Top-performing U.S. community bank shows value of revenue diversification

Oregon Bancorp once again finds itself in a familiar perch: atop a key ranking of community lenders.

For the fourth consecutive year, the $407 million-asset company is No. 1 on the list of 200 top-performing publicly traded banks with less than $2 billion of assets published annually by American Banker. The Salem-based company, which does business as Willamette Valley Bank, reported robust profit metrics and low credit losses throughout 2021 amid volatile economic conditions.

President and CEO Ryan Dempster credits the blending of its local commercial banking operation with a regional mortgage business that delivers strong fee income.

“That diversification has really helped us over the last several years,” Ryan Dempster said in a recent interview. “It allows us to be active in one area when it’s the right time for that and conservative elsewhere.”

“We have enough variety that we can focus on where the need exists and do not have to push too hard where it doesn’t,” Oregon Bancorp CEO Ryan Dempster says in stressing the importance of having commercial lending and mortgage operations that can offset each other.

The median return on average equity for the top 200 in 2021 was 13.40%, according to data compiled by Capital Performance Group. The median for all of the 438 publicly traded U.S. banks and thrifts under $2 billion of assets was 10.64%. The metric is a key measure used to determine the rankings. Oregon Bancorp posted an ROAE of 32.84% in 2021.

Oregon Bancorp’s mortgage operation spans the Pacific Northwest, which Dempster described as “a really hot market” in terms of jobs, rising affluence and demand for homes. The company’s traditional commercial lending operation is focused primarily on the Willamette Valley south of Portland. The region is home to more than half the state’s population and a wide range of industries.

Claude Hanley, a partner at Capital Performance, said Oregon Bancorp exemplifies what sets the top banks apart from the rest of the pack: strong sources of fee revenue and interest income, sound underwriting and efficient operations, and an economically vibrant footprint.

The top 200 community banks had median revenue growth in 2021 of 9.89% compared with 9.09% for the larger group.

Median nonperforming assets, as a percentage of total assets, among the top-performing banks was 0.33% last year, in line with the larger peer group and reflecting overall “pristine” credit quality across the industry, Hanley said.
The top banks tend to also have low-cost deposit bases that should position them well for the rest of 2022, following 75 basis points of interest rate increases by the Federal Reserve this spring. Fed policymakers noted during a May press briefing that rates could climb another 100 basis points this summer. When rates rise, banks generate greater interest income on their loans and the increases bolster bottom lines.

At the same time, Hanley said, coming out of first-quarter earnings season, a majority of small banks say loan demand is on the rise this year. The top banks “are really well positioned to capitalize on loan demand pick-up,” Hanley said in an interview. “They have tons of liquidity” to fund loan growth, Hanley said.

Of course, as rates rise, certain rate-sensitive business lines are bound to take a hit. 

The Fed’s rate increases largely influence short-term rates such as those on credit cards and car loans. Market-dictated long-term rates started climbing early this year, driving up the cost of mortgages. This is leading to a lower demand for home-loan refinancing, and is beginning to affect home purchases.

“While weakness in refinancing is understandable, we are now increasingly focused on the health of the purchase mortgage market,” said Wells Fargo Securities analyst Michael Kaye.

The average 30-year fixed-rate mortgage recently increased to 5.27%, according to a Freddie Mac survey conducted during the first week of May. That was up from 2.96% a year earlier.

With housing supplies already tight and home prices high, more expensive mortgages could cause a substantial slowdown this year, Kaye said. Banks’ mortgage revenue is bound to shrink.

Oregon Bancorp’s Dempster does not dispute that thinking. His bank is seeing a slowdown in refi activity, but it expects to continue to post impressive financial results because even if homebuying also eases, the bank is gearing up to meet strong business loan demand, Dempster said.

The Willamette Valley’s population continues to grow, new business formations are on the rise, and existing businesses are expanding, he said. The bank is targeting 15% commercial loan growth this year.

“Again, it’s the importance of that diversification,” Dempster said. “We have enough variety that we can focus on where the need exists and do not have to push too hard where it doesn’t.”

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