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Originally published February 23, 2013 at 8:01 PM | Page modified February 24, 2013 at 2:10 PM

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Size matters for Washington’s recovering banks

Some but not all Washington banks have bounced back from the recession.

Seattle Times business reporter

Fourth-quarter profits sparkle

Here’s how Washington banks and thrifts stacked up on quarterly return on average equity, a key measure of profitability.

Washington Federal: 7.6 percent

Columbia Bank: 8.0 percent

HomeStreet Bank: 27.7 percent

Sterling Savings: 7.4 percent

Banner Bank: 12.1 percent

Source: SNL Financial

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Washington’s biggest regional banks are on a buying spree and booking healthy profits.

Not a single community bank in the state failed last year, for the first time since 2008.

And the state’s banks, as a group, have the highest capital levels in at least two decades.

That’s the good news.

Meanwhile, however, almost one in five Washington community banks and thrifts is losing money. Many are still saddled with a high level of delinquent loans and foreclosed properties. And they are hiring pricey consultants to comply with a blizzard of new regulations from the 2010 Dodd-Frank reforms passed by Congress.

“Right now on my desk today I have a mortgage loan officer compensation rule that is 540 pages long,” said Laurie Stewart, CEO of Seattle-based Sound Community Bank, a modest institution with about $382 million in assets. “I defy any bank our size to have the internal expertise to assimilate that many pages.”

Over the next three years the pressures of regulation, narrowing margins and limited lending capacity — as well as the aging of chief executives who are nearing retirement — will spur more of the state’s small banks to sell to the highest bidder, say industry experts.

“For those banks that have just got enough capital to survive, they really can’t go anywhere else,” Stewart said. “A merger is more appealing than it would have been in a different environment.”

There were 71 Washington banks and thrifts at the end of 2012, down from 97 before the Great Recession, and the number continues to drop:

In January, Westside Community Bank in University Place, Pierce County, became the nation’s first bank failure of 2013, at an estimated loss to the federal deposit insurance fund of $20.3 million. California-based Sunwest Bank acquired its assets.

The same month, the parent company of Heritage Bank in Olympia acquired Northwest Commercial Bank in Lakewood.

And next month Lynn-wood’s Pacific International Bank expects to close an $8.2 million deal to merge into Los Angeles-based BBCN Bank, the nation’s largest Korean-American bank.

Even as small Washington banks get bought or merge, large Washington banks are expanding their reach through deals in Oregon and California.

The biggest one: Columbia Bank’s bid for Oregon-based West Coast Bancorp, a $506 million transaction that executives call the largest Pacific Northwest bank deal done without government assistance since the 2008 financial crisis.

The combination creates a bank with $7.2 billion in assets and more than 150 branches, mostly along the I-5 corridor. The deal is expected to close this quarter.

In November, Washington Federal finalized its acquisition of Oregon’s South Valley Bank & Trust for $44 million in stock and cash. The combined company has 190 offices in eight states and total assets of over $13 billion.

Meanwhile, Spokane-based AmericanWest picked up California-based Inland Community Bank and expects this year to close a $58 million deal for Oregon’s PremierWest Bank, with 32 branches in Oregon and Northern California.

This quarter, Spokane-based Sterling Financial expects to close a $6.5 million deal for the parent of Borrego Springs Bank in Southern California. It also announced in December it was buying Boston Private Bank & Trust’s Seattle-area operations.

But the environment for banks is not all rosy.

Banks overall saw their deposits mushroom during the financial crisis because the Federal Deposit Insurance Corp. lifted its limit on protecting deposits in non-interest-bearing accounts. On Jan. 1, the FDIC reinstated its coverage limit of $250,000.

“You’re seeing some of that money flow out into other places like money-market funds,” said Sara Hasan, a banking analyst with McAdams Wright Ragen, a Seattle brokerage.

Regulators expect banks to maintain core capital of at least 10 percent of assets: At the end of 2012, only half of Washington’s commercial banks had capital levels of at least 10.5 percent of their assets. A quarter of commercial banks had capital ratios of 8.8 percent or less.

If deposits decline significantly, banks may curb lending. But for now, banks are competing fiercely, which should help small businesses find good loan terms.

“It’s a market share game” because loan demand isn’t what it was in 2006, said Cort O’Haver, executive vice president of commercial banking for Umpqua Holdings, the Portland-based parent of Umpqua Bank.

Winning that game means standing out. To that end, HomeStreet Bank in Seattle has launched its first major ad campaign in more than five years — including two TV ads in which plain-dressed youthful men impress, one with break-dancing moves, the other by standing up to a bar bully. The bank said its ads use a blend of humor and “unusual settings” to portray its bankers as friendly, smart and committed to customers.

HomeStreet has been a major local winner in the mortgage-refinance boom, analysts say. The bank posted a 27.7 percent return on average equity in the fourth quarter last year, ahead of all but two Washington banks and thrifts — the much smaller Seattle Bank (29.8 percent) and Fife Commercial Bank (39.9 percent), according to SNL Financial.

In the same period, the local banks with “Texas ratios” — troubled loans as a percentage of capital and loan-loss reserves — well over 100 percent were Eastside Commercial in Bellevue, Business Bank in Burlington and Prime Pacific in Lynn-wood, according to SNL.

But some once-troubled banks like Seattle-based First Sound Bank have come back from the brink: CEO Pat Fahey said the bank recently hired a new loan officer, a positive move for a bank that slashed three-quarters of its staff during the Great Recession and almost failed in 2011. This past week the small bank said it had raised $7.9 million in capital and retired all $7.4 million in preferred stock issued to the Treasury in 2008 at the height of the financial crisis.

“I think we’re going to be creating jobs rather than losing them,” Fahey said.

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

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