Nestled among the art galleries, coffee shops and loft apartments of Portland, OR's Renaissance-style Pearl District lies Ray Davis's latest effort to bolster his bank's image as a trendsetter. The 3,500-square-foot Umpqua Bank outlet here looks and feels more like a hotel lobby. Customers in plush chairs access the Web on their wireless laptops while sipping Umpqua-branded coffee. Others browse the magazine rack just below a television tuned to CNN Headline News. "We call it sip, surf and read," Davis says. Those that transact get their cash or receipts on a silver tray, a la the Ritz-Carlton, accompanied by an Umpqua chocolate. At night, the branch plays host to poetry readings, book signings and so-called "stitch-and-bitch" sessions, where neighborhood residents sew and chat, and even watch the occasional movie. "It's more than a bank," Davis proclaims, "it's a community center."
Some might think it hokey, but innovative marketing has helped make Umpqua one of the fastest-growing banks in the country. Since Davis took the helm 10 years ago, it has blossomed from a small rural bank into a $5 billion-asset powerhouse with 91 branches along the I-5 corridor, from Portland to northern California. Acquisitions have helped. But it's the bank's quirky image that has allowed it to grow organic deposits at a 20 percent annual clip. Next up: Seattle, the region's largest market, where a de novo office is planned this year. "The greatest asset this bank has is its culture," Davis says. "We're doing little things all the time to create a buzz."
Davis, named the Pacific Northwest's "Entrepreneur of the Year" in 2004 by Ernst & Young, isn't the region's only hot banker, nor is Umpqua its only banking success story. Despite a recession that's been tougher here than in most other places, no Oregon or Washington banks failed during the recent recession. Not only that, the region's banks have outperformed their peers nationally by a comfortable margin. Jim Bradshaw, a bank analyst for D.A. Davidson in Portland, says the average return on equity for banks in the region is a gaudy 15 percent, compared to 12.8 percent nationally. "It's the first recession I can recall where banks grew their earnings through a fairly significant downturn," he says. "If you looked at bank performance, you'd never even know there was a recession."
Virtually overnight, it seems, an entire new class of high-performing banks in the $1 billion-asset to $7 billion-asset range has emerged. They've been led by Umpqua-which in 1999 controlled less than one percent of Oregon's deposits, but today boasts a 6.2 percent share, according to FDIC figures-and Sterling Financial, a Spokane, WA savings bank that was a mere blip on most rivals' radar screens five years ago, but now has $7 billion in assets and roughly three percent of deposits in both states. Other high fliers include $970 million-asset Cascade Bancorp in Bend, OR, which saw loans, deposits and revenues all soar by 29 percent or more during the last fiscal year, and Everett, WA-based Cascade Financial, a $1.1 billion-asset former thrift that increased third-quarter net income 28 percent over the previous year.
Acquisitions are often part of the formula. Umpqua has been an active acquirer-its 2002 deal for the old Centennial Bancorp gave it a strong Portland foothold-and Sterling has bought its way into Oregon, including a 2004 deal for the $1.5 billion-asset Klamath First Bancorp. But most have been adept at snaring customers on their own, too. "Customers are voting, like they do when they decide to go to Wal-Mart instead of Kmart, and locally run banks are winning," says Bob Sznewajs, CEO of West Coast Bancorp, a $1.7 billion-asset business lender in suburban Portland that increased per-share earnings 16 percent in the period and reported zero loan charge-offs.
Investors are taking note. Since a mid-summer swoon, stocks of the region's publicly traded banks have been on a tear, thanks to record earnings reports and an improving economic outlook. Umpqua, both Cascades and the likes of Walla Walla, WA-based Banner Corp., Spokane's Sterling Financial and Everett's Frontier Financial have seen share prices spike by 20 percent or more. Several now fetch P/Es above 20. "Especially in the last few quarters, we've seen a real improvement in performance and share prices," says Erika Hill, an analyst with Ragen MacKenzie in Seattle.
It's impressive, especially given that these haven't been the best of times for Oregon and Washington. The region's economic fortunes have long been tied to timber and other natural resources and, in the Puget Sound area, Boeing. More recently, the "Silicon Forest" has sprouted a big-time technology industry, anchored by Microsoft in Seattle and, to a lesser extent, Intel, a big Portland employer. The tech bust of 2000 hit the region hard; the slump in air travel post-9/11 was another blow. Through much of the past few years, the two states have battled each other for the nation's highest unemployment rate. Oregon witnessed three straight years of net decline in number of jobs, says John Mitchell, a Portland-based economist for U.S. Bancorp, while Washington experienced two. Even after some recent gains, Oregon's unemployment rate of 7.1 percent is well above the 5.5 percent national average.
Despite that, it's not unusual to see banks here turning in returns on equity in the 20 percent-plus range. Ask bankers to explain such success, and you get a variety of answers: the economy is in better shape than moribund unemployment figures suggest; faster population growth and younger demographics lead to a more-profitable mix of loans and deposits; a legacy of large dominant banks are both ripe for the picking-of market share and talent-and a stabilizing influence on the market; prudence, in lending practices and the way excess profits were managed during the 1990s boom, provided firm footing for the downturn.
All these factors have no doubt played a role. But perhaps the best explanation lies in a crop of smart, edgy CEOs blessed with compelling visions and the ability to impart them to their teams. From the earthy relationship-building ways of Patricia Moss's Cascade Bancorp and buttoned-down professionalism of Sznewajs's West Coast, to the number-crunching consistency of Bob Dickson's Frontier and envelope-pushing innovation of Davis at Umpqua, the emerging industry powerhouses reflect their CEOs personalities. "Every one of these companies looks and feels just like the CEO," Bradshaw says. Given that the strategies are mostly good ones, "that's a very good sign."
The "smarter CEO theory," as Cascade Financial CEO Carol Nelson describes it, gets a lot of currency in these parts. Consolidation has weeded out poorer managements, leaving only the best to compete. "It's been very Darwinian," she explains. "All the people who are left are pretty darned good."
The same could be said for other parts of the country. Yet somehow the leadership in many of the Northwest's banks simply feels more in sync with the demands of the market, better able to carve out niches for themselves. Nelson, for instance, has transformed a once-sleepy thrift into a strong commercial lender by focusing on dentists, doctors and women-owned businesses. Moss has made her Cascade part of the fabric of fast-growing central Oregon by hiring good people and encouraging them to go out and ask for business. "Everyone on the street knows who they are," Bradshaw says. Even Washington Federal, a plain-vanilla, 30-year mortgage lender in Seattle, has turned in strong results by focusing on being successful. "They're the best buggy-whip maker out there at a time when most everyone else has given up on making buggy whips," Bradshaw explains. "As a result, they're tremendously profitable."
Another theory that gets a lot of play centers on the missteps of the big banks that, more than most other places, dominate the regional market. While other parts of the country remained wedded to unit-banking laws well into the 20th century, there were few such prohibitions on branch banking in the West. Even today, five large companies-U.S. Bancorp, Washington Mutual, Wells Fargo & Co., Bank of America and KeyCorp- control more than 67 percent of Oregon's deposits, according to the FDIC. Washington is a bit more fragmented, but those same five banks hold some 63 percent of deposits.
That high concentration, combined with a series of messy merger integrations, has left the giants vulnerable to the poaching of both talent and customers. When U.S. Bancorp, which once controlled 40 percent of the Oregon market, merged with First Bank System in 1998, "it was like Christmas" for community banks, which seized on the disruption to gain clients, Moss recalls. Today, U.S. Bank has a 23 percent share.
Several top executives, including Cascade's Nelson (from BofA), and both West Coast's Sznewajs and Sterling Savings Bank President David Bobbitt (from U.S. Bancorp), left their original companies after poorly executed acquisitions. Beyond the very top ranks, one would be hard-pressed to find a good-sized community bank that hasn't lured at least some executives or lenders-and their books of business-from a larger rival. West Coast's ranks include about 40 ex-U.S. Bank and Wamu lenders, and Moss, whose Bend, OR-based Cascade had all but sworn off a move into Portland, before reversing course when 14 commercial lenders from Pacific Northwest Bancorp defected en masse to her institution following a 2003 acquisition by Wells Fargo.
Bradshaw says lenders are naturally attracted to the greater money and local decision-making power offered by smaller banks. "The big boxes have gone to commodity banking, and most of these talented, experienced bankers don't want to be commodity bankers. They want a relationship," explains Heidi Stanley, COO of Sterling Financial in Spokane, WA. Stanley says Sterling has increased its corporate banking business fourfold in Portland since hiring a group of seasoned lenders from U.S. Bancorp. "There was such a huge supply of bankers who were available and wanted to do our brand of banking, we opened a second branch," she says. More recently, Sterling hired some lenders in Spokane after Wamu, in the midst of a restructuring, shuttered some of its commercial lending operations.
Even big-bank representatives concede some shortcomings. "Especially in the latter part of the 1990s, the big banks cut back and in essence staffed out certain types of business to the community banks," says Mitchell, the U.S. Bancorp economist. Since then, he adds, the bigger banks have responded, working to improve customer service to retain more business-a point with which most community bankers agree. "But there certainly was a period, at least, where that wasn't the case," he says.
More often than not, the new talent has provided a big bump to performance, giving the smaller banks skills and lending relationships they couldn't have won easily on their own. Among the biggest and healthiest areas has been the real estate market. The recession has left commercial vacancy rates in the two big cities, Portland and Seattle, hovering in the mid-teens. But retirees and young tech workers have kept residential property values and construction strong. Lending to the segment, combined with growing levels of demand deposits at many banks, has helped make spreads here higher than the national average, fueling profits. Frontier was among several banks reporting record earnings in the third quarter-something John Dickson, Bob's son and CEO of the bank subsidiary, attributes to the $2.2 billion-asset lender's focus on quick-turnaround construction and land-development loans, which provided a net interest margin of 5.15 percent. "When you can lend at base-plus-1.5 percent, with a 1.5 percent fee, and the market is hot enough that you can turn that money over two or three times a year, it can be very profitable," he says.
For the most part, these CEOs have been wise stewards of those earnings. Despite the economic troubles, credit quality has remained remarkably strong at most institutions, Bradshaw says. During the boom times of the '90s, many built up their reserves, creating rainy-day funds that provided extra assurance in the recent recession. "The CEOs did a good job of not getting caught up in the Internet hype, and when the boom went bust, they were protected," Bradshaw says.
Today, those same bankers face an entirely different challenge in rising rates and declining mortgage volumes. Most have strategies in place-Washington Federal, for instance, has kept mortgage prepayments in cash and short-term bonds, intending to redeploy the money only when interest rates push higher-but some could stumble, or worse, choke on their own growth. The good news, Mitchell says, is that the economy looks poised for a rebound. Both states added jobs in 2004 as the tech and aerospace sectors picked up, and barring some external shock, should be healthier this year.
Even so, most observers believe some consolidation of the Northwest's new powerhouses is inevitable-be it among themselves or by larger banks. Who the survivors will be is anyone's guess, but already bankers like Davis and Moss "have left an indelible mark on the regional banking market, and maybe the national scene," Bradshaw says.
