Columbia Banking System Inc. is living in limbo, and it's not complaining.

The banking company wants to grow, and is one of the few Pacific Northwest banks healthy enough to do so with acquisition. But it's also boxed in, operating in a geographic area where government-brokered deals are waning and traditional ones are not yet on the horizon.

This paradox has led the Tacoma., Wash., company to take small, deliberate steps with expansion rather than leaps since raising $240 million a year ago. Columbia managed to win two failed banks on back-to-back Fridays in May, but it hasn't landed a big one. The recent purchases added a total of $313 million of assets, but hardly made a dent in its capital.

Columbia "can add about $3 billion more in assets," but "there's just not a lot of expectations for open bank M&A," said Brett Rabatin, an analyst at Sterne Agee Leach Inc. "If you told management they would have not made a meaningful acquisition by now, they would have been surprised."

Analysts said a stagnant merger environment in the Pacific Northwest reflects recapitalizations among once-struggling banks.

Traditional acquisitions — absent capital injections — have been virtually nonexistent in the Pacific Northwest since mid-2007, when Banner Corp. bought NCW Community Bank and Washington Federal Inc. bought First Mutual Bancshares Inc. in Seattle.

Since then, most deals have involved recapitalization, such as Sterling Financial Corp.'s $730 million injection in August. With struggling banks getting capital, this takes out a chunk of likely targets for deals involving the Federal Deposit Insurance Corp.

"If you had told me a year and a half ago that we'd be midway through 2011 and had not seen a significant amount of activity [in M&A], I'd certainly be surprised by that," said Jeff Rulis, an analyst at D.A. Davidson. "The significant FDIC closures are now done."

Columbia raised capital in May 2010 after buying two failed banks in January 2010 in hopes that there would be more deals.

"We certainly expected … more FDIC resolutions at a greater speed, and we also had really hoped that the economy would be coming back faster," said Melanie Dressel, Columbia's president and chief executive. But "we still see plenty of opportunities for unassisted and assisted transactions."

To Columbia's credit, the company has been growing organically, opening branches and hiring more commercial loan officers.

"All banks are finding it very challenging out there to grow their loan books and to increase their assets, but the banks that are better positioned like Columbia have been hiring people and are looking to take additional market share," said Aaron James Deer, an analyst at Sandler O'Neill & Partners LP.

Columbia faces competition from nearby banks that have recapitalized and healthy banks also wanting to grow, mostly in commercial and industrial loans.

For example, Umpqua Holdings Corp. in Portland, Ore., expanded its commercial banking team in Walnut Creek, Calif., launching a business-banking division earlier this year. Upmqua's bank also made several failed-bank purchases last year before actively adding branches and commercial loan offices.

Despite competition and lack of deals, Deer said he likes Columbia's strategy with acquisitions and organic growth. "They're doing exactly the right thing," he said. "They're looking for opportunities, but they're not getting overly aggressive … they're looking to be very thoughtful and strategic in how they deploy their excess capital."

Dressel said that the company has been talking with prospects, and that in general the prospective sellers understand that growth will be limited because of the slow-moving economy and the regulatory environment. As for the company's organic expansion, Dressel said the bank is "pouring loans on the books every single day" but that's being offset by a decline in line-of-credit use.

Rulis said there should be a few more FDIC-assisted deals that could meet Columbia's needs.

But analysts agreed that it would likely be 2012 before traditional acquisitions would become widely available in Columbia's primary markets of Washington and Oregon.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.