navigate regulatory and credit challenges determining its long-term value creation.