One of the most important things Roy Whitehead does as head of Washington Federal is stifle creativity. Whitehead says he knows employees want to express themselves but "every...

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One of the most important things Roy Whitehead does as head of Washington Federal is stifle creativity.

Whitehead says he knows employees want to express themselves but “every one of those ideas adds costs and complexity.”

Take external e-mail, for example.

“This is a hard admission to make,” Whitehead, 52, says with a world-weary look, “but we’re in the process of installing it.”

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Seattle-based Washington Federal, parent of Washington Federal Savings, prefers to stay behind the times, with no online banking, no ATMs and no voice mail. It has stuck with passbook savings and eschewed free checking accounts.

Unlike most mortgage lenders, Washington Federal keeps loans on its books rather than sell them on the secondary market. And when fixed-rate mortgages dipped below 5.25 percent in 2003, the thrift simply held its money instead of making loans while rates were at historic lows.

The bank’s strategy made no sense at the time to Paul Miller, an analyst at Friedman Billings Ramsey.

Washington Federal

$7.17 billion

Market share in Washington: 2.53%*

Employees: 754

Branches: 119

States: Washington, Idaho, Oregon, Utah, Nevada, Arizona, Texas

*based on June 30 statewide deposits of $2.22 billion

“We said, ‘You should use that capital in buy-backs or whatnot,’ and they said, ‘We’re just going to wait and sit on our capital,’ ” Miller recalls.

Whitehead says that when Washington Federal was sitting on $1.4 billion in cash, “every analyst who came to town said, ‘You’re an idiot.’ ” But he stood his ground, and now the thrift is investing that money at higher rates than it could have a year ago.

Washington Federal’s old-fashioned approach means that it operates one of the most efficient financial institutions in the country, pays a handsome dividend and has earned a loyal following of customers and analysts. It also boasts of never having laid off an employee.

“They’re very disciplined, they don’t go outside their expertise and they have patience. If the business model comes under stress, they won’t do stupid things,” Miller says.

Whitehead acknowledges that, unlike most publicly traded companies, “We don’t really pay much attention to earnings from one quarter to the next.”

No rush to market

Indeed, Washington Federal posted net income declines in the fiscal years ended Sept. 30, 2003, and 2004, largely because it was unwilling to run full speed into the red-hot mortgage market for fear of being burned.

Its stock has underperformed the Nasdaq bank index for the past two years but still gained 35 percent during that time.

The company’s measured strategy enabled Washington Federal to weather the 1980s and early 1990s, when many savings and loans failed.

“If most institutions had stayed with what they had, it would have been self-correcting. We think their junk-bond and commercial-loan speculation took them down,” Whitehead says.

He joined Washington Federal in 1998 after a career with large banks; in 2000, he became the fifth chief executive since the thrift was founded in 1917.

Washington Federal is the state’s second-largest thrift, with assets of $7.17 billion compared with Washington Mutual’s $288.8 billion.

As a veteran of big banks, Whitehead thought it was a typo when he first saw Washington Federal’s impressive efficiency ratio, which measures an institution’s costs as a percentage of revenue.

The efficiency ratio for fiscal 2004 was 18.57 percent, less than a third of the average 57.74 percent for all federally insured institutions during the first nine months of 2004, according to the Federal Deposit Insurance Corp.

Penny pinchers

Whitehead quickly soaked up the penny-pinching culture of Washington Federal, impressing at least one analyst with his frugality.

Jamelah Leddy, an analyst at McAdams Wright Ragen, says that when she first met Whitehead, he told her he avoided the high cost of airport parking by hopping a bus downtown to make his flights.

“They are not into flashy perks that are going to cost their shareholders money,” Leddy says, still marveling at the mental image of a bank CEO taking the bus to keep costs low. “They are watching every penny, quite literally.”

Despite having 754 employees and 119 branches in seven states, Washington Federal has fewer than 10 people in its information-technology department.

The thrift saves money in that and other areas largely because its deposit customers — the high-balance, low-transaction kind that banks love — do not demand ATMs, online banking or a 24-hour call center.

They want good interest rates on their deposits and they prefer talking to their bankers in person, according to Whitehead.

No hard sell

Unlike customers at other banks, they do not have to worry about being cross-sold for loans or other products. For one thing, Washington Federal’s emphasis on simplicity means it does not have a wide array of products.

And it makes loans in niche markets, such as custom-construction lending and non-owner-occupied lending, that do not tend to overlap with its deposit-customer base.

Whitehead often hears that his deposit customers, made up primarily of senior citizens who have high balances and want high interest rates, someday will be replaced by a new group demanding online banking and ATMs.

He doubts it, saying that as people age, they often want more personalized service.

Analysts mostly buy into that philosophy. Miller, for example, figures, “There’s always a new set of old people coming in” because they want Washington Federal’s higher deposit rates.

Times change

Still, Whitehead acknowledges, “I’m certain that as time wears on, we’ll have to adopt more delivery methods. But I would just as soon defer it as long as possible.”

Take the external e-mail, which Whitehead postponed as long as possible, until real-estate appraisers and other vendors began charging the thrift for using faxes instead.

Whitehead still has concerns about external e-mail, among them security, litigation risk, the cost of help desks and system upgrades. His explanation could form a page in the Washington Federal management creed:

“There are all kinds of inefficiencies related to technology that are overlooked in the zeal to have the latest gadget.”

Melissa Allison: 206-464-3312 or