‘First World problems,’ including too much capital, face Seattle bank

Brent Beardall has big shoes to fill at Washington Federal in Seattle.

Beardall succeeded Roy Whitehead in April, replacing a CEO who had been at the helm for more than 15 years. Under Whitehead’s watch, the $15 billion-asset bank more than doubled in size.

Washington Federal is also the biggest community bank in the fast-growing Seattle area, with 3.6% of the market’s deposits at mid-2016, according to data from the Federal Deposit Insurance Corp.

Whitehead also bequeathed Beardall, a company that generates more than $100 million in excess capital annually.

"We have what we call a First World problem," Beardall said during a recent interview at American Banker's New York offices. "You lever that 10 times and that’s a billion dollars of net growth each year. It can be difficult to try and [put that to use] organically."

To that end, Beardall wasted no time putting his own stamp on the company, finalizing an agreement to buy Anchor Bancorp in Laney, Wash., less than a month after becoming CEO. Anchor, an underperforming bank, had been facing pressure from an activist investor.

Beardall discussed the Anchor deal and a partnership with CenterCard, a fintech firm that is developing high-tech corporate credit cards. He also shared his views on tweaking, rather than repealing, the Dodd-Frank Act.

Here is an edited transcript.

How is the adjustment to being CEO?
BRENT BEARDALL: It’s been a whirlwind. … In the first 24 days we announced our 20th acquisition. There’s a lot that goes into that. Roy Whitehead is still our executive chairman and he’s been mentoring me for quite some time. I still have a lot to learn, but it’s been fun. … I tell people all the time, it’s like being a quarterback. The quarterback gets way too much credit and then too much blame. But we have such a strong team.

What can you tell us about Anchor?
It’ll close sometime probably in the August to October time frame, depending on shareholder approval. We have the majority shareholders locked up. We’re not anticipating any problems [with regulatory approval], but you never know. We’re excited about the acquisition because it will augment our footprint in southwestern Washington and provide some branches in the Aberdeen area.

They have a longer legacy than we do, and they actually came to us because they [thought we were a] logical fit, and we agreed. That’s what we’re excited about from a cultural standpoint.

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Their main problem was they couldn’t get profitability to where it needed to be for a public company on a stand-alone basis. It’s hard to be a profitable bank at $400 million in assets. With our size, we’re going to be able to bring in the back-office infrastructure and make it far more efficient. It’s accretive to tangible book value by 19 cents a share, which is fantastic because normally investors look for five-year or shorter payback period. Once we get it fully integrated, which will probably be 12 months or so after we get it closed, it will be accretive to earnings per share by about 5 cents.

What’s next? Are you looking for more deals?
Our preference [is] never to do another M&A deal and just grow organically. When you think [of] all the risk that’s associated with an acquisition — it's substantial and it kind of takes your focus off of organic growth as you’re looking to consolidate back offices and so forth.

We have what we call a First World problem. We generate so much capital. We’re on pace to make $160 million this year. After we pay out cash dividends, we’ve generated about $100 million of capital. You lever that 10 times and that’s a billion dollars of net growth each year. It can be difficult to try and [put that to use] organically, and do it with the quality of assets we’re after.

The bank has worked with a tech firm to streamline lending operations. Are there plans to do more things like that?
We have plans to do more. It’s really fun with fintech because it’s evolving so quickly. I think the biggest strategic decisions to make are who we’re going to partner with. You can’t assume you’re going to bat 1.000. We’re going to swing and miss a few times, but hopefully we’ll make some solid contact on others.

We’re working with a group called CenterCard. We can utilize technology to simplify people’s lives and we’re small enough [to] be agile in terms of adapting new technologies.

What’s your view of building tech in-house?
We’ve tried that before and it turns out that you need to know what you’re good at and what you’re not good at. We’re not Microsoft. We’re not Amazon. We’re bankers and we think we’re OK bankers, but we think the best way is to capitalize on our strengths — our financial strength, our discipline and our know-how — and partner with people that are really good in their field.

What areas are best suited for fintech partnerships?
We’re looking at what’s going to be the next phone. We view real estate on phones as sacred. The last thing a millennial wants to do is give up five pieces of real estate on their phone for five different banking apps. They want one app that’s completely integrated.

What are your thoughts on regulatory and tax reform?
We’re excited about what we’re hearing from the administration. Clearly financials benefited tremendously from the Trump bump. I think the market is pricing in three things: less regulation, lower taxes and a better interest rate environment. Those are all good things for banking and business in general. So we’re cautiously optimistic. It’s easy to talk about getting things done, but it’s harder to get them done. I think if we were in charge of the administration, we may have led with tax reform and not immigration. But it’s nice to see that the president seems to be pivoting.

Brent Beardall
Woodinville, WA USA - circa September 2021: Street view of a Washington Federal Bank on an overcast day.

What’s more important, reg relief or tax reform?
I think tax reform is the most important. So many bankers just want to do away with Dodd-Frank. Dodd-Frank is fine. There were bankers that were out of control. We needed to rein them in. We just want effective regulation. [Legislators] set arbitrary limits within the law that don't take into account the riskiness of a business model. You could have a $7 billion-asset bank that’s under substantially less regulation than we are at $15 billion, but they could be running a 7% leverage ratio. Washington Federal has a risk-weighted capital [ratio] of about 18%. Who has more risk? They have more risk; we have more regulation. It’s not right.

What other changes would you like to see?
I think the CFPB is very well intended, but I’d like to see them focus more on the nonbanks that have caused so much trouble. Banks are just so well regulated. We’ve got the CFPB, the OCC, the Federal Reserve and the FDIC when they want to come in. It surprises me to read that some of these fintech companies have average yields on some loans that are 18% and 19%. Our average loan yield is 3.75%. Who’s being taken advantage of? Where’s the risk to the consumer?

What else should we know about Washington Federal?
We’re a portfolio lender. I really don’t know of any other bank of size that portfolios every loan they make like we do. The fact of the matter is that it’s less profitable in the short run to be a portfolio lender. But our belief is that it’s more profitable in the long run because you can work with your clients [if a problem arises with payment]. If we see you doing the right things we can help [by] giving a couple of months of relief of no payments or lowering the interest rate from 4% to 2%, or by making it interest-only for a period of time. It’s all dependent on the circumstance. During the Great Recession, we modified over 3,000 mortgages. Of those loans, 96% are performing. I would put that up against Hamp, Harp or any government program. It is good old-fashioned, common-sense personal banking.

Does that limit how many loans you can make?
That’s the beauty of our capital. There’s plenty of room for us to continue to make mortgages.

What are your thoughts on the Wells Fargo cross-selling scandal?
I have a great deal of respect for Wells Fargo. They're a first-class organization. I don’t know anything more about the situation than everyone else, but it certainly appears that they had a few bad actors and they’ve tried to take the steps to correct that. But at the end of the day, if you compensate to generate widgets, they’re going to generate widgets. So our philosophy is that we need to compensate our employees for taking care of their clients.

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