Kansas Banking: Moderation in the Middle

In banking, there is sexy, and there is stable. Rarely do the two travel together down the road of commerce.

March 2023 provided yet another example of the stark differences between the former style of high flyers like Silicon Valley Bank in California and Signature Bank of New York and the “boking banking” practiced by community banks in Kansas.

Federal regulators shut down those two large banks in the biggest failures since Washington Mutual, with more $300 billion in assets, went down in 2008 at the start of that year’s banking crisis. SVB catered to clients in the venture capital and tech space; Signature was known for its heavy involvement in cryptocurrency.

Sexy? For the moment, they were. Now, they’re gone.

The wave of mild bank panic that pounded share prices of investor-owned institutions didn’t bypass the Midwest entirely; Kansas City-based UMB was tagged by Moody’s for further review of its uninsured accounts. So was INTRUST Bank out of Wichita, which is privately owned. But executives from each offered assurances that their overall financial positions remained strong.

And so it was across Kansas, said Doug Wareham, CEO of the Kansas Bankers Association, whose members hold $93 billion in combined assets.

“Kansas banks maintain very strong capital levels that are well above current regulatory standards,” Wareham said. “They also maintain record levels of loan-loss reserves, which serve as an additional buffer for potential shocks to the economy.” 

Citing FDIC statistics, he noted that non-accruing loans, including non-performing ones, had plunged by more than 31 percent year-over-year as of early March. It was also important, he said, to note that in the 88-year history of the FDIC, “no one has ever lost a penny of an insured deposit and that Kansas bankers work closely with their customers to insure levels above the $250,000 protection threshold set by the FDIC.

Thus, he said, the recent bank closures “appear to be outliers and are not reflective of the norm or financial strength of banks across Kansas and across America.”

His public-sector counterpart, state bank commissioner David Herndon, echoed that, but pointed to slow-moving economic trends that overwhelmed slower-moving leadership at SVB and Signature.

“The rapid rise in interest rates, after being so low for so long, certainly has created some challenges for bankers as they adjust to this economic environment,” Herndon said. “An apparent cause of the two banks that recently failed is from a lack of diversification and a concentration on particular industries.”

By contrast, he said, “Kansas banks are diversified and not overly reliant on singular volatile markets, certainly not underperforming ones. I believe Kansas banks will effectively manage through this economic period. Kansas banks are well-capitalized and have strong reserves .… The U.S. banking system is safe and sound, Kansas banks especially.”

For the broader region surveyed monthly by Creighton University economist Ernie Goss, the March loan volume index turned in a strong performance, rising to 63.0 from 48.1 in February,  and it was up slightly from 61.9 in March 2022. The checking-deposit index increased to 40.9 from February’s 38.5, and the index for certificates of deposit and other savings instruments surged from 57.7 in February to a record high of 75.0.

Asked by Goss’ survey what interest rate action the Federal Reserve should undertake at its March 21-22 meetings, 56.5 percent of bank CEOs recommended a 0.25 percent rate increase; 30.5 percent supported a half-point boost, and 13 percent advocated no rate change. Those responses, he noted, were recorded before the big bank failures that came in the following weeks.

“It’s too bad that the Fed waited so long to raise interest rates,” Jeffrey Gerhart, former chairman of the Independent Community Bankers of America, said in Goss’ monthly update. “They could have begun raising interest rates sooner than they did and would not have had to raise them as fast as they’ve done.” He did, however, applaud the Fed for raising interest rates and its willingness to stay the course to get a handle on inflation.

Banking authorities say SVB and Signature may portend a larger cleansing of poorly positioned banks on a national level. Perhaps, but it’s hard to envision changes at that level making much of an impact in Kansas.

The U.S. went from nearly 24,000 banks in the mid-1960s to slightly fewer than 9,000 when the financial crisis of 2008 set in, and since then, the ranks have been further thinned by one-third to fewer than 6,000 today.

In a very real sense, Kansas banking has already been through a washout: Since 2008, it has seen the universe of banks fall from 340 down to 210, largely through consolidations as the leadership of family-owned banks hit retirement age.

What remains, though, is a sounder statewide banking system, Wareham says.

“Consolidation is not a dirty word,” he said. “It’s always been part of the natural evolution of business and industry, and banks are businesses, too.  Banks are constantly striving to achieve a size and scale that keeps them competitive and capable of providing their customers with state-of-the-art financial services.”

There’s plenty of capital at remaining institutions to grease the gears of commerce, but Wareham points to a different cost, a social one, imposed by a shrinking pool of banks.

“The unfortunate negative impact of fewer bank charters is the loss of the leadership, especially in rural communities, that comes from the loss of executive level banking positions and the loss of a local bank board of directors in a specific community,” he said. “Bankers are leaders that drive economic development, they serve on municipal boards and committees, they spearhead community programs and projects, and they mentor and develop business entrepreneurs. Communities, large and small, need leaders, and when a bank charter is removed from a community, there is a leadership void created that is difficult to fill.”

For the banks that remain, a major barrier to continuing profitability and service to their communities is the ever-increasing cost of meeting regulatory burdens. The sad irony, banking executives say, is that many of those regulations have been imposed to address the bad behaviors of much larger banks, which are only increasing in mass as compliance costs tank the small ones.

“I would argue that increased operational costs relating to regulatory compliance and cybersecurity are also major factors contributing to bank consolidation in today’s market,” Wareham said. “Other negative factors contributing to consolidation include more government interference and restrictions on non-interest bank income and ever-increasing competition from non-bank competitors that often enjoy preferential tax treatment to traditional banks.”

But what’s left today is a healthier banking climate, he says. “Yes, I believe banks in Kansas are in a stronger financial position than they were in 2008, but I don’t believe a reduced number of bank charters is the lone or even major driver of that strength,” Wareham said. “Banks perform well when local and state economies perform well, and we’ve experienced an extended period of positive economic growth in numerous business sectors, including agriculture, energy production, and information technology in Kansas.”