Washington Federal’s Roy Whitehead on Banking, Public Trust, and Regulations

“We are the strongest bank in our market,” said Washington Federal Savings CEO Roy Whitehead to the Met Grill’s “Guess the Dow” panel last week. His complaint was that you wouldn’t know that from the stock market. As I wrote then:

This year’s featured speaker, CEO of Washington Federal, Roy Whitehead, gave a textbook illustration of pessimism’s fear to tread. With investors soured on the whole financial sector, Washington Federal’s holding company stock (WSFL) is trading below its tangible book value. That can’t last. At some point, investors will have to agree to have money thrust into their hands, even if it’s from a bank. (Literally. WaFed is paying eight-cents-per-share dividends.)

Whitehead’s point deserves underscoring because it illustrates reason for economic optimism. Investors may well be “once bitten, twice shy,” but investor psychology can turn on a dime, much faster than can institutions with serious structural weaknesses. Not that winning back trust will be–or should be–easy. “If I could wave a magic wand,” admitted Whitehead, “I would bring back Glass-Steagall–or something like it.” Differentiating the role of his bank from investment banks, he said, “We are stewards, not big-game hunters.”

About this time in 2008, people were estimating that some $7.7 trillion had been lost in the subprime mortgage crisis nationally. Bank of America chief market strategist Joseph Quinlan was quoted as saying, “It could take months or even years before Wall Street and others get a handle on the true cost of the U.S. subprime meltdown and the attendant global credit crunch.” A year later, Bank of America’s stock hit a low of $2.53. It’s now trading around $6.60 (BAC).

In contrast, there’s stolid, headline-shy Washington Federal, profitable every single year since 1965, outperforming the industry average regularly, claims Whitehead, in return on assets. (For clarity’s sake, Washington Federal, Inc., is the company that owns the bank known in eight states as Washington Federal Savings.) It’s instructive that “Savings” is the sole word retained from the bank’s original name–it was founded in 1917 as Ballard Savings & Loan. With more than $13.4 billion in assets, Washington Federal still mainly makes its money the old-fashioned way, by loaning out depositors’ money against fixed-rate mortgages, which it holds onto.

On the face of it, there’s no reason for Washington Federal to be affected by subprime contagion; they never offered anything but “pure vanilla” fixed-rate mortgages to applicants whose credit-worthiness they knew, and since they never tried to securitize those loans, their ownership of the note is unquestioned. Because the crisis developed into a national tide that sank all boats, Washington Federal did see more non-performing assets than usual, but charge-offs reached their quarterly peak of almost $60 million back in spring of 2010, subsiding to just over $10 million for Q4 of 2011.

Conversely, net income has grown from about $13 million in Q2 of 2010 to about $33 million last quarter. Everything, said Whitehead, pointing to his graphs and charts, is “going in right direction except for loan volume, which is an industry-wide problem.” It’s still a difficult climate for lending if you are prudent with depositors’ money. Rather than compromise on the quality of their mortgages, Washington Federal is supplementing those loans with an evolution, begun “six or seven years ago,” into more commercial lending: real estate loans, term loans and lines of credit, and other business-related financial services.

That’s also a response to the fact that, as Whitehead put it, “the mortgage industry has been nationalized. We have conceded the largest asset class in the world to the federal government.” One way or another, the U.S. government backs 97 percent of mortgages, and Whitehead, I think it’s fair to say, believes that is a driver behind changing social attitudes toward credit obligations. When lending is local, there’s a social obligation to repayment–as George Bailey famously explained, that’s your neighbors’ money at work. When it’s the federal government, people find it emotionally easier to just walk away.

And that’s just one of his industry-fed headaches, the list of which includes other banks’ embedded balance sheet issues, exposure to the European economic crisis, historically low interest rates, the capping of debit card transaction fees, and spiking FDIC insurance: “The premiums the company pays to the Federal Deposit Insurance Corp. (FDIC) skyrocketed to $22 million last year, up from $870,000 in 2008,” reports Sanjay Bhatt in the Seattle Times.

His bank was just named #1 of “10 Well-Run, Profitable Banks” by TheStreet.com (who list WaFed as a Buy, currently), and back in January 2011, one of “10 Western Bank Stocks for the Long Term.” Summing up his bank’s thriftiness, Whitehead said, “We spend 30 cents to make a dollar.” But regulations imposed for other banks’ risky behaviors are cutting into the competitive edge that efficiency gives Washington Federal. They pay the same skyrocketing FDIC rates as any other bank, they’re pressed to hold a larger percentage of assets as collateral, they’re asked to fill out forms in triplicate to triplicating agencies.

When the FDIC agrees to back $250,000 of your deposit, that agreement doesn’t come for free. The bank cedes some autonomy, and takes on not-insignificant back-end reporting costs. In place of the personal trust shown by a local lender, the government demands verification, and in place of accountability, it often seems by design to prefer a blizzard of paperwork, instead.

It doesn’t need to be this way, argues Whitehead. Banks “need to win the public back over,” and they can, by recognizing (again) that savings banks and investment banks are not the same thing. “Compensation practices need to change,” he said, adding that he has always resisted paying incentives that weren’t tied to overall bank performance. Because they can, Washington Federal is working with its customers on mortgage adjustments, depending on ability to pay. They’re offering temporary, interest-only payment plans and even forgiving principal in extreme cases, sharing the “haircut” on valuations with their clients.

It’s striking to hear a graduate of the Southwestern Graduate School of Banking at Southern Methodist University say–in response to a question about Occupy Wall Street–that “young people need to be rioting in Washington about the forfeiture of their future.” Give it time.