The Slow and Sure Approach

Washington Federal Savings has had the same strategy for 92 years: lend long, borrow short and make money on the margins.

Through the savings and loan fallout of the early 1980s and the more recent boom-and-bust in the real estate market, the bank hasn’t strayed from that strategy. Now, the institution founded in Seattle’s Ballard neighborhood by a group of Norwegian fishermen stands as one of the largest Washington-based banks, with $12 billion in tangible assets. And its market cap is $1.3 billion, making the company worth four times as much as Columbia Banking System, the next most highly valued, publicly traded bank in Washington state.

“Here’s this bank that has stuck to its knitting, and you’re seeing a validation of that strategy,” says Sara Hasan, an analyst for Seattle-based investment firm McAdams Wright Ragen, which has had a buy rating on Washington Federal stock since July of 2006. (McAdams Wright Ragen was a co-manager of Washington Federal’s $300 million share offering this fall.)

Like its competitors, Washington Federal has watched its bottom line take hits due to loan losses in the current recession, and its investors have seen their quarterly dividends pared back at times. The bank posted a net loss in the fourth quarter of 2008 due to the precipitous decline in value of its Fannie Mae and Freddie Mac preferred stock.

“This is an economy that affects everyone,” says Washington Federal Chairman, President and CEO Roy Whitehead. “If you are involved in the housing industry, you can’t avoid the carnage.”

That’s the bad news for Washington Federal, but compared with many of its peers, it’s not so bad. While its dividend was reduced, the company has been able to offer a dividend for 106 consecutive quarters. Despite the loss in the fourth quarter of 2008, Washington Federal finished the year in the black. The company has posted a profit in each of the first three quarters of its fiscal year 2009. Other than that one quarter, the bank has been profitable every quarter since 1965, which is as far back as institutional memory goes.

The bank’s stability, even in tough times, is based on its conservative approach. It competes for fixed-rate home loans and markets its certificates of deposit aggressively, making money on the gap between the interest it brings in on its home loans and the money it pays out on its CDs.

Whitehead says 75 percent of Washington Federal’s loan portfolio consists of 30-year, fixed-rate mortgages. The next largest category is fixed-rate loans on multifamily properties, at 7.3 percent. Beyond that, the portfolio includes mostly loans for land and development, commercial-property loans and business banking loans.

The bank’s long-term approach also involves spending less money on retail banking than many in the industry. Washington Federal has 150 offices total in eight states, but it doesn’t offer free checking and doesn’t try to have branches on every corner, vice president of marketing Cathy Cooper says. The bank has fewer employees per branch than the norm, but those branches tend to have large balance sheets. A bank either can be convenient with a lot of locations or it can offer higher rates on CDs, she says. Washington Federal chooses the latter.

Moving forward, Whitehead notes, the challenge will be revenue growth. Many Pacific Northwest banks have grown with the residential market, but he says “the bloom is off that rose.” Many in the industry are forecasting a difficult period for commercial loans that will rival the recent mortgage crisis.

“There’s too much capacity; there won’t be enough business to go around,” Whitehead says. “Where is the business going to come from? I think revenue growth is the biggest challenge for the industry and Washington Federal over the next few years.”

Its two most recent acquisitions-Roswell, N.M.-based First Federal Bank in 2007 and Bellevue-based First Mutual Bank in 2008-are the first steps toward expanding its revenue base somewhat.

Whitehead says both institutions were healthy when acquired, and Washington Federal paid a premium for both. In return, the bank received business banking expertise it didn’t have previously.

McAdams Wright Ragen’s Hasan says business banking, specifically commercial and industrial loans, is one area where many banks are looking to gain a stronger foothold. With problems in the mortgage and commercial real estate markets, more banks will be competing to lend money to businesses for their operations.

“That’s the holy grail of banking,” Hasan says. “They’re profitable loans. They’re relationship-based. You will continue to see a lot of competition in the market.”

For Washington Federal, growth in that market will be deliberate. Eventually, Whitehead says, the bank would like to have a business-banking unit in each of its major locations. In the future, business banking would account for 15 to 20 percent of the institution’s revenues.

There is no timetable for that to happen, however.

“We would expect to grow that business, but grow it in a very slow, Washington Federal way,” Whitehead explains.

Whitehead’s answer isn’t surprising, given the bank’s history, Hasan says.

“It’s a sign of how conservative they are,” she says. “Wa Fed is always wearing its conservative stripes.”

List: The Top 25 Washington Banks