Washington banks trail industry in key indicators

Washington's economy may be doing better than the nation as a whole, but the banks based here are not.

Although Washington state doesn't have the plummeting home values or mass foreclosures that have stunned Florida and California, publicly traded banks in the state as a group trail the industry in profitability and have a higher share of sour loans than the national median.

What's more, banks in the state are setting aside far less money to cover their losses than their peers across the country.

"These banks probably did a decent amount of business with California builders, so the whole West Coast was hit hard," said Sebastian Hindman, a senior analyst at SNL Financial in Charlottesville, Va.

Washington Mutual, which was based in Seattle, became the largest bank failure in U.S. history in September when it was seized by federal regulators after devastating losses in its mortgage portfolio.

Hindman looked at 16 other state banks and found that while they are well-capitalized by industry standards, their performance lags their peers.

Five publicly traded banking companies in Washington were not profitable for the 12 months ended Sept. 30, according to data compiled by SNL.

They are AmericanWest Bancorp., of Spokane; Banner Corp., of Walla Walla; Cowlitz Bancorp., of Longview; First Financial Northwest, of Renton; and WSB Financial Group, of Bremerton.

Victor Karpiak, CEO of First Financial, said its profits turned negative last year when it converted from mutual to stock ownership and donated more than $16 million in stock to a new foundation it created to meet community needs.

He blames construction loans for a rise in First Financial's "nonperforming" loans, which are loans on which a bank is no longer collecting interest.

The company has money set aside to cover only 35 percent of its nonperforming loans should they become "charge-offs," which happens when a bank has given up ever collecting on them.

That is below the 47 percent ratio for the group of 16 Washington banks. And the state's banks as a group trail far behind the 91 percent that banks nationwide have set aside for potential loan losses.

Ideally a bank would have reserves totaling at least 100 percent of its nonperforming loans, according to Hindman at SNL.

But Karpiak said that historically, First Financial has charged off very few loans. "I'd have to go back 15 years to see when we wrote off maybe $20,000," he said.

First Financial added about $3.5 million to reserves last quarter to help cover potential losses, Karpiak said, and executives look at the loans each quarter to see whether they should set aside more.

Some of the state's banks are suffering more than others.

One of the hardest hit is WSB Financial, the parent of Westsound Bank, which posted a return on average equity of negative 41.5 percent for the 12 months ended Sept. 30. The median for 16 Washington banks was 2.99 percent, and the national median was 4.81 percent.

WSB's former CEO resigned last March around the same time the Federal Deposit Insurance Corp. told the company to correct its lending practices. The Federal Reserve Bank of San Francisco designated Westsound a "troubled" institution and put it under closer supervision.

WSB's reserves are only 21 percent of nonperforming loans, far from the ideal 100 percent. That's partly because WSB has so many nonperforming loans.

CEO Terry Peterson decided when he arrived last April that rather than continuing to renew Westsound's substantial portfolio of construction loans, any that were not being repaid would be reclassified as nonperforming loans so that depositors, shareholders and regulators could see how much it was holding.

WSB is helping problem borrowers market and sell their properties, and when they are unable or unwilling to do that, "we are aggressively pursuing a remedy that gets us in possession of that property so we can market it to investors," Peterson said.

Its loan portfolio is shrinking, which is good for the bank, and its third-quarter net loss of $4.3 million was improved from a net loss of $7.8 million a year earlier.

Many banks lined up for money from the U.S. Treasury's Troubled Asset Relief Program (TARP), part of Congress' $700 billion economic bailout package.

The largest infusion announced statewide is $303 million for Sterling Financial of Spokane. Others include Washington Federal of Seattle ($200 million), Banner ($124 million), Columbia Banking System of Tacoma ($76.9 million), Cascade Financial of Everett ($39 million) and Heritage Financial of Olympia ($27.6 million). Those recent infusions are not included in SNL's analysis.

Frontier Financial, of Everett, is still waiting to hear about its TARP application. Stock traders became so alarmed about the prospect of it being rejected that they sent shares plummeting last month.

CEO John Dickson took the unusual step of releasing a public statement saying that the bank was still awaiting word and had not been turned down.

The bank is still waiting. "There are over 7,000 banks in the country, and I don't know exactly how they prioritize, but there are more that haven't been approved than have been approved," Dickson late last month.

"Unfortunately, the stigma with government money is if you don't get it, you're not going to survive, which is absolutely not true," he said. "We are still well-capitalized and still have excellent liquidity."

Indeed, all 16 of the publicly traded banking companies that SNL looked at in Washington are well-capitalized, according to analyst Hindman.

Meanwhile, two local banks that aren't publicly traded are approaching the chaotic stock market with plans for initial public offerings.

Anchor Bancorp in Lacey and 1st Security Bancorp, of Mountlake Terrace, recently filed papers to convert from mutual to stock ownership. Anchor CEO Jerry Shaw, whose bank hopes to raise as much as $60 million, declined to comment.

1st Security, which plans to raise $19 million to $30 million, sees the credit crunch as an opportunity to gain market share, said CEO Joe Adams.

"A lot of banks are in a position where they literally can't lend," he said. "They're either lent out, or they're spending the majority of their time dealing with asset problems."

1st Security, which converted from being a credit union in 2004, does not have many real-estate loans. The IPO plans do not surprise Bob Rogowski, managing director of corporate finance at McAdams Wright Ragen in Seattle.

"Everybody's looking for capital in all kinds of places," he said.

Melissa Allison: 206-464-3312