04/07/2010 05:12 am ET Updated May 25, 2011

Little Bank Savvy on the Oregon Trail

During the first week of the Move Your Money campaign one of the towns complaining loudly that there weren't enough well rated little banks showing up in the MYM zip code tool in their area was Portland, Oregon. I put it in the back of my mind to revisit this part of the world at a later date to understand just how do the little banks living there get along.

The Willlamette River -- I'm told pronounced "will lah met" -- that bisects the city of Portland is so named because it is the French pronunciation of a village of the Clackamas Indians. And so we find little Willamette Community Bank and it's CEO Dave Wood looking out of his office window surrounded by mega banks Key Bank, Wells Fargo, Chase, USB and northern regional players Washington Federal and Umpqua. Six year old Willamette Community (Ticker: WMCB) was an "A" rated bank in the IRA bank stress system in the 3rd Quarter of 2009 and I'm happy to report that the preliminary 2009 end of year calculation in our system raises that rating to an "A+" based on our look at their 1/20/2010 CDR filing. When I spoke to Dave he carefully recounted how a year of diligence and discipline has turned this institution that specializes in lending to local small businesses into a zero current defaults, four-year weighted average maturity, eleven percent exposure at default banking operation. Those, ladies and gentlemen, are stellar performance metrics.

Willamette Community does this not by competing on price against its' gargantuan neighbors but on emphasizing superior reputation and service. If you call their telephone number a real person answers you. They ask what they can do for you and they transfer you to another real human being. Is that cool or what? Mr. Wood backs this up by staffing his 20 person bank with experienced bankers who understand the landscape of local lending and can work with clients to find the best solutions to their needs. These are, he notes, capabilities not as available to his larger neighbors because their internal processes are more rigid, disjoint and restrictive with regards to delivering the kind of service oriented solutions banking his customers need. Is he right? A minuscule 0.72% troubled lending percentage says yeah his business plan is probably onto something here.

The market success proof is in the pudding of course and the numbers say Willamette Community's model does seem to mean something to their market because WMCB has been growing at about $1 million dollars of new deposits per month for a number of months now. They did grow by another $1M in January 2010 although Mr. Wood wasn't able to pinpoint any transfers directly attributable to Move Your Money. He takes the larger view attributing his bank's progress to what he sees to be a growing recognition by people that good banking is attractive to good people. I heartily agree with him. It's also my observation this blossoming of American common sense intuition is something the Move Your Money campaign has tapped into and helped amplify but not invented. It's been there all along and it's not going to go away.

Dave Wood and company are not sitting still. They want more business in the Portland area and their IRA bank report readout shows they are indeed investing to grow in that direction. We track an 86% efficiency ratio for the bank which gets to today's bank math lesson. Efficiency ratio is a measure of how much money it costs a bank to make a buck. The classic benchmark number is 65% which means it costs 65 cents of expenses to earn one dollar of revenue. Lower numbers mean you are coasting on a platform of loyal depositors. Higher numbers mean you are expending more effort to either attract new customers or retain skittish ones. The worst business scenario is drowning in marketing costs the way Pasadena's IndyMac was in May 2008 at an efficiency ratio of 236% chasing what bankers call "hot money" -- opportunistic CD's with little or no loyalty to the bank. What I like about WMCB is that they are working on growing by emphasizing a quality small business lending model sitting on top of a platform of superior quality core deposits -- that's your local deposits to you people of Portland who sent all those emails complaining there weren't enough of these kinds of banks in your area. If it helps you to take the measure of the man, Dave Wood's quote is "I'll put my group of twenty up against any big bank in this town any day." Semper Fi Dave!

Next let's jump across the river to Oregon City and visit with Larry Baker, CEO of Lewis & Clark Bank. Yes I am smiling about the poetry of these two bank names bookending the same article. This $110 million dollar single branch bank also rated "A" by IRA in the 3rd Quarter of 2009 and again shows as an "A" per our preliminary review of their 1/20/2010 CDR filings for the period ending 12/31/2009. Larry Baker's bank has also been growing at around $722K per month in new deposits in the last quarter of 2009. He reports that January was a little slower for them with around $398K in new deposits but one of those was a whopper $240K that he's pretty sure was prompted by something, maybe Move Your Money. He also reports another $80K event in February also from a new customer coming in from a larger bank.

This is splendid stuff because Lewis & Clark, like Willamette Community, also specializes in lending to small businesses in the local area. They also have a core philosophy of sitting down with customers to solve problems and pride themselves on having the experience and resourcefulness to see the range of available options and ideas. Says Mr. Baker, "You talk to people you get to know. You work with the same loan officer over the long term." Heads up the rest of these United States. These aren't the only two banks from whom I've heard this theme music refraining repeatedly in my ear this last month. Larry notes that "banks like us can benefit greatly by having a few people transfer their balances" into his bank.

That's a call to common sense action if I ever heard one. Never mind this latest government TARP CPP preferred stock funded by future taxpayer liabilities where you owe quarterly dividends at 5% or at 1% if you tow the line and do what the U.S. Treasury dictates to your bank. Do you think Washington will ever figure out that all these banks out in the provinces already know that TARP is a "Scarlet Letter"? Heck man! These guys are already executing on plans to do this with good old fashioned private ordinary people money.

Mr. Baker's bank costs a little more to run than Mr. Wood's at efficiency ratio of 102.7% per our last calculation. Our look at the readout sheet indicated it's due to a bit more brokered deposits than Lewis & Clark would probably like and Mr. Baker acknowledges he's quite keen to replace these with core deposits from local patrons to the extent possible. He'd like you to consider opening a checking account or even an IRA (the retirement kind) with his bank. And what kind of service can you get from this single branch bank? Start with the reception person who answers the incoming line at Lewis & Clark might actually have a better located office than the CEO. Next did you know deposits can be made in other parts of town because they are part of a correspondent group in the Portland area where you can drop off your money on a special deposit slip at one bank and the ACH transaction forwards into your account by the next day? Ok so these are sort of nice. Are you ready for the really good part? So if you go on vacation to some other part of the country and use an ATM and they'll credit back the transaction fee to your account. That good folk of Portland means the ATM's of the world are your globetrotting oyster bed thanks to banks like Lewis & Clark. Like I said I do love the poetry of this one.

Ok it's time for the corny line. Yes indeed there is a lot of savvy in Willamette Valley. Is it safe for me to show my face in Portland again?

*** end of original posting ***

Notes worth noting,

But these banks aren't actually in Portland.

Technically yes they aren't located within the boundaries of the City of Portland proper. They are located in the Willamette Valley where around 70% of the population of the State of Oregon lives. The business reality is that all banks -- large and small --market to a region and not to any single city. Not even banks located in the jam packed metropolis zones of this country can afford to make the mistake of thinking insular. The innovation I was trying to point out was how these smaller banks make up for the fact that they do not have physical branches sprinkled about the landscape. These innovations allow them to economize on bank premises expenses and focus those operating dollars on service. This is one of the ways the business models of banks differ from each other.

Many credit unions are recognizing the importance of this very same regional market base. In their case there's a been a trend to converting their charters to market their services statewide instead of just to the employee associations that gave them birth. They are becoming more like the mutual banks -- a subgroup within the banking industry -- in their business structures. These are natural migrations by these industries adapting to emerging market conditions.

I completely understand that people have different tastes. Some cherish the closeness of service and will drive a little out of their way to get it. For those who's comfort zone lies closer to the imposing granite presence of banks endowed enough to place a branch on each corner, there are options in the industry available along those lines. They just won't necessarily be under $65 billion assets class banks. The beauty of the banking system in the United States remains that all of these options are in fact available to consumers.

Deciphering the Kabuki of paragraph 8,

Just to make it clear this article's policy centerpiece was paragraph 8. What's going on here is that I'm using the examples of two hard working banks in Oregon to back up my statement that I think the proposal about extending a new round of TARP to smaller banks might be a bad idea. I could have used examples of innovative financial institutions in any state to bookend the note and encase the national policy comment message within the piece. I assure you there are many, many other worthy cases that could have been used to make this illustration. To make it clearer, my deeper worry is that there are patterns I see in these plans that too closely enable interests where decimating innovations that could cause long term tangible change and progress to how banking and finance looks in the United States might prevail and become the unintended consequence resulting from it. I'm not naïve enough to think that such things can't happen. There are trillions of dollars at stake here. Neither should you be. Vigilance about such things is the very essence of the responsibility of good citizenship. For this piece, I needed concrete examples to show that there are viable "in situ" non-taxpayer dollar alternative solutions to achieve the national stability and recovery objectives upon which the current round of TARP initiative is being justified. The national interest that is at stake is whether or not these processes are encouraged or impeded by the politics surrounding them. This is the collective test we face on behalf of the generations who will pay for our mistakes.