San Francisco North Bay banking executives expect growth, increasing competition in 2020

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Will it be a happy new year for the North Bay banking and lending markets?

We asked North Bay financial leaders to speak out on the headwinds and tailwinds they see going into 2020 and to comment on everything from their appetite for expansion to the changing competitive marketplace in banking north of San Francisco.

Executives said they saw a strong local economy but voiced some concern over changing interest rates in the new year. While much of the financial landscape is dominated by larger institutions, executives at mid-sized area companies are looking to consolidate their customer base and better serve their customers. They voiced little concern about newcomers moving into the area in a bid to gain market share.

Here is some of what they had to say:

What are the overall trends you expect in your business next year?

A healthy Bay Area economy overall is contributing to cautious optimism on the part of Bank of Marin President & CEO Russell Colombo.

“The economy in the Bay Area is healthy, with commercial real estate strong in San Francisco, Oakland and the Peninsula in particular,” Colombo said. “In addition there is ongoing job creation, and solid business expansion. Against that backdrop, we’ve seen steady loan demand and strong deposit growth. We expect these positive trends to continue in 2020.”

Exchange Bank Executive Vice President and Chief Banking Officer Troy Sanderson said he expects steady growth in core deposits and loans in the coming year as well as increasing focus on digital and mobile banking for consumer and business lines.

President and CEO of Redwood Credit Union Brett Martinez said continued growth and expansion are some of the main trends he is expecting. “I don’t see a big recession next year,” Martinez said, noting his company is hiring in the Napa area and is building out an additional suite of offices near the airport there.

What overall challenges do you expect to have to deal with?

Summit State Bank President and CEO Jim Brush said he expects increased competition for fewer opportunities in the North Bay market.

“The general economy is still doing well but there’s less activity,” said Brush, whose bank focuses on business loans and banking. He added extremely low interest rates offered by other banks narrowed the field for the kinds of loans his bank competes for.

Colombo of Bank of Marin said getting and holding the best people would continue to be a challenge.

“Attracting and retaining employees has been a continuing challenge and this likely will continue to be the case in 2020” Colombo said. He added that he is confident about the bank’s ability to recruit the best bankers in the market, pointing to increased third-quarter loan originations which jumped from $77 million from $53 million a year ago.

Martinez said he does not see fluctuations in interest rates as a challenge necessarily; however, “uncertainty around the interest rate environment is really the challenge as opposed to (rates) going up or down.”

Generally speaking, what are the characteristics of the North Bay marketplace and competition and do you expect that to change in the near future with more competitors setting up shop in the North Bay?

Executives polled said the North Bay market would continue to be a difficult one to break into for newcomers, both because of established relationships with customers and the clout of larger organizations.

“Sonoma County has a lot of banks and other institutions already. This is a hard market for outside competitors to expand in,” Brush said.

Large institutions create some of that hardening of the market but also create opportunities for organizations like Redwood Credit Union, Martinez said.

“I know there’s some new players, but if you pull back, the large banks own the market share in the U.S. and here,” he said. “They make my job a lot easier,” he added, saying it allows his company to offer alternatives to customers who aren’t feeling fully served by larger institutions.

Sanderson at Exchange Bank highlighted people choosing to leave the North Bay as a defining characteristic of the market. “The fact that some people are leaving Sonoma County due to the high cost of living creates additional challenges to growing the bank in this competitive environment,” He said. Sanderson added the bank’s long history in the area and its retail branch network, along with technology investments, would bolster its standing in the community banking landscape.

What impact will the Kincade fire have on your construction loan business as well as deposits, particularly from insurance payouts? What does that mean for your business overall?

The Kincade fire will likely have less of an impact on communities and therefore financial institutions than the devastating North Bay fires of 2017, the executives agreed.

Brush said, “This will be significantly different from the 2017 fires where there was widespread structural damage.” He added, “Thanks to an amazing job by firefighters, structural damage was more limited and related construction and insurance payouts will be much less.”

“However, the effect on the local economy, especially on businesses forced to close for a week and on their employees, will be worse this time. We are concerned there may be a long-term negative effect on our community,” Brush said.

Martinez agreed that because no lives were lost and fewer structures burned, the impact would be different. Many banks saw an increased influx of deposits because of insurance payments rolling in after the 2017 fires.

Exchange Bank noted it is beginning to see an increase in fire-related deposits but not nearly to the extent triggered by the 2017 fires.

What, if any, are your plans for expansion and what is your appetite for acquisitions?

Exchange Bank noted that last year it acquired two separate trust and investment operations in the Sacramento area and in the South Bay.

Martinez said RCU is in the process of merging with the small, 600-member Ukiah Employees Federal Credit Union but added it would not have much impact on the business overall. “We’re not looking for mergers,” he said, adding the credit union came to them.

Bank of Marin is keeping an open mind when it comes to the M&A landscape, according to Colombo. “With respect to acquisitions, we are a proven acquirer and are always assessing the M&A landscape and potential deals when attractive partners decide to sell,” he said. “We will continue to examine possibilities, and if we find a good fit, we will pursue the acquisition. We will continue to pursue acquisitions that are both strategically and financially compelling.”

Brush was more blunt and said he sees organic growth as the company’s primary strategic goal. “We would, however, acquire a branch if it was attractive” he added.

How do you see the future of bank branches, and do you expect to move away from them as an expense as more banking goes online? Does generational change have anything to do with this?

Because banks are investing in more online and mobile technology, the role of branches is changing. Executives acknowledged this and said while they do not necessarily expect branches to close in the next year, those transactions there are on the decline.

“We have been proactive in reducing the size of our branches over the past 10 years,” Colombo at Bank of Marin said. “Branch transactions are on the decline and we are working very hard to identify opportunities for efficiencies, while maintaining our high level of customer service. I believe that technology will dramatically change the look and functionality of the branches in the future.”

Bank of Marin rolled out a new digital banking platform in June and announced it would close its downtown Petaluma branch as of Aug. 9.

Sanderson at Exchange Bank said as a community bank, branches are a critical part of the company’s retail strategy. “Convenient access to a branch remains a very high priority for customers when choosing where to bank. In fact, we just broke ground on a new, state-of-the-art branch in Sebastopol which we look forward to opening in 2020.”

Brush at Summit State Bank said he expects branches to decline, but does not see a change for his bank in the near future. “Generally speaking, I believe the number of branches overall will continue to decline as banking, and money transactions in general, continue to be more electronic. For Summit State Bank, I foresee us having the same five branches, all in Sonoma County, for a long time to come.”

Martinez underscored that for Redwood Credit Union, branches will continue to be part of the company’s strategy, adding their location is essential. “It’s not just for the basic services,” he said of the modern bank branch. “When customers have ques tions and they need to sit down and get help the branch is where they can go and get that customization of a solution.”

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