U.S. Bancorp CEO: Big BanksTo Steal Small Ones' Lunch

The top official at U.S. Bancorp is warning California community banks that their days may be numbered.

John F. Grundhofer, president and chief executive officer of the Minneapolis banking company, told a group of bank presidents here last week that big banks-like his-are expanding in California and aiming to steal business from community banks. As a result, he said, there will be "significantly fewer community banks in California" 10 years from now.

"It's getting tougher and tougher to make money in community banking," Mr. Grundhofer told the gathering at an annual conference for bank presidents. "Imagine how it will be as larger banks become more efficient."

Mr. Grundhofer's comments, similar to remarks he delivered to Oregon bankers in Portland last month, irked some of the community bankers attending.

John F. Burger, president and chief executive officer of Six Rivers National Bank in Eureka, said community banks have survived big-bank competition this long and he sees no reason why that wouldn't continue. In fact, many California community banks enjoyed their most profitable year ever in 1997.

Since Mr. Grundhofer "started as a community banker, I'm surprised by his comments," said Mr. Burger. "I think he greatly underestimates community banks."

And Benjamin Hong, president and chief executive officer of $161 million-asset Nara Bank in Los Angeles, is confident it will beat $71 billion-asset U.S. Bank in a head-to-head competition for customers.

"I don't think he can forecast what's going to happen in my market," said Mr. Hong, whose bank caters mainly to Korean business owners.

To be sure, Mr. Grundhofer said, he believes some small banks-those that offer superior service to offset higher rates-will prosper in the changing banking environment.

"There will always be that segment of the business market that will want to be the big fish in the small pond, even if it means paying a little more," Mr. Grundhofer said.

But his message was clear: Small banks will lose business customers to large banks simply because they cannot compete on rates or offer the same range of products.

Some in the audience conceded there is some truth in Mr. Grundhofer's viewpoint.

Richard E. Proudfit, president and chief executive officer of First State Bank of Southern California in Santa Fe Springs, said that, while customers often value relationships with their bankers, they are becoming increasingly cost-sensitive.

"If we're going to take on a big bank, we're going to lose," said Mr. Proudfit, whose institution has $165 million of assets. "At some point, a price differential is going to force us to look at what an individual bank adds to a relationship."

Mr. Grundhofer's prediction may already be coming true for the smallest banks. A report released this month by the California Bankers Association, said banks with less than $100 million of assets posted an average return on assets of 0.74% in the third quarter.

By contrast, banks with more than $100 million of assets averaged 1.19%.

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