It’s a simple question, but it has no simple answer: What is a local bank? Is it “local” by virtue of its size, or lack thereof? By the hometown listed in its articles of incorporation? By the presence of an office down the block, even if the headquarters are halfway across the country?
There are good reasons why any discussion of bank locality has more significance in Kansas City than in other cities in the middle of the nation: In a field of 10 cities stretching from Denver to Indianapolis, this region is home to more banking operations per capita—based in-state and out-of-state—than any other Metropolitan Statistical Area with a population of more than 1 million, according to FDIC figures analyzed by Ingram’s for this report.
But more than just bank-heavy, the region stands out from those peer cities when you measure local ownership, as gauged by the levels of deposits with each institution. In fact, no other city comes close to this metro area in terms of overall market share controlled by banks headquartered in Missouri or Kansas.
And that’s not because of the market dominance exerted by the two biggest players in the field here: UMB and Commerce Bank. While they certainly skew the local-ownership numbers on the high side, the percentage of market share deposits they control within the 10 largest banks operating here (48.9 percent) is significantly less than the total local-ownership market share (76.34 percent) among the full field of 164 banks with operations in the area.
Which raises additional questions about what’s drawing so many players into this market. The Kansas City MSA has nearly as many banks (134) as the St. Louis MSA’s 137, even though the St. Louis region is more than one-third larger in population. And Kansas City has far fewer residents per banking company than each of the other MSAs, save for Omaha: Slightly over 15,000 residents per banking company here, compared to more than 37,000 per banking company in Denver, Dallas and Chicago.
“One of the reasons we have so many separately chartered banks in Kansas City is that the state of Kansas was one of the last states in the nation to approve the presence of multi-state bank holding companies,” said Mark Jorgenson, regional president for Minneapolis-based US Bank. “This created an opportunity for many bank charters to be established in the vacuum created by the state’s regulatory environment.”
But it’s been a vacuum worth filling: “Kansas City is still a very attractive market, owing to its relatively stable and predictable economy,” Jorgenson said. “Our high level of investment in this region, I think, corroborates that opinion.”
The numbers clearly show that we have more banks, more local banks, and more local market share among those banks, than other markets. All of which raises the question: Do those local numbers matter, in practice?
It’s a question that yields different answers, depending on the banking executive you ask.
“We certainly think so,” says Kevin Barth, president of the Kansas City region for Commerce Bank. “To the extent that the bank is invested in the community and relies heavily on the community for its long-term success, it’s a better partner for business and is focused on what’s in the best long-term interests of the community. We’re interested in a stable, growth-oriented community. Local banks are closer to the market, you know the people, you know the companies better, and you know how they operate through good and bad times.”
Not surprisingly, Jorgenson holds a different view as the chief local executive for one of the nation’s 10 largest banks, as measured by assets.
“It shouldn’t matter,” Jorgenson said. “I think most bank-management teams understand we have a responsibility to our community to address its credit needs, help create jobs, and also give back to the community in a variety of ways.”
Between those countervailing views sit financial-services professionals like Chuck Stones, president of the Kansas Bankers Association. “I don’t really know” if local ownership has a measurable impact, Stones said. “From my perspective, especially in metro areas, I’m not sure most customers pay much attention. It’s more about relationships and the culture within the bank that makes the difference on that sort of thing.”
If an out of state bank or its branches provide superior service and build long-term relationships, Stones said, the chances of success are good. “The same is true with banks with local ownership. From what I’m hearing from banks, customers tend to be rate-driven and relationship-driven, that is more important that where the ownership is located.”
His counterpart across the state line, Max Cook of the Missouri Bankers Association, is decidedly more convinced.
“I think, absolutely, it does matter,” Cook said. “I don’t know for a fact, but if you look in some major markets with smaller percentages of local control or ownership in share of market, what you’ll find is that there are some very large institutions that control a larger percentage. These larger banks generally are out of state, and the larger the banks tend to get, the more cookie-cutter in style they get.
“I think that makes a difference when local banks control more, because they know their market: They live, breathe, sleep, work and play, worship and go to school right there in that community,” Cook said. “They know their clientele very well. Their products and services are developed by people living in that market who know that market better than somebody developing a product out of a big city back east, west, north or south. I think it makes a big difference.”
This is not to suggest that executives and employees from out-of-state banks don’t engage in comparable levels of civic engagement. Jorgenson, for example, doesn’t exactly helicopter in from Minneapolis each morning at US Bank. He’s been here since 1981, and his own list of board service and interaction with business groups rivals that of executives from most any local bank.
“While we don’t view ourselves as an out of town bank, I’m sure that is a perception held by some,” Jorgenson said. “We have effectively chosen to fight that perception by investing in the Kansas City region in a very meaningful way. Since the onset of the recession, we have invested over a quarter of a billion dollars in the market, have gone from 600 employees to 1,700, and have expanded our branch network system from 38 to 53, which now represents the largest branch network in the metro.”
Another key asset for US Bank, he said, is its local advisory board of directors. “We have always had a very active board of civic and corporate leaders—a group that keeps us informed and connected. They view us as ‘local,’ and consequently have chosen to lend their names and expert counsel to help assure our success in Kansas City.”
There are, however, outside banks that have set up shop here without nearly that level of engagement. That’s one contributing factor, among many, preventing them from seizing market share, bank executives say.
“Because we have so many strong local banks, those banks tend to have strong customer ties, but it’s also one of the reasons market share is a little fragmented,” said Barth. “One of the toughest things to do in our industry is to enter a new market and consolidate share rapidly. What we’re finding, in markets where we’ve entered and consolidated, is that people want alternatives. Well, they have lots of alternatives here in Kansas City. But that’s also why we’ve had so much success growing after entering Colorado and Oklahoma—people want alternatives. But it is very difficult for an outside bank to come and have success.”
Another barrier to success for outside banks, Cook said, was the market dominance of the two hometown banks: “UMB and Commerce, they’re not going away,” he said. “With them controlling larger percentages, yes, that is somewhat of a barrier for larger organization garnering bigger chunks of market share.” The standards they set, he said, force competing banks to raise their own levels of service and products, or risk irrelevance.
That, said Stones, is why it’s so important for any bank, even a large one, to interact with customers as if it were a community bank. “Studies continue to show that the location of a branch is important,” he said, “but especially in the commercial lending area, relationships more important than anything else.”
But even a good relationship will only take you so far, Barth noted, if it’s not grounded in the authority to execute decisions locally.
“You make more intelligent decisions when you’re in the market and very knowledgeable about the market,” he said. “One of the strengths that a bank like ours brings is that the decision-makers are here. A lot of times, the ultimate decision-maker is not in the market, and the larger borrowers may never have had a chance to meet that person face to face.”
With very large banks out of market, he said, there may be an industry on the east coast that may have issues—construction, for example—and the bank may respond by pulling back in that industry across the nation. “They manage by industry, and those decisions have nothing to do with the strength of that industry in the market you’re in,” Barth said. “So if that very, very large bank is having issues elsewhere, it can affect you; we’ve seen that.”
Even having a strong profile as an outside bank won’t be enough, he said. “Running the office and having the ultimate say over the direction the organization is headed is completely different,” Barth said. “Kansas City is very, very fortunate to have two major banks around for a very long time that have stuck to pretty basic fundamentals of banking. We have depositors, we take in their money, and
we have a very strong sense of responsibility that you lend that money out with the idea that it’s not your money, it belongs to the depositors and needs to be paid back.”
That doesn’t mean a bank must adopt overly conservative set of lending guidelines, he said. Sometimes, the local angle will factor into making the loan when a far bigger, more distant bank wouldn’t consider closing the deal.
“If you know your borrowers well, you know how they manage their business and how they deal with adversity, “ Barth said. “So sometimes you can take more risk and work with them through good times and bad times, because you have a good sense of the strength of their management, their business and their quality of service. You have to get close to a company to know that.”
Does the number of smaller banks operating here—and the challenges they face absorbing regulatory burdens like those imposed under the Dodd-Frank banking reforms—create opportunities for larger banks to make acquisitions and establish a toehold here?
Perhaps, bankers say, but the more likely scenario might be that other local banking companies will make those purchases. Leawood-based CrossFirst Bank, for example, recently crossed the $1 billion threshold in assets using an acquisition strategy, less than seven years after it opened its doors.
“I do think we will see continued consolidation, if for no other reason than it has become very expensive for banks to comply with an ever increasingly complex web of regulations,” said Jorgenson. “Many see consolidation as a way to spread those costs over a larger bank structure that can afford the resources necessary to be responsibly compliant with such regulatory requirements.”
That acquisition dynamic has been playing out for a generation, Barth noted. “Some out-of-city banks sold
to national banks that have established operations here,” he said. “But if you look over the past 20 years, after the acquisition, that bank typically has lost market share, and most of that loss was gained back by banks head-quartered here.”
Because of those transactions, a number of cities in the U.S. lack a major local banking presence, Barth said, and that loss has translated into fewer options for customers and a more challenging borrowing environment. “Some of those that sold and took stock in those national banks as part of the deal are not as happy today as they were the day they sold,” he said. “They’ve not performed well.”
In any case, Barth said, an exercise in studying market shares by using deposits as the measuring stick might not tell the full story of what drives banking success. “I don’t know that deposits are always the best measure,” he said. “The number of housing units that are customers is really what it comes down to. One very, very large commercial depositor-—and that could be a company that’s not even based in Kansas City—can make deposits that can inflate the totals.”
That, alas, is another analysis—and another story altogether.
Remember “Too Big to Fail?” That was the ill-constructed shorthand for describing national banks that had outgrown the pull of regulatory reins in late 2008, amid the financial-sector tumult that some said could have collapsed the U.S. economy.
Because they were so big, and threatened such widespread misery if they failed, a new order of regulation was needed to prevent them from growing even bigger, critics said. Result: The Dodd-Frank Act, 848 pages (in its final form) so leglislatively grotesque that regulators who have coughed up 14,000 pages of rule-making still aren’t finished, four years after they started.
And in the meantime? The market share of the largest national banks has gone one direction: Up. The big got bigger.
Clearly, we haven’t adequately addressed the threat posed by banks deemed too big to fail, have we? “I don’t think so, to be quite honest with you,” says Max Cook of the Missouri Bankers Association. “Part of that answer is, I don’t think we can really know. The mechanisms that have been put in place to supposedly help us address that haven’t been tested. We don’t know if it’s going to work.”
Chuck Stones, of the Kansas Bankers Association, noted a number of rules that have yet to be disseminated. “The Consumer Financial Protection Bureau has something new every week: more paperwork, more reporting, more of something that every bank has to do, including community banks,” Stones said. “The fallacy of Dodd-Frank was that community banks would be exempt, and that’s not true at all. They are exempt from direct examination, but everybody is subject to the same rules.”
With a marginally improving economy and enough time, the issue has faded from the public’s attention. But it’s not gone.
“As it becomes less of a political lightning rod, I think we’ll see more rational application of regulatory requirements as the pendulum swings back,” said Mark Jorgenson, president of US Bank operations in Kansas City. “There were many legitimate reasons for heightened attention to stronger bank regulations, but this also has caused many unintended consequences that have had a detrimental effect on the economy. Kansas City is fortunate in as much as our banking community is strong, which in turn will provide the foundation for continued responsible growth in our region for years to come.”
Cook, though, says the numbers tell the story. “You look at the very large institutions, and you’ve got to scratch your head a bit and say, can we adequately deal with those if, in fact, there are huge problems?” he said. “Can they be managed, can they be examined, can they be taken care of in a problem scenario with the tools and mechanisms we’ve put in place? But I don’t know for sure. I don’t think anybody knows.”