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Genuine Optimism, Tempered With a Dash of Caution
Since the advent of the nation’s financial crisis in 2008, bankers have tended to gather under dark clouds at Ingram’s Banking Industry Outlook assemblies, overshadowed by concerns about excessive regulation, lack of qualified borrowers, public misperceptions that commercial banking, rather than investment banking, triggered the crisis, and other buzz-killing trends. No more. When a score of executives from the region’s leading commercial and community banks gathered March 1 for the 2017 assembly, the views inside the boardroom at Bank of Blue Valley were as sunny as the vista beyond, overlooking a vibrant commercial district in Johnson County. In a two-hour discussion directed by co-chairs Kristie Remster Orme of the McDowell, Rice, Smith & Buchanan law firm, and Bob Regnier of the host bank, participants assessed the reasons why these are, indeed, good times for regional banks. The down-turn washed out some of the weaker players in the banking scene, loan volumes surged in 2016, and the need for enforcement actions and loan workouts plummeted. Their discussion was a powerful reminder of the link between banks and the broader region’s economic fortunes.
This New Year’s Eve past must have been fraught with mixed emotions for bankers in the Kansas City region, an experience not unlike saying farewell to a dear friend who only recently had re-entered your life and reminded you why you were so drawn to him in the first place.
For many bankers in the region, and certainly those gathered at the table for this assembly, it wasn’t just a good year—it was a record year. And more than a few pointed to a surge in fourth-quarter lending volume that helped set those new standards.
Somewhat surprisingly, none cited any specific reasons for the late-year lending wave, which might tempt one to suggest the cause was The Election Outcome That Dares Not Speak Its Name.
Mark Fortino, chief operating officer for Bank of Blue Valley, said that for the calendar year, the bank had seen 10 percent growth in loan volumes. “But $40 million of that $50 million came in the fourth quarter,” he said. “We really saw an uptick in business on the lending side, and we doubled our mobile deposit users last year. I think that holds promise on the deposit side, going forward.”
At U.S. Bank, the new market president, Tim Petty, said 2016 started slow, “but we grabbed momentum throughout the year,” particularly with activity in commercial and industrial lending. But, he said, “it was really across the board. We finished the year at
20 percent growth on loans, which really is significant growth. And that is on the heels of 12 percent the year before that.”
While growth wasn’t nearly 20 percent, it was still a healthy 7 percent bump at Central Bank of the Midwest, said CEO-designate
Bill Ferguson. “We look at 2017 as that momentum picks up,” he said. “Our credit portfolio continues to get stronger, so we’re sitting in a pretty good spot on that growth.”
Paul Thompson, chairman, president and CEO of Country Club Bank, said 2016 was the third year of a boomlet that has pushed loan totals 50 percent above 2014 levels. “We did at least three years of about $100 million in net loan growth, most of that around the areas of assisted living, which is kind of a niche we’ve developed, and also around health care.”
The biggest bank represented at the table, in terms of assets in this market, was UMB, No. 2 by that measurement. And CEO Mike Hagedorn had a few success metrics of his own. “We had record earnings, our stock hit an all-time time high and we saw an increase of 70 percent in our stock price,” he said. Loan volume growth the past three years was at least double the industry average, reflecting success in its Texas markets geographically, and in agriculture and industrial lending by segment. “It’s nice,” he said, “to see double-digit growth to the left of the decimal.”
Banks that are both newer, and newer to the market, enjoyed the bounty, as well.
Peter Shriver, managing director of business banking for CrossFirst Bank, said the loan portfolio grew more than 40 percent with more of that coming in 2017. The bank opened its doors at the most challenging possible time, in 2008, but has grown with a conservative approach to capital expenditures, and an aggressive one by jumping into new markets, particularly in Dallas. “What’s interesting to me is how strong the fourth quarter of 2016 was; generally, that’s when business slows down,” he said.
And Brian Hoban, market president for relative market newcomer Mutual of Omaha Bank, said the 9-year-old institution was seeing growth in markets from Tampa to Pasadena. While the energy sector was down a bit, he said, “general C&I lending was up, commercial real estate was up, and we’re projecting 9 percent growth in 2017.”
What’s happening with banking is a tide lifting smaller boats, as well.
“We’re a small family bank, in the same family more than 100 years, and we had a tremendous 2016,” said Bank 21 chairman Tyler Knott. “We also hit a real milestone for us, crossing over $100 million in assets.” Much of that came from carving out a niche in rental properties for units accommodating one to four families, he said, but looking ahead, “I do see some potential issues in the multi-family market, especially in the urban core.”
Lead Bank, which opened its Crossroads branch in late 2015 with a goal of seeking out small, growing companies as clients, found the strategy paid off. “We had our first full year there, and we’re doing better than expected with the first year of a new location. We’re happy to be more in the metro area,” said CEO Josh Rowland His challenge is “keeping it under control with the demand we’ve got, making sure we’re growing the way we want.”
Co-sponsor McDowell, Rice, Smith & Buchanan presented an array of perspectives in financial-services law, and they, too, reinforced the strengths of this region’s banks.
“We’re a law firm, so I doubt most of you really care how we did last year,” said Scott Long, invoking laughter all around. “But from an attorney’s perspective, it’s clear 2016 was a good year. We’ve seen a lot more loan activity from the banks we represent. We also represent some borrowers, and their appetite for credit is really out there.” Banks are willing to make loans and there is no shortage of strong borrowers shopping for the best deals.
From another angle, Mike Gorman said his work at the firm with enforcement and workouts illustrated a new lending landscape. “You all must have healthy portfolios, because that work is not what it was three or four years ago,” he said.
Banking, said the firm’s Jonathan Margolies, has both a happy side and a dark one. “Transactions show an ongoing appetite for credit,” he said, “and those of us old enough to recognize it know that these are still incredible interest rates.” The dark side of banking law, he said, is Chapter 11 bankruptcy, where demand for legal services has plunged. “That seems to indicate to me that business is pretty strong,” he said.
A contributing factor to the good times of 2016, said Bank of Blue Valley’s Brue Easterly, was what most every bank had endured going back nearly a decade. The consolidation of weaker banks that followed the financial crisis of 2008, he said, was a washing-out that “left us with a lot of strong players.”
One trait that defines the Kansas City banking marketplace is the ferocity of competition—it has far more banks, per capita, than markets in peer cities like Minneapolis, Milwaukee or Cincinnati. Kristie Orme cited the number of banks with operations outside the immediate region, and Bob Regnier wondered whether that was driving local banks to seek out opportunities in distant markets, where margins might be higher.
“We’re not in other markets because of competition in Kansas City,” said UMB’s Hagedorn. Rather, the bank had followed its lines of business and its clients’ interests back to their home markets, and expanded with acquisitions, as well. “I actually think it’s crazy to come into our market—there are a lot of good, very well-run banks here,” he said.
Paul Thompson said that the opportunities for growth that have attracted new institutions to this region are the same factors that keep Country Club Bank focused on the home town. “Between organic growth in Kansas City, experiencing that, and our relative market share, there’s no reason for us to be looking to different markets,” he said. “We still feel like there are great opportunities for us to be here in Kansas City.”
Brian Hoban noted that “there are 125 banks in the Kansas City market, so a couple more wouldn’t change the dynamics much.” What has changed recently, he said, was the flow of money, particularly from the West Coast, into Midwestern real estate. “People like the stability of our Midwestern economy—we didn’t swing as much as coastal communities did” during the hous-
ing downturn and rebound cycle.
“This is a tough market,” said Bob Regnier. “There are more than 110 really good banks in this market. It’s more difficult now than it’s ever been to take business away from someone.” The occasional opportunities to do so, he said, are often grounded in disagreements between a bank and a customer who starts shopping for an alternative.
Right now, said Mike Hagedorn, banks’ balance sheets “have never been as diverse. If you have diversity, it doesn’t bring you down” when the economic cycle down-stroke hits.
“I think the overall health of the banks is better,” said Tim Petty. “What we try to do is what did before. It’s really easy to look your at loan policy in good times and think it’s outdated, and want to stretch, but if you’ve been through it, you know not to do that—stick to what got you there and kept you safe, and in the downturn that is when you grow, because you have the capital to grow.”
When times are good and banks can tell clients that they can increase their lines of credit, it’s meaningful and strengthens relationships, he said. But in bad times, you don’t want to convey a message that you can’t help a client because your past lending practices were ill-advised. “We don’t want to put clients in that spot,” he said. “We want to be realistic and truthful with them on their own plans and educate them, because if we keep them safe, we keep ourselves safe.”
Every business is seeing the impact of a new generation of workers, but the Millennials pose challenges unique to banking with both the differing attitudes they bring to traditional concepts of workplace and career, and to the very way they interact with banks.
The first of those challenges is existential.
“My biggest concern is not around credit, it’s human capital, and trying to keep up in all our markets,” said Peter Shriver. “It is really hard to find the right people. There’s a real dearth of talent, and the talent that is out there is really being taken care of well by their organizations.” As a result, the bank spends a lot of time “thinking about compensation and incentive packages to be as competitive as we possibly can. It’s our No. 1 issue.”
Kristi Orme speculated that other financial-services tracks were drawing away prime candidates, and Mike Hagedorn, who also has an instructional role at the University of Kansas, agreed that private equity, analytical and money-management disciplines were siphoning off qualified workers. But it goes beyond that, Hagedorn said.
“We don’t produce generalists anymore; everybody gets so specific,” he said. “They’re 25, 26 and they want to manage money.
My Dad was a banker, and he would often say that nobody should give you money until they have a little gray around their temples.” He’s considering ways to take formal training programs and “put them on steroids” to deepen the bank’s bench.
“In our case, as a de novo bank, we couldn’t hire and train,” Shriver said of the bank’s startup phase. “We’re just getting to that point where have to have a bench, an inventory of people we can advance within the organization, or we’re going to lose them.” So a more formal training program and better recruiting are in order, he said.
Part of the challenge is that Millennials don’t think in traditional terms about climbing a corporate ladder. “It’s more a corporate lattice,” Shriver said. “Most of the younger folks think, ‘just put me in best position where it’s interesting and fun to work.’ ”
“What’s important to them has changed a lot,” said Tim Petty, but he conceded that looking at things from a perspective of wanting more career flexibility—in tasks, responsibilities and scheduling—wasn’t necessarily a bad thing, and was something even he found instructive as a manager. “They want it all: the career, the pay and the family.”
Paul Thompson noted a greater sense today of young workers’ wanting to make a positive impact and create a social benefit in their work. “We’re still having a bit of a hangover from the financial crisis in terms of PR with that group,” he said. “It shouldn’t be a surprise to us that a lot of younger men and women don’t know if they want to be part of that, because we’ve been maligned.”
Small banks have an additional challenge, Josh Rowland, said, and that is building a culture that tells young workers they can make a career at a community bank. “We’re trying to address that as a training issue, look at people who want to make a difference, problem-solvers who care that what they’re doing is making a difference in person’s life. Community banking is a great way to do that.”
Fortino said Bank of Blue Valley was fortunate in that more than half its staff had been on board for more than a decade. But, he said, “the whole idea of are we going to generate new bankers, and how we do it, has to go back to the educational system.” He sits on the board of accounting information at KU, where he says it’s clear there’s little interest in going into banking after graduation.
Mike Hagedorn said he asked his class of about 40 whether any were interested in careers in commercial banking. “No hands went up,” he said. His father, Hagedorn said, “was a great banker, and people had great respect for what he did. It mattered, and it was important to him, but it’s all been pushed under the rug. But we’re not the people who caused the problems.”
The co-chairs jumped into current events and talk from Washington about rolling back some of the regulatory onslaught introduced over the past eight years, particularly with the Dodd-Frank amendment. The hopes were great, participants said, but the practical reality is, they’re tempering expectations.
“I don’t think it’s realistic to truly dial back seven years of this in the making,” said Tom Kientz of Dickinson Financial Corp. “We don’t expect much change of Dodd-Frank; we’re assuming it’s going to be pretty much the same. At the same time, we all believe the new president will be beneficial for banks—as long as he doesn’t screw it up. There’s some uncertainty still, but he is saying a lot of the right things.” And 2017, in fact, is the first year in a long time that the bank has not budgeted payroll growth in its compliance section.
Brian Hoban expects things to be “business as usual,” and the bank is taking the same approach. “We’re going to do what’s right for clients, customers, and consumers,” he said.
Paul Thompson wondered whether emerging threats to traditional banking, in the form of financial-tech companies with innovative payment and processing applications, would be faced with regulations of their own. “If there’s a lot of players who have a different level of playing field than we do, it’s going to be more difficult to compete with that,” he said.
One thing already changing, Kientz said, was the focus away from non-credit aspects of bank operations, and Barbara Christ of Arvest Bank concurred. “Fair lending and lending presence, where are lenders housed,” were emerging as regulators’ priorities, she said. “Not just which banks are assigned to low-to-moderate-income areas, but are they actually living in those areas. The person who walks into our Prospect Avenue branch looking for a business or mortgage loan should have the same experience as someone walking into our Johnson County branch.”
She also cited compliance with the Com-munity Reinvestment Act and a heightened focus on loan applications from businesses owned by women and minorities.
Mike Hagedorn pointed to the CRA, which dates to 1977, as a piece of banking regulation badly in need of a 21st-centruy reality check. “That law has got to be modernized, and we should push for that,” he said. “It’s crazy we have the rules we have today. The CRA is about access, but not many banks are opening a lot of branches today.”
Paul Thompson observed that banks’ commercial clients, as well, were feeling that burden. “A lot of our customers are feeling they are able to breathe again after the election,” he said. “We’re increasing our compliance people; but they have to, too.” And that overabundance of regulation, he said, hampers efforts by those companies to do what they need to do to succeed—interfacing with their customers. “What’s good for them is going to be good for the banking industry as well,” he said.
Bob Regnier asked what banks were doing today to address the inevitability of economic downturn, especially against the backdrop of a boom. “Bad loans are made in good times,” he said. “And I’m seeing some things kind of starting to migrate.”
But if the mood at the table is an indication, banks are more resolute than they were a decade ago about avoiding excessive exuberance in lending.
Referencing the 2008 downturn, Josh Rowland said that “what we learned in the last six years, seven years, is how bad it can be. That’s the founding myth of our bank: how bad it can be, not how good it can be. We are talking about that a lot with our lenders.”
The lesson from 2006-2008, he said, was that even if somebody else were willing to take a chance on a loan that lacked the proper fundamentals going in, “we don’t have to make that loan. So we won’t. And if they leave, they leave, but we’re not going to do it.”
Creative destruction, said Mike Hagedorn, had worked wonders within the industry over the past decade. “The real-estate banks that were the biggest challenge for our industry in 2008, they’re gone,” he said.
Brian Hoban suggested that pockets of the construction sector bore scrutiny. But “a construction project today,” he said, “is going to be highly, highly capitalized. I think you’re starting to see loan to cost limits coming down. That’s something we’re preparing for.”
Bob Regnier cited the Downtown Kansas City apartment-building boom as one area worth watching, especially for high-end units. “I’ll bet there are a thousand units that will come on-stream at almost the same time in the next six months Downtown,” he said. “That’s amazing to me. That’s a bunch.”
Josh Rowland did his best not to dampen spirits, but felt compelled to cite another cause for concern in an economic development: We may think we’re doing better at promoting innovation and entrepreneurship than we really are. “We tend as a community to look at these as trendy and exciting, and they are exciting,” he said. “The fact is, though, that we are not doing that well in finding sustainable companies that are capable of competing.”
Part of the challenge, he said, is improving the capital infrastructure with funding avenues outside of banking channels—private equity, venture capital and angel investors. Efforts are going on to change that, he said, “but we’re not there yet.”
Still, said Duncan Burdette of Enterprise Bank & Trust Co., “the ability to get a loan today is better than it has been in years.” Because of intense competition among banks, anyone with a solid business plan and some capital to invest is doing it at an optimal time, with rates comparatively low.
The discussion wrapped up with some observations about the value of the role banks play in the local economy. Not just as lenders, said Tim Petty, “we’re also connectors in the community because we serve on so many boards. We’re in the community, trying to connect all the time, leveraging opportunities outside the bank.”
Eight years ago, Paul Thompson recalled, bankers in general were branded as fat cats who nearly brought down a nation’s economy. But “what we do is a noble thing, to figure out where the best flow of capital will go to,” he said. “It’s not just ‘OK, here you go,” and push money at people; we have to do it in a thoughtful, responsible manner, giving credit where it’s due, but also not burdening people when they can’t manage that level of debt.”
As Tim Petty sees it, “we get the opportunity to do something special for clients every day. That’s kept me in the business for 30 years: I get to see America created every day. That’s what’s exiting—when you see how you can make somebody’s dreams come to life.”
