Local bankers admit times are tough and could get tougher.
“No one predicted the decline would be so fast and steep,” said Ray Davis, chief executive officer of Oregon-based Umpqua Bank, which has three locations in Vancouver.
That said, most Southwest Washington community banks seem to be holding their own.
“We’re pleased with how we have navigated this so far,” Davis said.
The bank’s strategy for success includes the following key points:
• Offer solid products
• Do banking one customer at a time
• Compete on a solid value proposition – not just on interest rates
• Have a diverse loan portfolio
• Ensuring the management team has the right people in the right jobs.
And lending and senior management teams must know the local market, said Randy Krenelka, chief financial officer at California-based Regent’s Bank, which has a Vancouver branch. For example, he said, most of Regents’ team members have lived in the region for more than 30 years.
“Recessions are times when community banks define themselves for the next upswing – what do they want to look like when the economy recovers?” said Brett Bryant, executive vice president at Vancouver-based First Independent.
Hands-on approach
High-touch customer interaction seems to be at the heart of many local banks’ performance despite banking industry turbulence.
Seeing the most marked growth in the local market, Pacific Continental Bank experienced a nearly 93 percent increase in deposits from June 2007 through June 2008.
The bank continues to see growth, due to a philosophy of partnering with clients and getting to know them before taking them on as clients, said Kristy Weaver, senior vice president and Southwest Washington team leader. As a result, she said, the bank sees almost no deposit turnover.
Jim Rathbun, vice president of marketing at Longview-based Cowlitz Bancorp, the parent company of Bay Bank, stressed the importance of reassuring customers.
“There is a lot of anxiety out there,” he said.
In July, Bay Bank aired a radio message about the bank’s stability, then posted point-of-sale signage about it in all branches in October. The bank also offered a Frequently Asked Question brochure that answered questions like “Where is the safest place for my money?” and “How do I know I won’t lose money?”
Rathbun said this cost-effective initiative had a profound impact.
“People appreciated us having that information – it kept people from withdrawing their funds,” he said.
At Pacific Continental Bank, which is based in Oregon and has a branch in Vancouver, bankers are spending more time with clients. Weaver recommended that business owners spend more time with their bankers, accountants and attorneys.
“Gather around your professional services network – make sure you are in touch,” she said.
Weaver also was adamant about the value of treating customers as people, not numbers.
“We never credit score – we get to know our clients,” she said.
Get diversified
Diversified loan portfolios can help community banks survive economic ups and downs, Davis said.
Out of Umpqua’s $6.3 billion loan portfolio, residential development loans make up 8 percent; 30 percent is in small business commercial and industrial loans with another 8 percent in commercial construction projects.
While land acquisition and development loans have virtually vanished, it is “not totally doom and gloom,” said Wayne Kepfer, senior vice president and regional manager at Bay Bank in Vancouver.
He reported positive activity in the under-$300,000 housing market, where production builders are streamlining costs and offering creative financing packages.
Umpqua’s home mortgage department also is doing well. Davis said production was up over last year with a pipeline of about $1 billion.
Owner-occupied property loans and commercial and industrial loans for inventory and equipment are still strong. United States Small Business Administration lending, too, is popular with bankers because it offers a fairly safe investment (50 percent loan-to-value).
Plus, the process is streamlined, making these loans easy to handle, Krenelka said.
Many banks have grown their loan portfolios, notwithstanding the supposed credit crunch. According to their respective third-quarter earnings reports, Cowlitz Bancorp had an annualized total loan growth rate of 8 percent, Pacific Continental Bank’s loan growth was $101.8 million year-to-date and Banner Bank grew loans 10 percent compared to the first nine months of 2007.
“We’re still out there, pounding the streets and making the calls,” targeting small, well-run businesses, said Doug Bayne, vice president and director of marketing at Walla Walla-based Banner Bank, which has a branch in East Vancouver.
Some banks are thinking up new ways to package loans to take advantage of strong sectors. Umpqua recently introduced the GreenStreet Lending Program, which offers low-interest loans to companies who want to invest in energy efficiency and renewable energy.
Good bankers are choosy
Banks are being more selective about who they lend to.
Transaction lending – when a customer has a loan from a bank without any other interactions with the bank – is becoming less popular, Krenelka said. Community banks are now looking for a “balanced relationship” – that is, a deposit base to go with the loan.
First Independent is still lending but is being targeted, Bryant said.
“We like the health care sector very much,” he said.
Across the industry, Kepfer said, banks are tightening up loan criteria:
• Increasing the loan-to-value ratio from 80 percent to 75 percent or 70 percent (business borrowers must put more dollars up front).
• Decreasing the debt-to-service coverage from about 1.35 percent to 1.25 percent (the company must have more cash flow and income to cover the debt).
Now, Kepfer said, many businesses don’t have an appetite for loans, citing a 25 percent to 50 percent drop in loan activity in recent months. Instead, businesses are waiting to see what happens with the uncertain market and new administration.
“We’re in an economic perfect storm, but it will pass,” Davis said. “We need to watch for rays of sunshine and the media needs to report the good news as well as the bad, because economic recovery depends on consumer confidence, which in turn depends on what consumers read, see and hear.”
Comments from community banks Bank of Clark County, Riverview Community Bank and Columbia River Bank were not available for this story.
BUYING INTO THE CAPITAL PURCHASE PROGRAM
On Nov. 12, Umpqua Bank, which has three locations in Vancouver, received $214 million from the federal Capital Purchase Program. It is, according to CEO Ray Davis, the first Oregon bank to do so.
The CPP has been incorrectly labeled a “bailout.” A better term is “buy-in,” Davis said.
“The scope of return (for the federal Treasury) is tremendous,” he said.
Through the CPP, the feds buy preferred bank stock – and the bank pays a 5 percent dividend to the Treasury for the first five years. At that point, if the bank doesn’t return the CPP funds, the dividend rate increases to 9 percent.
Plus, Davis said, the government gets what amounts to a stock option worth 15 percent of the CPP funding – if the bank stock goes up, the government can exercise that option. If Umpqua’s stock rose from $15 to $25, the government could make about $20 million on the bank’s stock alone, he said.
The CPP infusion raises Umpqua’s already healthy 11.2 percent risk-based capital ratio to about 14 percent.
Other regional banks may participate in the CPP. Banner Bank has received preliminary approval to participate to the tune of $124 million. Pacific Continental Bank has been invited to participate, but hadn’t made a decision about it at press time.
“We have applied, just to get into the queue,” said Brett Bryant, executive vice president at First Independent. “But we are not certain yet if it is something we need or want. We are trying to understand all the strings attached, which are not clear for privately held banks that are S corporations.”
