You might expect Tamara Gurney to spend all of her time talking to small businesses. After all, as chief executive of Mission Valley Bancorp in Sun Valley, a three-branch community bank with $253 million in assets, business lending is her bread and butter. But Gurney spends quite a bit of her time thinking about credit card transactions. That’s because Mission Valley has a “settlement bank” business providing processing services for its own clients and other companies. Gurney estimates the business, which has been growing, brings in between $30,000 and $35,000 a month. Not a lot, but she’ll take it. “We see a lot of opportunity in growing this business line,” Gurney said. “It’s a tough economy for a bank to make money in, and I’m not on a mission to grow asset size. I am more focused on revenue generation.” In fact, Mission Valley Bank actually has almost the identical assets as it did at the end of 2010. In that same span, its net income has nearly doubled to $2 million last year. Gurney is not alone in her predicament. While certain industries have put the recession behind them, community banks have largely struggled in a low-interest-rate environment that has limited net-interest income – and vastly increased regulations have hit the bottom line and limited opportunity. On top of that, the banks find themselves up against the local offices of giants such as Bank of America Corp. that are better able to absorb the regulatory costs. Wade Francis, a former bank examiner and now president of Long Beach banking consultancy Unicon Financial Services Inc., said while the worst is behind community banks, they need strong management to thrive. “There are always going to be changes in the industry, but those banks that survived the downturn are doing fine,” he said. “It comes down to leadership and people who see opportunity. You have to see where the market is and what small businesses are starting.” Growth strategies The lifecycle of a credit card transaction is surprisingly lengthy and along the way, several entities are able to collect fees. Mission Valley has been working with First Data Corp., an Atlanta credit-card processing firm, on the settlement business, which requires the bank to maintain cash accounts to settle payment obligations that come from a credit card transaction. A settlement bank, often called an acquiring bank, contracts with the merchant to maintain accounts so the business can accept credit cards. The bank also serves as the intermediary that pays the merchant the dollar amount corresponding to a sale once it clears. It extracts a small fee on every transaction. Gurney said banks can be aggressive in the business, opening them up to any number of businesses that accept credit cards. But Mission Valley is keeping it small, focused mostly on existing small businesses clients and a couple of larger travel companies, though she did not provide specifics. “I would rather keep hitting singles than swing for a home run,” she said “Maybe I give up a bit, but I’m still here. And some folks are not.” In addition, Gurney said her bank is currently exploring more ways to increase its share in lending through the Small Business Administration, which guarantees loans, though that is still being worked out. (See article page 26.) Francis said smaller lenders are looking into other revenue generators, such as getting involved in auto lending or even personal loans. Gurney said she considered getting involved in subprime auto lending, but decided the bank didn’t have the expertise and certain markets were firmly in big-bank control. “If I am not comfortable, I won’t do it,” she said. “It’s better off if I just play where they’re not.” For other banks in the region, acquisition has been the way to grow. Take Americas United Bank in Glendale, which has about $163 million in assets and is the smallest community bank in the region. Late last year, the bank agreed to purchase the deposits and Lancaster branch office of Silvergate Bank of La Jolla. The acquisition brought Americas United’s branch total to three and gave it a new community to service beyond Glendale and Downey, where it had offices previously. Chief Executive Adriana Boeka said her bank doesn’t get involved in any “unusual products,” but is instead focused on basic business lending, with geographic expansion in the High Desert a big opportunity. “We would like to expand that branch,” she said. “We have a solid base now and will be looking to do some more lending.” Boeka has her banks assets trending up in recent years, growing 43 percent since 2010, but revenue fell by a third reflecting how tough it is to make money in a low-interest-rate environment. She said the bank plans to grow its small business client list. “There’s nothing very sophisticated in our growth plans. We need to do more of the same to get the scale,” she said. CU Bancorp of Encino is following a similar strategy. In June, it announced it would acquire 1st Enterprise Bank in downtown Los Angeles. CU Bancorp, parent of California United Bank, is the largest community bank in the greater Valley, with $1.4 billion in assets. The $103 million all-stock acquisition will bring the bank up to about $2.2 billion in assets and add four branches, bringing its total to 12. California United has locations all across the region, including Valencia, Thousand Oaks, Los Angeles and Irvine. The acquisition will get the bank branches in Woodland Hills, Los Angeles, Irvine and Ontario. Chief Executive David Rainer did not return calls seeking comment, but said after the deal that the combined institution would continue focusing on small- and middle-market business lending. California United has been the big winner in the local market, as its assets, revenue and net income have risen each year since 2010, when it lost $2.3 million. Back to basics The biggest challenge for community banks seems to be increased government regulations stemming from the financial crisis, including the Dodd–Frank Wall Street Reform and Consumer Protection Act. The wide-ranging act has touched nearly every aspect of the banking industry, even community banks that may have very conservative lending practices. Consider the local bank’s Tier 1 risked-based capital ratio, which measures whether a bank has enough capital for the risks posed by its loans and other assets. Americas United reported a Tier 1 ratio of 20.4 percent for the second quarter, far above the 6 percent for a bank to be considered well-capitalized. Mission Valley reported a ratio of 18.2 percent; Bank of Santa Clarita reported 12.3 percent; and California United reported 11 percent. “The good news is that after the financial meltdown, community banks are better capitalized than before,” said Paul Merski, chief economist at the Independent Community Bankers of America, a Washington D.C. advocacy group. “Things are stable for banks. They just need more lending and less regulations.” Merski added that regulations will continue the trend of consolidation among community banks unable to bear the costs. For example, community banks have had to establish compliance units, a matter often handled by an existing employee prior to the new regulations, and pay for external audits by third parties to determine if the bank is properly managing risk. Gurney at Mission Valley said the increased costs can be as much as $400,000 a year. Boeka from Americas United said it’s about $100,000 a year for her bank. In addition, due to the toxic mortgages sold by lender such as Countrywide Financial leading up to the meltdown, increased regulations have excluded community banks from getting involved in certain markets. Boeka said community banks aren’t even considering getting involved in first mortgages for homebuyers anymore, though it was never a popular field for the smaller institutions to begin with. “We’ve been wiped out of that because of all the regulations and requirements that were added. “It’s left entirely to large banks that can staff it,” she said. ‘One-size-fits-all’ Francis, the consultant, said while the increased cost associated with new post-recession regulations are also higher at a larger institution they have the revenue to support it. “It’s very difficult when they put in one-size-fits-all for regulations,” he said. “Community banks have to spend a lot of money on expenses that don’t make them any money.” Consider Wells Fargo & Co., the San Francisco-based mega bank that has a huge presence in the L.A. market. Marla Clemow, who is the bank’s L.A. Metro president, said small business lending is a big priority for the bank. In fact, through 11 months of its fiscal year ending this month, Los Angeles Wells Fargo branches have approved 47 percent more SBA loans by dollar amount than the previous year, though the bank declined to provide dollar amounts. It was already the No. 1 SBA lender in the L.A. market. “We define a community bank as having local leadership and local bankers,” said Clemow, who works out of an Encino branch. “We try to create a local community feel at all our branches. We hire local bankers – I’m local.” Clemow said Wells Fargo has three branches opening in the next month in Los Angeles, including one in Sherman Oaks – all with business specialists on site. That kind of expansion could make community banks nervous, but not Frank Di Tomaso, chief executive of Bank of Santa Clarita, which has about $274 million in assets. He said he is not worried about large bank growth, and in fact finds them as sources for poaching business. He also prefers the increased regulations. “Risk management keeps banks out of trouble,” he said. “My thought is let’s not complain. Let’s move forward. I don’t spend a lot of time saying woe is me.” The bank’s revenue has grown by only about 5 percent to $8.9 million since 2009, while net income rose 56 percent but is still under $1 million. Assets are up 31 percent over the period. The bank has just two branches, both in the Santa Clarita Valley. It’s what Di Tomaso calls the truest form of community bank, with the institution’s entire business focused on small business loans of between $100,000 and $5 million – all to Santa Clarita Valley businesses. “We’re marketing to them directly or we’re introduced to them via our sources. There is plenty of opportunity, especially if you have established referral sources and strong ties to the community,” he said. “Every entrepreneur out there is looking to better their financial position and they are always going to be looking for a banking relationship that fits their needs.” CU Bancorp 15821 Ventura Blvd., Encino Branches: 8 Assets: $1.4 billion Tier 1 Ratio: 11 percent Market Cap: $210 million 52-Week Stock Movement: +9.6 percent Mission Valley Bancorp 9116 Sunland Blvd., Sun Valley Branches: 3 Assets: $253 million Tier 1 Ratio: 18.2 percent Market Cap: $16 million 52-Week Stock Movement: -7.7 percent Bank of Santa Clarita 23780 Magic Mountain Parkway, Santa Clarita Branches: 2 Assets: $274 million Tier 1 Ratio: 12.3 percent Market Cap: $20 million 52-Week Stock Movement: +0.6 percent Americas United Bank 801 North Brand Blvd., Glendale Branches: 3 Assets: $163 million Tier 1 Ratio: 20.4 percent Market Cap: $20 million 52-Week Stock Movement: +26 percent Notes: Assets and Tier 1 ratio as of June 30. Market cap as of Sept. 30.