By Dennis Boone
A lot has indeed changed in the years since the first banks set up shop in the mid-19th century. And a lot has changed in just the past five years, with new major players jumping into an already competitive market. But make no mistake: the biggest players in the region, the two systems that define this region’s conservative approach to banking operations, are the branches that grew from the Kemper family tree—Commerce Bank, the largest in the region by assets, and UMB.
At $21.8 billion by mid-2013 (Commerce) and $14.9 billion (UMB), they accounted for nearly half the $74 billion in assets held by the 20 biggest regionally headquartered banks. The only other area bank that came remotely close to breaking the $10 billion asset threshold was Topeka-based Capitol Federal Financial, at $9.26 billion.
But that doesn’t mean everyone else is fighting for table scraps. Right behind those three is Bank Midwest, an organization reborn in 2010 when upstart NBH Holdings of Boston acquired that flagship and other assets from Dickinson Financial Corp. With the addition of Hillcrest Bank to its fledgling brand, the new Bank Midwest has claimed its position among the hierarchy of regional banks.
Despite the relative overcrowding of banking companies in this market, CEO Tom Metzger said at the time, the new banking system made this its entry point because of the factors that drew all those competitors in—solid banking fundamentals.
“From a competitive point of view,” Metzger said, “we saw the competition here as very rational—whether it’s Commerce, UMB, Bank of America,
US Bank—they’re all rational competitors. In a lot of other markets, there are some banks that have gotten pretty irrational on structure and pricing. It doesn’t make sense for the long haul to compete with somebody who’s irrational in that regard.”
Just a year earlier, Arkansas-based Arvest Bank, rooted in the legacy holdings of Wal-Mart founder Sam Walton, made a similar call, acquiring the Kansas City operations of Harrington Bank.
The financial crisis of late 2008 spawned an upheaval in U.S. banking, with more than two dozen community banks failing since then in Kansas and Missouri, about half of them in the Kansas City market. That created opportunities for existing banks to grab market share through acquisitions, or toeholds for newcomers like Arvest.
Those moves have been among the more pronounced changes in a sector that has seen much of it over the past 40 years—and one likely to see more as the full effects of the Dodd-Frank financial reforms bill take hold. That legislation, originally sold to the public as a way to address the “Too Big to Fail” phenomenon that marked the 2008 crisis, having exactly the opposite effect: Community banks have largely been the ones going under over the past five years, and the nation’s 10 largest banking systems control substantially more market share today than before Dodd-Frank.
Operationally, Kansas City banks have shown great dexterity in following national trends. The advent of mobile banking in recent years has lessened the pressure to create more brick-and-mortar presences for existing banks, but overall, banks today offer a wider range of products and services than ever before. And they are delivered faster and more efficiently, as advances in technology provide a wider range of ways consumers can manage their money.
Throughout that evolution, banks have been a structural pillar for the American economy, not only assuring the safety of their customers’ assets, but putting that money to work throughout the community, providing the credit that greases the wheels of commerce.
The first banks in Missouri, and Kansas City, were established in 1820 and flourished during a period of growth in overland transportation and the supply business centered in the Kansas City area. This region’s unique role in the nation’s growing system of financial services was cemented with Kansas City’s selection as one of 12 new Federal Reserve Banks in the years before World War I. That was particularly significant with another Fed presence in St. Louis; to this day, Missouri remains the only state in America to boast two Fed Bank regional headquarters.
Throughout the 20th century, the banking industry struggled through various efforts on the part of the government to provide structure and regulatory oversight—much of it ill conceived and plenty of it poorly applied. While the 200-plus year history of banking in America is both complicated and colorful, some of the most striking and relevant events that have shaped the banking industry—both nationally and here at home in the Kansas City area—have occurred within Ingram’s 40-year life span.
Surviving the Crunches
By late 2013, consolidations and failure had brought the number of U.S. banks below 7,000 for the first time since the Federal Reserve began tracking their numbers. But, as many bankers will tell you, that still leaves a lot of banks in operation. Neighboring Canada, by comparison, has fewer than 30 domestic banks, and even when counting foreign banks with subsidiaries and branches there, the total is less than 100. Competition is still a hallmark of U.S. banking.
But it’s been a long and storied history in the U.S., one replete with financial crises, contractions and bank failures that have brought the overall numbers down from more than 18,000 at their peak. And throughout that span, almost all of the vanishing banks have been smaller, community banks, primarily those with assets of less than $100 million. Once considered a threshold for critical mass as an institution, that figure has risen to roughly $1 billion in asset size needed to provide the financial fundamentals that allow banks to comply with tens of thousands of pages of regulations in the Dodd-Frank era and other requirements.
Over the past 40 years, two key events have shaped the financial-services landscape in the Kansas City region, and both unfolded at roughly the same time.
The first was the savings and loan meltdown, which came after years of robust, overly generous lending—conditions not altogether unlike those cited in the run-up to the 2008 disaster. Nationwide, more than 740 savings and loans failed, and taxpayers picked up the tab for $125 billion to bail out that system. Nor was it limited to S&Ls; during that decade, 309 institution in the Kansas City Federal Reserve District went under.
That unfolded as the Midwest experienced a wrenching contraction in agriculture, a staple of the regional economy. When the bubble of high commodity prices and escalating land values burst in the early ’80s, prices for both plunged, with farmland values dropping by more than half.
Just as homeowners would come to realize in 2008, many farmers in the 1980s found they owed more than their land was worth or more than the value of the crops they could raise. Just as with bank contractions, ownership of farm-land was shrinking—235,000 farms failed
between 1980 and 1984, taking down with them an estimated 60,000 related rural businesses.
The early 1980s also saw one of the biggest technological advances the sector had ever seen, at least from a customer’s perspective: the introduction of the Automated Teller Machines. Trips that once required a physical visit to a bank lobby could now be done from a drive-up window, then in grocery stores, shopping malls, gas stations, convenience stores and street corner kiosks.
Within a decade, something called the Internet brought additional change, particularly with online banking and bill payment services for businesses and consumers alike. Not only were customers blessed with banking conveniences, the banks themselves came to realize back-office efficiencies that dramatically changed the way they operated.
The 1990s also produced significant merger activity, as three of the area’s top five banks—Boatmen’s, Mercantile and Mark Twain Bank—merged or were acquired by other banks. Boatmen’s, in fact, was the oldest bank west of the Mississippi and the largest commercial bank in Missouri when NationsBank [eventually part of Bank of America] acquired it in 1996.
The crisis of 2008 produced the greatest government intervention in banking since Franklin Roosevelt ordered every bank in the country closed briefly to stem a tidal wave of public fear. The Troubled Asset Relief Program, signed into law by President Bush, originally sought to infuse roughly $700 billion into the banking system to provide badly needed liquidity.
That amount was later reduced to $475 billion by Dodd-Frank, with $418 billion eventually dispersed. By the end of 2012, the vast majority of banks that caught the federal lifeline had returned roughly $405 billion—about 97 percent of it overall. With the government effectively taking partial ownership positions in selected banks, the final wave of mergers and acquisitions nationwide followed. What’s still unknown are the full implications of Dodd-Frank, which has had regulators cranking out new guidance for banks since its 2010 passage.
So what will the banking industry look like a decade from now? Even those in banking won’t admit to knowing where their sector could end up. But one thing all will tell you is that change will continue to grind away on a highly regulated, highly competitive industry.
So stay tuned.