People's Bank of Commerce was eager to diversify its balance sheet, so when the Medford, Ore., bank heard the owners of a local factoring firm had decided to cash out, it pounced on the opportunity.

Six months later, the bank's deal for Steelhead Finance is paying rich dividends. Now the emboldened $302 million-asset institution is scouting for another niche line, most likely in insurance.

Its game plan is an example of how community banks are trying to stay relevant and stay in business when so many are threatened by long-term economic, technological and other trends. The need is especially urgent in a place like southern Oregon, which has seen most of its community banks fall by the wayside.

Only a handful of banks based in the region “have survived without being acquired or failing,” CEO Ken Trautman said in a recent interview. “We go into recessions first and we come out the last, so having enough capital to weather that and enough diversification is [tough] to achieve. We were looking for ways to mitigate that.”

horizontal bar chart of fee income at People's Bank of Commerce in Medford, Ore.

The state's industries and distinct housing cycles make it more prone than other places to booms and busts, said Linda Navarro, president and CEO of the Oregon Bankers Association.

"There are places in Oregon, for example, that still suffer from the effects of the timber industry declines that began in the 1980s,” Navarro told American Banker in an email.

At the same time, Medford is “a key economic center for southern Oregon and even for Northern California,” Navarro said. “There is great potential there, and People’s Bank of Commerce is right in the middle of it."

So far, People’s is pleased with the results of its diversification effort.

In the four months between Aug. 25, when it acquired Steelhead for an undisclosed sum, and the end of 2017, the company reported factoring-related revenue totaling $1.4 million. By comparison, noninterest income for all 12 months in 2016 amounted to just under $2 million.

“When we were in the discussion phase with [Steelhead], I think maybe we underanticipated what the income potential was,” Trautman said. “It’s been a good addition. They stand alone, [so] they’re not a distraction to the bank — all the things we were hoping for as we put our strategic plan together.”

Factoring is similar to asset-based lending. Both types use a borrower’s accounts receivable as the basis for extending credit. In a factoring deal, however, the borrower sells its receivables to a lender, called a factor.

With their vaults bulging with cash, banks are natural partners for factors, according to Bert Goldberg, executive director of the International Factoring Association in Avila Beach, Calif.

“Factors are always looking for two things, clients or money,” Goldberg said in an interview. Partnering with a bank “eliminates the money concern, and it’s cheap money, so it allows them to become more competitive in pricing their product.”

Banks structure their factoring operations in a couple of different ways, Goldberg said.

“Sometimes [a bank] will purchase a company like Steelhead and let it operate independently. Other banks, like Gulf Coast Bank out of New Orleans, operate large factoring departments,” he said.

A number of larger banks, including the $30.4 billion-asset Sterling National Bank in Montebello, N.Y., employ in-house models similar to the $1.6 billion-asset Gulf Coast’s. People’s has kept Steelhead independent of the bank. It is a model that has worked for many smaller community banks, Goldberg said.

“If a bank purchases a factor and it lets it run independently, they are normally much more successful than if the bank comes in and tries to apply its loan standards to the factoring company,” he said. “It’s normally a lot easier for a community bank to purchase a factor than it is for them to start their own factoring department. It takes a different mindset to run a factor. You’re looking at different repayment sources and different [credit] standards.”

People’s had admired Steelhead from the time the bank opened its doors in 1998, Trautman said.

“Our county is geographically fairly large, but we only have 210,000 residents,” he explained. “It’s pretty darn small. You typically know who the players are.”

People’s gained an even better appreciation of Steelhead when a member of the group that founded the company in 1981 joined the bank’s board. “He left Steelhead about three years ago, but still knew the company ... and really appreciated the business,” Trautman said.

As a result, People’s was poised to move quickly when the two remaining founders began looking to sell their interests.

For most of its 36-year history, Steelhead has focused on serving the trucking industry. Goldberg called trucking “the largest niche among members of the [International Factoring Association]. … It is also by far the most competitive, with the lowest rates.”

Steelhead, however, always seemed to win its share of business.

“They’re well-run, very conservative, very risk-averse,” Trautman said. “It fit really well. We didn’t have a concern that they would do something that would put the bank at risk or that the risk appetites between the two companies would be different.”

The deal was clinched when People’s persuaded Steelhead's president, Bill Stewart, to stay on the job. “He’s in his early 50s, which fits what we wanted,” Trautman said. “We needed a president that shared the same philosophy but had some length and tenure left to start that transition.”

For People’s, acquiring Steelhead is part of a wider diversification strategy.

“We’re looking at insurance” as the next target, Trautman said. “That’s a business you’ve got to have the right people to run it, too. We’re being very patient to find what we think we’ll need.”

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