Special Reports - 2011 Best in Banking

Community Banker of the Year: The Builder

Failed-Bank Deals Fuel Rapid Growth at Columbia State

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The bubble years were not the best of times for Columbia State Bank President and Chief Executive Melanie Dressel.

While many of her bank's competitors were supercharging profits by using brokered deposits to fund high-risk, high-reward construction loans, Dressel was taking heat from analysts and investors for sticking to a more basic community banking model of gathering deposits locally and lending to the most creditworthy borrowers.

"I cannot tell you how many times we stood in front of investors and they would say, 'Why aren't you producing the same kinds of returns as these other banks?'" Dressel said. "It was difficult to get them to understand" Columbia's strategy.

Turns out Dressel knew just what she was doing. The Tacoma, Wash., thrift, a unit of Columbia Banking System Inc., did not just weather the financial crisis better than most of its competitors, it has thrived largely by picking up the scraps.

Since the start of 2010, Columbia has acquired five failed banks, boosting its assets by 50%, to $4.8 billion.

Meanwhile, with many of its remaining competitors still more focused on clearing out problem loans than making new ones, Columbia is seeing strong organic growth in many of its markets.

The result: Through the first nine months of 2011, Columbia Banking System reported a profit of $33.3 million, up more than 150% from the same period in 2010. Thanks in large part to its high levels of low-cost core deposits, its net interest margin through the first nine months was 5.96%, significantly above the industry average.

Aaron James Deer, an analyst with Sandler O'Neill & Partners LP., said that margin growth and loan growth are the "two biggest headwinds facing the industry." Columbia, he added, "is doing well on both fronts."

For having the confidence to stick with a traditional community banking approach while others chased the easy money, and for deftly capitalizing on competitors' woes, Dressel has been named by American Banker as one of its Community Bankers of the Year for 2011.

But the Columbia story is far from complete. Dressel expects there will be "quite a bit more consolidation in the Pacific Northwest" and she says that Columbia intends to remain an active acquirer. "Our long-term vision is we want to be a Pacific Northwest regional community bank, with the emphasis on community," said Dressel, 59.

Dressel has spent her career in banking, although at a young age she thought she was destined for a career in law. She grew up in the timber-farming town of Colville, Wash., about 40 miles south of the Canadian border in northeastern Washington. Dressel's parents owned a jewelry retail store and as a girl, Dressel would sometimes work behind the counter.

"I grew up learning how to take care of customers," she said.

Shortly after graduating with a political science degree from the University of Washington in Seattle, Dressel got married and entered the work force. Although she graduated early with the intention of enrolling in law school, Dressel liked that bankers worked a Monday-to-Friday schedule, which was appealing to a newlywed, and she hasn't left the industry since.

Her first job was a clerical one in the Tacoma branch of Bank of California, which later merged with Union Bank. She rotated through a series of positions in several different departments over a 14-year period, eventually landing in private banking. After a stint at Puget Sound National Bank, Dressel joined Columbia in 1993 as senior vice president and private-banking manager. She later was promoted to president and CEO of Columbia Bank and was named CEO of the holding company in 2003.

James Will, a Columbia board director since 1993, cited Dressel's background in private banking for helping the bank diversify. Under Dressel, Columbia has beefed up its trust department, sought out new clients in the nonprofit sector, started offering accounts-receivable and equipment financing, and began providing foreign currency-exchange services to clients with international sales divisions, Will said.

Will added that it was Dressel's reluctance to follow the pack that largely kept the bank out of trouble after the real estate market went bust.

"She's been running the bank very conservatively and that really helped us get through that difficult period," said Will, who owns several automobile dealerships in Tacoma and Olympia. The decision to diversify outside real estate — about 44% of its loans are commercial loans — also was key, said Donald H. Rodman, who has been a director of Columbia since 1991.

"We've stayed away from housing development-type projects, and that kind of saved our bacon," said Rodman, owner of the real estate developer Rodman Realty in Longview, Wash.

To be certain, Columbia did not escape the financial crisis unscathed. The company posted losses in 2008 and 2009 largely because a decline real estate values led to a surge in borrower defaults. But Columbia managed to maintain healthy levels of capital, which allowed it to pounce while others were struggling to survive.

Columbia struck its first failed-bank deal in January 2010 when it took over the $955 million-asset Columbia River Bank in The Dalles, Ore., and followed up a week later with a deal for the $329 million-asset American Marine Bank in Bainbridge Island, Wash. It bought two more failed banks in May 2011, the $142 million-asset Summit Bank in Burlington, Wash., and the $173 million-asset First Heritage Bank in Snohomish, Wash., and added a third failed bank this year when it took over the $550 million-asset Bank of Whitman in Colfax, Wash.

The deals have generally won the approval of investors and analysts that at times had been impatient with Dressel, who has been president and CEO of the holding company since 2003.

During a May 2008 conference call, Dressel found it necessary to tell analysts explicitly that she intended to stick with her strategic plan despite what competitors were doing. "We are being realistic about what we see going on out there in the market," Dressel said in May 2008, according to a transcript of a conference call. "That has caused us to just be even more diligent in the management of our portfolio."

Still, while there were some investors who were frustrated with Columbia's average returns, most long-term banking industry investors understood Dressel's strategy, Deer said. "It was that we were in a really strong economic environment, and some people looked around and saw other banks growing very rapidly" but not Columbia, Deer said. "But folks who know banks well and have been active investors tend to stand by banks that take a more prudent approach to how they invest in their loan portfolios."

Columbia's deals for failed banks exposed the bank to new industries and markets. Buying Columbia River Bank, for example, got the bank into agriculture, a big industry in the Willamette Valley of Oregon and the Palouse region of eastern Washington. Included in agriculture are loans to the burgeoning wine-growing industry in Washington and Oregon, Rodman said.

Dressel has developed a reputation as a "thoughtful acquirer," Deer said. Though some of the deals have been in-market acquisitions that resulted in some overlap, he said Columbia has resisted taking "a slash-and-burn approach to finding cost saves."

James Will, the board member, said that slashing and burning would not be Dressel's style. Under Dressel. he said, Columbia has become an employment destination for other bankers in the region.

"It's certainly one of the best places to work in our community," he said. "She's created a culture that people want to come to work at Columbia."

So what's next for Columbia under Dressel?

Before the recession, Columbia already had been trying to expand through acquisitions — it bought three banks in Washington and Oregon between July 2007 and April 2008 — and it has the capital to do more open-bank deals.

Columbia accepted $77 million from the Treasury Department's Troubled Asset Relief Program in 2008, even though its capital levels were already solid. Columbia repaid its Tarp investment in September 2010.

Columbia also has completed two public offerings, raising $120 million in August 2009, and another $229 million in April 2010. At Sept. 30, Columbia's tangible common equity ratio was 13.2%, and its total risk-based capital ratio 21.9%, according to Deer, both well above industry averages.

Dressel said it is looking hard at Idaho as an area for expansion, as well as other regions in the Northwest, and she expects that "director fatigue" among board members at struggling community banks will lead to additional consolidation in the market.

Still, don't expect Dressel to get too aggressive, even with its big war chest of capital. During a February conference call to discuss Columbia's second-quarter earnings, Dressel told analysts that while she's looking to buy other banks, "We're not going to do anything crazy. We're going to maintain our discipline."

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