WAFD Earnings Preview: Uncertainty Clouds $28.07 Shares

Overview and Share Performance

WaFd, Inc. (NASDAQ: WAFD) – formerly Washington Federal – is a Pacific Northwest regional bank with ~$26 billion in assets following its recent merger with Luther Burbank Corporation (^[1]) (^[1]). The stock currently trades around $28 per share, roughly 0.8× book value, reflecting investor caution (^[2]). Year-to-date, WAFD shares have underperformed broader markets amid industry-wide pressures (higher funding costs, economic uncertainty). While the bank’s trailing P/E is ~11.5 (^[3]) – below the S&P 500 average – this discount is common among regional lenders given cyclical risks. Upcoming earnings will be closely watched for clues on net interest margin stabilization, deposit trends, and merger integration progress, all of which cloud the near-term outlook for the $2.4 billion market-cap bank.

Company Background: Founded in 1917, WaFd has a long history of steady operations. It remains well-capitalized (Common Equity Tier-1 ratio ~11.3%, Tier-1 Leverage ~8.9% (^[1]) (^[1])) and predominantly a real estate lender. Over 85% of its loans are secured by real estate, with an average current loan-to-value under 45% (^[4]). This conservative credit profile has historically kept losses low. However, rising interest rates and a recent expansion into California have introduced new uncertainties. Management itself acknowledges the entry into California (via Luther Burbank) presents elevated risk as WaFd is “new to this market” and must retain LBC’s local talent to compete (^[1]). In short, WaFd’s fundamentals are solid, but the operating environment is challenging – a theme for the upcoming earnings release.

Dividend Policy, History & Yield

WaFd boasts a rich dividend history dating back to 1983 (^[5]). The bank has paid 168 consecutive quarterly dividends and steadily increased the payout in recent years. The current quarterly dividend is $0.27 per share (raised from $0.26 last year), equating to $1.08 annually (^[5]). At a ~$28 share price, this implies a dividend yield around 3.8%, which is attractive relative to the sector. Dividend growth has been modest but consistent – roughly 4% per year (a one-cent increase each year in recent periods (^[5])). WaFd’s dividend policy appears conservative, targeting sustainability: the common dividend payout was ~41% of FY2024 earnings (^[1]), indicating the dividend is well-covered by profits. This moderate payout ratio suggests ample coverage, leaving room to absorb earnings volatility.

It’s worth noting that AFFO/FFO metrics are not applicable here – those are used for REITs’ cash flows, not banks. Instead, analysts focus on earnings and cash dividends. WaFd’s earnings easily cover the dividend (FY2024 net income was ~$200 million vs. ~$74 million paid to common dividends (^[1])). The bank also carries a small amount of non-cumulative preferred stock (Series A, 4.875% coupon), costing ~$14.6 million in annual dividends (^[1]) – another claim on cash flow but one that the bank can comfortably meet. Overall, WaFd’s dividend appears secure, with a forward yield ~3.5–3.8% (depending on share price) providing investors a decent income stream (^[6]). The key question is whether future earnings growth (or strain) will affect the bank’s pattern of penny-per-year dividend hikes. So far, management has maintained increases even through industry stress, signaling confidence in long-term profitability.

Leverage, Funding Mix and Maturities

Balance Sheet Leverage: WaFd’s equity-to-assets ratio is about 11%, corresponding to a leverage of ~9× assets/equity (^[1]). This is a healthy capital level for a bank and in excess of regulatory “well-capitalized” thresholds. The merger with Luther Burbank in early 2024 expanded WaFd’s assets by ~$7.7 billion (^[1]). Post-merger, total assets stand around $26.2 billion, funded by ~$21.4B in deposits and ~$3.3B in borrowings (^[7]). WaFd’s borrowings consist almost entirely of Federal Home Loan Bank (FHLB) advances (about 98% of total debt) with a small portion of junior subordinated debentures (^[7]). As of fiscal year-end, total borrowings were $3.27 billion (down from $3.65B a year prior) with a weighted average interest rate of ~3.93% (^[1]). These advances are used to manage liquidity and funding costs, and WaFd has hedged a portion of them to fix rates – resulting in an effective average maturity of ~2.3 years on its FHLB debt (^[1]). This means the bank does not face immediate refinancing spikes; its wholesale funding is laddered over the next couple of years.

Deposit Funding and Maturity Profile: Deposits remain WaFd’s primary funding source, but the mix has shifted. The LBC acquisition brought in a large base of time deposits – 66% of Luther Burbank’s accounts were CDs – boosting WaFd’s time deposit balances by $4.25 billion (+80%) (^[1]). At September 2024, time deposits were $9.56B (about 44.7% of total deposits, up from 33% a year prior) (^[1]). These are higher-cost, interest-rate-sensitive funds. WaFd’s weighted average deposit cost jumped to ~3.09% (from 2.12% a year ago) as customers demanded higher rates (^[1]). Many of the acquired CDs will mature over the coming year – for example, ~$3.37B of time deposits (≥$250k) were set to mature within one year of 9/30/24 (^[1]) (^[1]). The bank has indicated it will “continue to offer market rates” to retain renewing CDs (^[1]). This strategy should help maintain deposit levels, but it also means interest expense will remain elevated. WaFd may try to rebalance its deposit mix toward lower-cost transaction accounts over time; indeed, management noted a goal of “shifting away from time deposits in favor of transaction accounts” (^[7]). In the near term, however, deposit betas (rate paid to customers) are high, and WaFd’s funding costs will likely stay near current levels barring a change in interest rate trajectory.

It’s important to highlight liquidity and borrowing capacity as well. WaFd has access to substantial backup liquidity: its FHLB credit line can cover up to 45% of total assets (over $11B potential, subject to collateral) (^[1]) (^[1]). The bank also participated in the Fed’s Bank Term Funding Program (BTFP) earlier in 2024 to bolster liquidity when industry stress emerged (^[1]) (^[1]). As of September, WaFd had $13.5B in unused borrowing capacity and cash/investments to weather deposit fluctuations (^[7]) (^[7]). Meanwhile, deposit quality appears solid: ~74% of deposits are FDIC-insured (uninsured deposits are ~25.6%, a relatively low level) (^[7]), and the top 20 depositors comprise only 10% of total deposits (^[7]). This granular, well-insured deposit base reduces the risk of sudden funding runs, a crucial consideration after the regional bank scares of early 2023. Overall, WaFd’s leverage and liquidity profile seem prudently managed – but the cost of that liquidity (via higher CD rates and FHLB interest) is a headwind to earnings in this rate environment.

Earnings Coverage and Dividend Coverage

WaFd’s earnings coverage of fixed charges and dividends remains strong. Interest coverage in the traditional sense (EBITDA-to-interest) isn’t a typical metric for banks, since interest expense is part of core operations. Instead, one can look at net interest income relative to expenses, and dividend coverage by profits:

– Net Interest Income vs. Interest Expense: In FY2024, WaFd’s net interest income was $604 million, while interest expense (on deposits + borrowings) was $358 million (^[1]). This implies interest coverage (net interest income / interest expense) of roughly 1.7×. However, net interest income has been under pressure (down year-over-year due to higher funding costs), so this coverage has tightened from prior years. The bank’s pre-provision, pre-tax income still covers its interest costs with room to spare, but the margin is shrinking as deposit rates rise.

– Dividend Coverage: As noted, WaFd paid $74.3M in common dividends in FY2024 against $200M in net income, a payout ratio of ~37% (^[1]). Including preferred dividends, total dividends were ~$89M, which is ~44% of net income – still under 50%. This means earnings covered over 2× the total dividends, a comfortable buffer. Even if earnings growth stalls temporarily, WaFd could likely maintain the dividend. For additional context, Dividend.com assigns WaFd an “A+” dividend safety rating with a low payout ratio relative to peers (36% vs ~33% sector average) (^[8]). The dividend has also grown at ~4% CAGR, in line with steady earnings (^[8]). All of this points to a well-covered dividend.

Looking at regulatory capital distributions: WaFd does some share buybacks in addition to dividends (it repurchased ~$27 million in stock during FY2024 (^[1])). Combined dividends and buybacks were about half of earnings, leaving the rest to bolster capital. The bank’s retained earnings plus new stock (from the merger) lifted equity to $3.0B (^[1]). Thus, WaFd has maintained a strong capital base while returning cash to shareholders – an indication of prudent capital management. The key coverage question going forward is whether net income will remain sufficient to cover dividends with the same ease, given margin compression. With a payout around 40%, WaFd has a cushion if profits dip, but a prolonged earnings decline could eventually pressure the pace of dividend increases or buybacks. At present, though, coverage metrics appear solid, and no immediate red flags emerge on the dividend front.

Valuation and Peer Comparison

Valuation Multiples: WaFd shares trade at a significant discount to historical norms on asset-based metrics. At ~$28, the stock is around 0.8× stated book value (^[2]) (and an even lower multiple of tangible book, given intangibles from the merger). This implies the market is pricing in concerns about future returns. For context, WaFd’s price/book was 1.1–1.2× in late 2019 before the pandemic and rate spikes (^[2]). The current discount reflects the challenging environment (higher interest rates and integration risk). On earnings, WaFd trades at roughly 11–12× trailing EPS (^[3]). That is in line with many regional banks, though below the broader market’s ~15–18×. Regionals often have lower P/E ratios due to their cyclicality and slower growth. By comparison, similar West Coast bank peers like East West Bancorp and Western Alliance trade at ~11–13× earnings (^[3]), so WaFd’s P/E is not out of line. Its dividend yield near 3.8% also stands higher than the S&P 500 average (~1.5%) and modestly above peer bank yields around 3%–3.5%.

Why the Discount? Investors appear to be pricing WaFd on a “show me” basis until key uncertainties clear. The bank’s return on equity (ROE) likely dipped this year because net interest margin fell sharply (more on that in Risks), pushing the efficiency ratio up to ~62% (^[1]). Historically, WaFd delivered ROEs in the low double-digits when NIM was healthier; currently ROE may be in the high single-digits, which can justify a sub-book valuation. Additionally, the overhang of unrealized losses on fixed-rate loans/investments in a 5%+ rate world means that book value may be somewhat “inflated” relative to market value of assets (though WaFd has opted out of AOCI in regulatory capital, it still reported ~$9M in comprehensive loss in 2024 from hedges, etc. (^[1])). Many regional banks trade below book for this reason. WaFd’s own net interest margin was just 2.69% in FY2024 (^[1]), down from 3.4% – this compresses earnings power. Until margin and ROE recover, the stock may remain at a discount.

Comparative Strengths: That said, WaFd does have some differentiators that could support valuation longer term. Credit quality is a standout (non-performing assets just 0.28% of total assets (^[1])) and the bank’s reserve coverage and real estate collateral provide comfort. WaFd is also known for efficient operations – prior to the recent merger, its efficiency ratio was near 50% (^[1]), better than many peers. The cost surge to 62% is likely temporary due to integration and revenue compression; if management can bring expenses back in line or margins recover, profitability metrics should improve. Moreover, WaFd’s presence in high-growth Western markets (Washington, Texas, now California, etc.) gives it growth opportunities peers may lack (^[7]) (^[7]). Analyst price targets (where available) have a median around $32, about 10–15% upside from current levels (^[9]) – suggesting modest optimism that the stock is undervalued if it navigates current headwinds. In summary, WaFd’s valuation reflects caution, but any positive inflection in earnings or successful execution on the merger could drive a re-rating closer to book value.

Key Risks and Red Flags

While WaFd is fundamentally sound, several risk factors and uncertainties are clouding its outlook and weigh on the stock’s risk/reward profile:

– Net Interest Margin (NIM) Compression: The rapid rise in interest rates has significantly squeezed WaFd’s spread. NIM fell to 2.69% in FY2024 from 3.40% in FY2023 (^[1]) – a steep decline reflecting that deposit and borrowing costs climbed faster than asset yields. WaFd’s interest expense on deposits jumped 78% in the past year (^[1]). With ~45% of deposits now in higher-rate CDs (^[1]), funding costs remain elevated. If the Fed keeps rates “higher for longer,” WaFd’s NIM could stay under pressure or even compress further, denting earnings. Every 25 bps increase in deposit costs directly cuts into margin unless loan rates can reprice upward – a challenge given many loans (like fixed-rate mortgages) adjust slowly. NIM stabilization is critical; until we see funding costs peak, this risk persistently overhangs earnings.

– Efficiency and Expense Management: A knock-on effect of lower NIM is a worse efficiency ratio. WaFd’s efficiency ratio spiked to 62.1% in FY2024 (from ~50.7% prior) (^[1]), meaning expenses rose to 62% of revenues. Part of this jump is from one-time merger integration costs and adding LBC’s operations, but part is simply reduced revenue. A >60% efficiency is on the high side for a bank of WaFd’s size, and it drags on ROE. If management cannot achieve expected cost synergies from the merger or if revenue doesn’t rebound, there’s a risk that elevated overhead becomes a new normal. We will want to see expenses being managed tightly (e.g. branch consolidation in overlapping markets, back-office integration) to bring the ratio back down into the 50s. Any signals of cost overruns or delayed integration savings would be a red flag.

– Integration of Luther Burbank (LBC): The March 2024 LBC merger introduces execution risk. WaFd is entering California for the first time, a highly competitive banking market (^[1]). The bank must successfully integrate 10 new branches and a different business culture. Retaining key LBC personnel is not guaranteed (“We may be unsuccessful in retaining those existing employees,” management warns (^[1])). Additionally, LBC’s business model differed – it relied heavily on high-cost time deposits and concentrated in multifamily mortgages. If WaFd fails to adapt and compete effectively in CA, the anticipated benefits (cost savings, new customer growth) may not fully materialize (^[1]) (^[1]). The merger also added goodwill and intangibles (e.g. core deposit intangibles for LBC’s deposit base), which will be impaired if the acquisition underperforms. In short, the expansion brings opportunity but also heightened risk, and investors will be watchful for any integration hiccups or customer attrition in the acquired franchise.

– Deposit Retention & Repricing: Thus far, WaFd has navigated the regional bank turmoil relatively well – deposits were stable or growing through early 2023 (^[4]), and management noted no significant run-off during the spring banking scare. However, the composition of deposits has shifted to more rate-sensitive CDs, especially after absorbing LBC’s depositor base (^[1]). Retaining these deposits will likely require WaFd to keep offering top-of-market rates (^[1]), which crimps profitability. There’s a risk of a “hidden” outflow if WaFd tried to cut deposit rates – customers might leave, forcing the bank to replace funds via even costlier wholesale borrowings. The special $3.7B influx of time deposits from LBC (^[7]) will test WaFd’s retention strategy as those CDs mature in coming quarters. Any sign of accelerating deposit outflows or heavy reliance on brokered deposits to plug gaps would be a red flag. So far, core deposit trends are hard to parse due to merger noise, so upcoming results should shed light on organic deposit flows. Encouragingly, WaFd’s deposit base is relatively granular and well-insured (only ~25% uninsured) (^[7]), which lowers run risk – but the flip side is those insured deposits often chase yield aggressively.

– Asset Quality and Loan Concentrations: Credit metrics at WaFd are currently very strong – non-performing assets (NPAs) are just 0.28% of assets (^[1]), and net charge-offs have been minimal (after years of net recoveries up till 2023 (^[4])). However, there are hints of emerging stress as rates rise: after nearly a decade of net recoveries, WaFd had to take net charge-offs in the last two quarters of 2023 (^[4]) and made “outsized” provisions for credit losses in 2023 (^[10]). Management acknowledged that “the rapid rise in interest rates is causing some stress for a limited subset of borrowers” (^[4]) – likely those with debt payments resetting higher. Importantly, the bank disclosed that if you include performing restructured loans, the ratio of problem loans plus restructured would be 1.55% of assets (versus 0.28% NPAs alone) (^[1]). This suggests some borrowers have been given loan modifications to help them stay current, a potential warning sign. Segments to watch include construction/commercial real estate and California multifamily loans. WaFd even noted it “throttled back” on new construction lending in 2023 due to the uncertain environment (^[4]). While WaFd’s average LTV of under 45% on its real estate loans provides a large cushion against losses (^[4]), a severe decline in property values or a recession causing tenant distress could still lead to higher defaults. Given that over 85% of loans are real estate-backed (^[4]), the bank is inherently exposed to real estate market cycles. Any uptick in delinquencies or need for further provisioning (beyond normal levels) would be a notable risk development.

– Interest Rate Risk (Duration Mismatch): Like most banks, WaFd faces interest rate risk on its balance sheet. Many of its loans (e.g. 1-4 family mortgages, some multifamily) are longer-term and fixed or have rate caps, whereas deposits reprice quickly. The bank’s internal models show that a +200 bp rate shock would reduce its net present value of equity by ~27% (^[1]), whereas a -200 bp shock would increase equity value by ~22% (^[1]). This indicates a liability-sensitive positioning – not surprising after a year of heavy Fed hikes. WaFd has engaged in hedging (e.g. interest rate swaps on FHLB advances (^[1])), but the fact remains that the economic value of its longer-duration assets has declined as rates rose. If rates continue to climb or stay high, WaFd might see further margin pressure and depressed book value growth. Conversely, if/when rates eventually fall, margin could recover but new issues could arise (e.g. accelerated loan refinancings reducing yields). The uncertainty around the rate outlook thus adds to clouded earnings visibility.

– Regulatory and Other Risks: WaFd operates under a robust regulatory framework (Fed, FDIC, state regulators). It is now above the $20B asset threshold, which can invite more regulatory scrutiny and compliance costs (^[4]). The FDIC’s special assessment to replenish the deposit insurance fund (after 2023 failures) will hit banks of WaFd’s size – management noted an additional expense for this in 2024 (^[1]). While not material to capital, such one-off costs do hurt earnings. Additionally, any tightening of regulations on mid-sized banks (liquidity requirements, capital rules) could force WaFd to hold more low-yielding assets or capital, weighing on ROE. Finally, natural disasters (the bank has a presence in earthquake and wildfire-prone states), cybersecurity events, or loss of key personnel (such as long-time CEO Brent Beardall) are always potential risk factors to consider in the background.

In sum, WaFd’s key red flags to monitor are persistent margin decline, integration stumbles, and credit quality deterioration – these are the main variables that could impair its earnings trajectory. Thus far, credit remains a bright spot and the deposit franchise has shown resilience. But the “uncertainty cloud” over WaFd is largely about how long interest-rate and integration pains will linger, and how successfully the bank can adapt.

Open Questions and What to Watch

Going into the earnings call, several open questions will shape the market’s view on WaFd:

– Will Net Interest Margin Find a Floor? WaFd’s NIM compressed by 71 bps in the past year (^[1]). Investors will be looking for signs that margin pressure is bottoming out. Key details include: deposit cost trajectory (did interest expense growth start to slow in the latest quarter?) and loan yield improvements (e.g. are new loan originations being done at much higher rates to offset repricing?). Management’s outlook on NIM – whether they expect stabilization around current levels or further compression – is pivotal. Any guidance on deposit betas or efforts to remix funding (for example, growing non-interest-bearing deposits) will be closely scrutinized.

– How is Deposit Momentum (Ex-Merger)? With the noise of the LBC merger, it’s unclear how WaFd’s organic deposit base is trending. An important question: Are core transaction deposits growing or at least holding steady? WaFd’s commentary on customer behavior (e.g. migration from checking to CDs, or any notable outflows) will be telling. The fact that WaFd had stable deposit growth through mid-2023 (^[4]) is encouraging, but conditions have evolved. Watch for disclosure of the percentage of deposits that are uninsured (previously ~25% (^[7])) and whether WaFd plans to reduce high-cost CDs over time. Any mention of utilizing wholesale brokered deposits or higher promotion rates could indicate funding pressure. Ideally, management will highlight that deposit balances are stable and diversified, which could reassure investors that another Spring 2023 scenario is unlikely here.

– Progress on Cost Synergies and Efficiency: Now that the Luther Burbank deal is closed (as of Mar 2024), how quickly can WaFd bring down costs? The efficiency ratio shot up to ~62% (^[1]) post-merger, but management’s target might be to return closer to low-50s over the next year or two. Investors will want updates on branch consolidation plans, headcount reductions or tech integrations that could yield savings. WaFd increased headcount to 2,208 employees after the merger (from 2,120) (^[1]) – will that come back down? The timeline for full integration (e.g. core system conversions, rebranding of LBC branches) is another point of interest. If management can articulate a clear path to realizing cost synergies (and possibly quantify them), it would address one of the major uncertainties.

– Loan Growth and Credit Outlook: WaFd deliberately slowed loan growth in 2023 (Q2 originations were less than $1B, down from $2.7B in Q1 (^[4])) to preserve liquidity. Will the bank start growing the loan book again? With a larger balance sheet post-merger, there may be opportunities to lend in new markets (California) or segments. However, high rates have dampened loan demand generally. Clarity on loan pipeline and growth expectations for fiscal 2025 will be useful. On credit, management’s view on portfolio health is key. Questions here: Are they seeing any uptick in delinquencies in areas like commercial real estate or multifamily? How big are the modified/restructured loans (the 1.55% of assets mentioned) and are those borrowers performing under new terms (^[1])? WaFd’s stance on provision – do they feel credit losses have “normalized” to a modest level, or are they bracing for higher charge-offs? Considering WaFd’s historically cautious underwriting, any change in tone on credit would be notable.

– Capital Deployment Plans: WaFd’s capital levels are robust (Tier-1 risk-based ~13%, leverage ~9% (^[1]) (^[1])). Will the bank continue returning capital via dividend increases or buybacks at the recent pace? The dividend was just raised to $0.27 and the payout is moderate, so another penny hike next year seems plausible. More interesting is whether management sees the stock as undervalued enough to repurchase shares aggressively. They bought back ~$27 million in FY2024 (^[1]), which is relatively small (about 1% of market cap). Given tangible book is likely in the mid-$30s per share, buying at ~$28 could be accretive. Investors might ask if the board is considering increasing the buyback authorization or if they prefer to hoard capital given uncertainties. Any signals here could influence sentiment – a heavier buyback would indicate confidence from management, whereas hesitation might suggest they’re conserving capital “just in case.”

– Guidance on California Expansion: Since this is WaFd’s first full quarter with Luther Burbank integrated, it will be insightful to hear management’s experience so far in California. Are they successfully attracting new customers in that market or at least retaining the existing LBC client base? The open question is how growth in California will offset integration costs. Management might outline strategies for the California franchise – e.g. leveraging LBC’s multifamily lending expertise, cross-selling WaFd products to LBC deposit clients, or expanding business banking services there. Also, have there been any surprises (good or bad) in the acquired loan portfolio? For example, sometimes merging banks uncover credit issues or cost synergies that weren’t obvious upfront. A transparent discussion on the status of the California operations can either alleviate or heighten investor concern about this strategic move.

In summary, WaFd enters this earnings report with a solid base but a foggy near-term outlook. The stock’s low valuation reflects skepticism that will only be dispelled by evidence of stabilization – in margins, expenses, and integration execution. Investors will be parsing the results and management commentary for reassurance that the dividend is safe, deposit outflows are not an issue, and earnings headwinds are being actively managed. If WaFd can demonstrate progress on these fronts, the current uncertainty discount on the $28 stock could begin to lift. Until then, caution prevails, and the onus is on the bank to show that it can navigate the convergence of high rates and a major acquisition without veering off course.

(^[2]) (^[1])

Sources

1. https://sec.gov/Archives/edgar/data/936528/000093652824000164/wfsl-20240930.htm
2. https://macrotrends.net/stocks/charts/WAFD/wafd/price-book
3. https://macrotrends.net/stocks/charts/WAFD/wafd/pe-ratio
4. https://theinstitutionalriskanalyst.com/post/what-does-washington-federal-tells-us-about-bank-earnings
5. https://wafdbank.com/about-us/investor-relations/stock-dividend-history
6. https://streetinsider.com/dividend_history.php?q=WAFD
7. https://sec.gov/Archives/edgar/data/936528/000093652825000066/wafdinvestorpresentation.htm
8. https://dividend.com/stocks/financials/banking/banks/wafd-washington-federal-inc/
9. https://tickernerd.com/stock/wafd-forecast/
10. https://wafdbank.com/about-us/investor-relations/financial-news

For informational purposes only; not investment advice.