Powerlist: Shadow Banking

Oregon’s community-banking sector shrinks as out-of-state financial institutions snap up local institutions. (And check out the 2017 Banking Powerlist at the end of the article.)

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Ever since brokerage firm FIG Partners held its annual West Coast banking conference in Los Angeles, a representative at an Oregon bank has taken part in the meeting’s Northwest banking panel.

Things were different this year. For the first time in the eight years FIG has held the event, no local bank took part.

The absence is a sign of the diminishing number of Oregon-headquartered banks. Two of the state’s largest community banks, Pacific Continental and Bank of the Cascades, are going through acquisitions by out-of-state financial institutions.

Tacoma, Washington-based Columbia Bank is buying Pacific Continental. Billings, Montana-headquartered First Interstate BancSystem is acquiring Bank of the Cascades. Both deals are expected to close by mid-2017.

Their disappearance will leave in a hole in the state’s local banking brand. Only Umpqua Bank will remain as a significant independent, Oregon-headquartered community institution.

The rest of the state’s local banks are small fish in the pond with fewer than $550 million in shares and deposits (Umpqua’s Oregon shares and deposits are more than $8 billion).

The demise of Oregon’s community banks is a concern for small and medium businesses as well as nonprofits, which depend on the local banks for financing.

Mergers and acquisitions are notorious for creating dissension among bank employees. Customers may find their long-standing relationships with the acquired banks faltering as operations merge and employees leave out of dissatisfaction with how the acquirers handle the mergers.

Jim White, executive director of the Nonprofit Association of Oregon, is concerned about the potential for nonprofits to lose financing as a result of the wave of acquisitions.

Both Pacific Continental Bank and Bank of the Cascades lend to nonprofits and have employees that volunteer in the sector. “There are nonprofits that rely on those community banks and the people that they hire. It is not just banking; they have involvement in the community,” says White.

Community banks are more likely than the larger, commercial institutions to have special lending arrangements with nonprofits, which often do not have assets as collateral to back loans. In the case of Columbia Bank and First Interstate acquisitions, “it should be incumbent on both of these acquiring banks to ensure they continue to have nonprofit ties,” says White.

Timothy Coffey, vice president of research at FIG Partners, says Pacific Continental’s niche focus on the nonprofits is “very attractive” to Columbia Bank, making it likely the merged company will foster relationships with the sector.

Coffey adds that smaller banks are more interested in expanding niche business lines because retail banking, such as mortgage lending, has become commoditized and better handled by larger banks.

Parties involved in the Pacific Continental and Bank of the Cascades acquisitions are quick to point out the mergers will not hamper existing customer relationships. Roger Busse, the CEO of Pacific Continental, says the Columbia Bank acquisition will strengthen its customer ties.

“We strongly believe that our corporate values are aligned with Columbia’s, which will undoubtedly aid in the integration of our two banks, and our clients will continue to work with their existing relationship personnel in all markets,” says Busse in an email.

He declined to comment on whether he will remain at the bank after the acquisition closes.

In an investor presentation, Columbia Bank says the acquisition provides it with a solid foothold in Pacific Continental’s home market of Eugene, and that both banks are culturally compatible with similar core deposits and commercial banking operations.

Terry Zink, CEO of Bank of the Cascades, who is retiring after the close of the First Interstate acquisition, says no employees will lose their jobs after the deal closes.

“There is no overlap,” says Zink of the First Interstate transaction. “There will be no shutting down of branches. It is an expansion for Interstate.”

Despite these assurances, bank analysts caution about the potential damage to customer service that may result from the consolidation of community banks. “As banks get larger and merge, the customer-facing element is less receptive. That is a potential negative,” says Jeff Rulis, senior research analyst at D.A. Davidson & Co.

One potential upside of the community bank mergers is they will have more resources to provide more sophisticated products.

The fact that Columbia Bank has a tradition of community banking and already has a presence in the Oregon market could mean the merger will not be too disruptive to customers.

First Interstate’s acquisition of Bank of the Cascades could be more disruptive given Interstate’s home market is Montana, says Rulis. “Interstate Bank is very different from the Bank of the Cascades. The economy and residents of Montana are very different. It could be potentially straining.”

Both analysts and bank executives agree consolidation in the community banking is good for shareholders given the burden of regulatory costs, which are eating away at the smaller financial institutions’ profitability.

Larger banks can swallow regulatory costs more easily. They can also lower operating costs by streamlining back office operations and competing better with other banks on loan pricing.

“Bigger banks tend to be more profitable,” says Zink, who complains regulatory costs have been hard to bear for his bank. “I don’t believe staying independent would be the best for our shareholders,” he says.

Analysts and bank executives expect further consolidation in the community banking sector. Bank stocks have rallied since the November election, making acquisitions more attractive for financial institutions seeking to expand.

President Donald Trump has pledged to roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has helped boost bank stocks because of the potential for lower compliance costs.

The Federal Reserve raised its benchmark interest rate on March 15 for the second time in three months, allowing banks to charge more for loans.

The Federal Reserve has suggested there could be further rate increases this year, which could push bank stocks higher.

“Some banks that barely got through the downturn and credit cycle are fatigued. Now they have found footing and bank stocks have rallied, there could be more [merger and acquisition]activity,” says Rulis.

Coffey at FIG Partners also sees more acquisitions on the horizon. “For smaller banks this is the day they have been waiting for,” he says. He sees the possibility for startup banks to spring up because of the potential for laxer financial regulations under Trump.

But it is still unclear how much of the Dodd-Frank regulation the new administration will roll back. Stringent capital requirements still make it difficult to start a new bank, adds Coffey.

With the prospect of more future bank acquisitions, Oregon’s local community-banking sector will continue to wane. But for practitioners in the community- banking field, the Oregon state bank brand is not important. What is more relevant is maintaining service to the local community.

“I don’t think it matters whether you are a local state bank. It is more important to be involved with the community,” says Zink. “With large banks, there is no community involvement compared to the local community banks.”

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