People's Bank of Commerce in Medford has seen solid asset growth and has expanded its lending, says Ken Trautman, its president and chief executive officer. - Mail Tribune / Julia Moore

Small regional banks face challenges

Like any other business, a bank has to make money to keep its doors open.

Those low interest rates customers love can squeeze smaller banks, which depend heavily on interest income — so much so that shareholders often see a better chance for a reasonable return on their investment by selling to another bank.

A new survey by audit, tax and advisory firm KPMG underscores the point, as 1 in 4 chief executive officers and senior executives surveyed at banks with assets of between $1 billion and $20 billion expected to sell during the next year. Last year, just 15 percent of those executives anticipated selling within two years.

American Banker, an industry organ, reported a variety of reasons for the shift, including regulatory pressure.

Ken Trautman, president and chief executive officer of People's Bank of Commerce in Medford, has no desire to follow the growing herd. Not only has People's Bank of Commerce seen solid asset growth, but its lending has expanded.

A growing loan portfolio allows smaller banks to add to their coffers even when interest income is barely measurable.

"The challenge you have nationwide — not just for community, regional or super-regional banks — is that there hasn't been as much loan volume," Trautman said. "Everyone needs to support the growth they are getting from the deposit side of the bank. We're looking at 24 percent growth this year in assets, and we've seen 20 percent growth the past two years. But we've also seen over 15 percent loan growth the last three years."

Simply investing deposits in federal funds accounts won't do, Trautman said.

The interest would be less than one-eighth of a percent, not enough to pay for the tellers taking deposits at the window.

"So you have boards asking what is a viable marketing plan, and they can't come up with one," Trautman said.

"So they are forced to look at being acquired — orbeing an acquirer."

Ray Davis, chief executive officer and president of Umpqua Holdings Corp., Umpqua Bank's parent company, took the KPMG survey with a grain of salt, calling the numbers "a little aggressive."

"Everybody in our industry thinks they're experts when it comes to consolidation," Davis said. "With interest rates where they are, it's correct smaller banks are going to find it much more difficult to do well; they make all of their money on net interest margins and can't effectively diversify."

Umpqua Holdings, on the other hand, will have more than $20 billion in assets once its acquisition of Sterling Financial Corp. is completed.

If the economic environment doesn't bode well for Umpqua's home lending, it turns to its equipment lending or wealth management divisions.

"The smaller banks don't have the resources to do that," he said.

Trautman and other Northwest bankers recently visited Washington, D.C., to meet with staff from the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Federal Reserve. He discovered there is little or no movement to create new banks.

"We asked the OCC if you are seeing any new bank applications, and we were told none — nationwide," he said. "The FDIC said, 'We think we're getting one.' "

In Oregon, which routinely spawns new banks, none are seeking a state charter, Trautman said. "No one is willing to start a bank unless you have some short-term earnings that have some meaning to them."

Reach reporter Greg Stiles at 541-776-4463 or Follow him on Twitter @GregMTBusiness, friend him on Facebook and read his blog at Edge.

Share This Story