When lending at Seattle's WaFd Bank increased to a record $6 billion in 2020, it was reasonable to think the total would decrease the next year without the injection of almost $1 billion in loans from the Paycheck Protection Program.
That's not what happened. WaFd's loan production totaled more than $8 billion in 2021, and the the bank is on pace to lend between $8.5 and $9 billion this year, a new record, CEO Brent Beardall said in an interview this week. Commercial loans at the $20.2 billion-asset bank, formerly known as Washington Federal, have grown faster than mortgage or consumer loans over the past six years.
A resilient economy and ravenous consumer demand have increased appetite for credit among commercial clients, which account for about 80% of the bank's new loan originations. Even higher interest rates have yet to weigh on demand for loans for real estate developments and warehouse expansions.
"Loan growth is so strong that we've gotten to a point where we're looking at ways to slow it down because we want to be able to maintain our capital levels," Beardall said. "It's a good position to be in."
In addition to the company's lending boom, Beardall spoke to American Banker about rising financing costs, the bank's overhaul of online banking offerings and whether he would rather see employees in the office more often. The following has been edited for clarity and length.
Let's start with the most important question first. The Seattle Mariners recently made the playoffs for the first time since you took over as CEO in 2017. Who's your favorite player in the lineup right now?
BRENT BEARDALL: It has to be the young guy, Julio Rodriguez. He is so fun to watch.
I want to ask about the long-term impact of PPP since you guys have a largely commercial client base. Are there customers you picked up through that process that are some of your biggest customers today or who are taking on more loans? What does that look like?
I described [PPP] at the time as a generational opportunity for us, and it absolutely was. It leans a bit more toward the C&I side, so the non-real estate loans. Especially helpful in PPP was the hospitality industry, which not very many people were talking about. Everybody said, "Oh my goodness, these hotel operators are in such dire straits, and PPP really saved them." Now, hotel operators have the highest profit margins they've ever had because their occupancy rates are through the roof and they've increased the rates they're charging.
Where do you look to get a sense of how the economy is doing or where it's headed? Are you looking at external indicators like GDP or unemployment? Are you looking at metrics within the bank, like loan growth?
We follow all the metrics, but to me the most important one is the relationship you have with your clients. I was just on a phone call with a developer in Salt Lake City, and he told me the biggest problem they have is with the trades. Lumber costs are coming down, which is a godsend, but he said they're just not getting anybody coming into the trades. I don't know how that gets better in the short term.
We've boomed for the last 10 years, and now we have this huge constraint in terms of the amount of labor we have and an almost unlimited demand to build multifamily projects, single-family — you name it.
Are labor costs the main thing you hear commercial clients mention when they talk about the impact of inflation? Or is it material costs related to supply-chain issues?
The supply-chain issues have gotten much better than they were, thankfully. When they talk about inflation, labor costs are No. 1 and interest rates are No. 2 because their financing costs have doubled from a year ago.
So if I'm a developer whose financing costs have doubled from a year ago, what are my options? Do I adjust the scope of my project? Do I borrow less money?
It depends on how well off you are, right? If you have the additional equity to put in, you can now borrow less because your financing costs are higher. If your debt-to-service coverage ratio goes up, you're going to be able to borrow less. A year ago, you could have borrowed $22 million for a $30 million project. Now, you might only be able to borrow $18 million on that, so now you're going to have to come up with $4 million more of equity. If you have the money to put in, you can still do it. If not, you're going to have to not do it. But even if you do have the equity, a developer would have to charge higher rents because he needs a return on that equity.
Last year when we talked, you mentioned kind of overhauling some of the elements of your website or online capabilities. How is that process going?
We believe we're the only bank in the country of our size that has built its own online banking platform. Everyone else relies on Fiserv, FIS, Jack Henry and then just white-label it. We have built that, and the benefit of that is we control our own destiny. We're doing upgrades every 30 to 45 days. Our clients are thrilled with our online banking.
We're just able to add full functionality that we couldn't before. One example is the ability to download tax statements. That's not new; it's fundamental; it's an expectation, and now we have it.
We just rolled out the most important enhancement about six weeks ago. We now allow you to call in, and your voice is your password. You no longer have to give your mother's maiden name or your dog's nickname. Now your voice is your password.
How much did that overhaul cost?
We're not putting an exact figure on it. It's all part of our operating expenses. We haven't capitalized any of it, so it's in our operating expenses. Last quarter, our efficiency ratio went down to 53% because of growth and margin. Many others are trying to maintain their efficiency ratio by cutting expenses. Our philosophy is, Let's continue to make investments and grow the top line, and that's exactly what's happening.
So how do you slow down loan growth?
Two things. The underwriting is formulaic, right? So we look at debt service coverage ratio. When interest rates are higher, what you have to pay for debt service is higher, so that will limit the loan amounts in and of itself. It's a natural kind of hedge. Then the other thing is the margin or the credit spread that we can put on it. We can increase or decrease your credit spreads. We're increasing credit spreads to say, "Yeah, we can make a loan, but it's gonna cost more." It's not just going to be whatever the index is plus 200 basis points. It's going to be the index plus 250 or 300.
What's the latest update on return-to-office at WaFd?
If you came down to our office today, you would increase the population by 50%. We're not going to be leaders in return-to-office. We kind of meet our employees where they want to be met. We're probably on pace for our best year ever.
We're not going to push anything. We want to create an environment where people want to come to work to be alongside their colleagues so they can be productive and build relationships and build our culture, but we're not going to mandate anything.
