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Originally published December 10, 2011 at 10:01 PM | Page modified December 10, 2011 at 10:08 PM

For state's banks, 2011 is a profitable year

Many Washington banks and thrifts are on track to make 2011 a profitable year — but experts say the industry needs more consolidation to be healthy.

Seattle Times staff reporter

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Many Washington banks and thrifts are on track to make 2011 a profitable year — but experts say the industry needs more consolidation to be healthy.

After three unprecedented years of losses for the sector and the disappearance of more than two dozen institutions, Washington's banking industry posted a third-quarter profit of $116.9 million, double its profit in the previous quarter and a sharp contrast to the $88.7 million loss in the same period a year ago.

To be sure, the sector is far from healthy. Historically, the benchmark for good performance was a 1 percent return on assets. In the third quarter, the median return for Washington's 73 banks and thrifts was 0.43 percent, the Federal Deposit Insurance Corp. reported last week. Still, that return is an improvement over 0.22 percent in the same quarter a year ago and a negative 0.84 percent in 2009.

Some observers say the sector must shrink further before those figures get better.

"The number of banks has to go down," said Tim Coffey, a San Francisco research analyst for FIG Partners, a brokerage firm that specializes in community banks.

"The only way for the average bank to make any money right now is to reduce expenses," such as closing branches and laying off employees, he said.

Roy Whitehead, CEO of Washington Federal, the biggest bank headquartered in the state, agrees the industry needs more consolidation.

"There's tremendous overcapacity in the industry," he said. At the Seattle-based thrift, "we have no use for additional deposits. We have more cash than we can put to work."

Part of the reason the industry has become profitable this year is because the ones losing money disappeared, having failed or sold to stronger banks.

The surviving banks and thrifts have brought in more income from selling new mortgages to the secondary market, disposing of foreclosed properties and reducing the number of soured commercial loans as their borrowers' businesses improve.

A few banks, such as Tacoma-based Columbia Bank and Spokane-based AmericanWest Bank, have added to their bottom lines also through acquisitions.

Columbia Bank bid successfully for Burlington-based Summit Bank, First Heritage Bank in Snohomish and Bank of Whitman in Colfax.

Mark Nelson, Columbia's chief operating officer, said he expects fewer bank failures next year.

"With the economy slowly improving and more banks that had problems resolving their issues, that opportunity is starting to go away," Nelson said.

Strong performers

Only five Washington banks posted third-quarter returns on average equity that exceeded 13 percent, which was the average return from 2000 to 2006, according to SNL Financial, a leading research firm on the banking industry.

HomeStreet Bank, which postponed its initial public offering again this past week, had the strongest showing — a 49 percent return — but loan demand didn't fuel most of those gains.

The Seattle bank, which is barred by law from commenting on its financial results due to its pending IPO, has slashed its cost of funds over the past two years.

Since the third quarter of 2009, advances from the Federal Home Loan Bank of Seattle and brokered deposits have fallen from $1 billion to $67.9 million, while core deposits have risen from 64 to 94 percent of bank funding, according to a recent filing with the Securities and Exchange Commission.

HomeStreet also set aside $26.2 million less for loss reserves in the first nine months of this year compared with last year. While it gained $30.4 million from selling loans, it lost $23.2 million from selling foreclosed properties, according to federal data.

The other banks that posted high returns on equity in the third quarter were Community First Bank in Benton County (17.9 percent, Baker-Boyer National Bank in Walla Walla (15.4 percent), Cashmere Valley Bank in Chelan County (14.2 percent) and Central Valley Bank in Yakima County (14 percent).

Mergers

One out-of-state player that made big bets on Washington state's economy is doubling down.

Almost exactly a year ago, California-based SKBHC Holdings picked up bankrupt AmericanWest Bank in Spokane and infused it with fresh capital.

In 2011, AmericanWest Bank acquired Bellevue-based Bank of the Northwest and Seattle-based Viking Bank, positioning it to be a viable competitor in a fiercely contested growth market.

"I don't think loan demand is strong," said AmericanWest CEO Scott Kisting. "I think the loan-growth issue is a zero-sum game right now: I think you have to take good customers away from other banks."

The bank inherited a large portfolio of troubled loans, and Kisting said he's pleased the bank was able to sell or restructure nearly $80 million of them.

In the future, AmericanWest expects to reduce its commercial real-estate loan portfolio and expand its loans to small and medium-size businesses.

The flurry of bank mergers predicted at the beginning of 2011 didn't materialize, several bankers say, because of sellers' price expectations and the beaten-down bank stocks, which are a key ingredient in financing deals.

Kisting said AmericanWest still has more than $350 million in capital to spend on bank acquisitions.

"I see 2012 as a year in which we'll continue to do acquisitions in the Pacific Northwest and hopefully some in Northern California, and also grow organically," he said.

Challenged banks

Some Washington banks still face challenges. According to the SNL research firm, at the end of the third quarter 10 Washington banks still had "Texas ratios" above 100: For every $1 in loan-loss reserves and capital these banks had, they had more than $1 in nonperforming and past-due loans.

First Sound Bank in Seattle had a Texas ratio above 200, one of the highest among Washington banks.

Earlier this year, a jury handed down a verdict that could cost it $2.3 million. An attorney told the court that the bank, which is under scrutiny by regulators, may not be able to afford such a judgment.

The bank did not respond to a request for comment.

Seattle-based Regal Financial Bank, which began a $12 million private placement over the summer, had a Texas ratio above 200 at Sept 30. This past week Randy James, the bank's CEO, said Regal had commitments for just over $5.5 million and was optimistic that it would be "our last capital campaign."

The business bank has reduced its foreclosed property holdings by nearly half and has no loans 30 days past due.

"It's the first time we've ever been able to say that," James said.

The Seattle market remains one of the best in the nation for growth, bankers say. The recent contract between Boeing and its unionized workers, Amazon's expansion and similar healthy growth at other large companies headquartered here can only spell upbeat earnings for banks, said Whitehead, Washington Federal's CEO.

"We expect the local economy to perk up a bit in the next year."

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com

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