Q & A with Tom Terry

March 2021

UMB's Executive Vice President and Chief Credit Officer assesses changes in the Kansas City banking market, their impact on business borrowers, and the never-ending quest for talented staff.

Q: Kansas City has long had a reputation for a competitive banking market (some would say it was overbanked). Overall, though, the number of banks in this market declined by 24 percent since 2014, with 27 of the previous 112 banks no longer in operation. Has that made it any less competitive among the ones still operating?

A: It’s very competitive. It has been and will continue to be. It’s interesting: These things ebb and flow over the economic cycles, but right now, it’s as competitive as it has ever been, both in terms of interest rates and structure. 


Q: Are you expecting consolidations to continue at the pace we’ve been seeing?

A: I think there will always be some. Will it be the same pace as the last five years? That’s difficult to answer. Looking back over the past 20 years, we’ve seen consolidation across the nation, a decrease in the number of banks in significant numbers. I believe that’s going to continue, but I’d have a hard time telling you at what pace. With consolidation, though, regardless of the pace, the competitive environment is real and very intense.


Q: Are there reasons why so many banks are operating here?

A: If you go back to the early 1990s, the state banking laws were very different. In Missouri, you had holding company laws, and you had branch banking. In Kansas, you had neither. So in Kansas City, you would have four big banks on the Missouri side and 50 small ones on the Kansas. What you had was United Missouri Bank back then, Boatmen’s had just bought First National, out of St. Louis, Centerre and Mercantile. They all belonged to a holding company, and you had branch banking. In Kansas, there was a bank on every corner, not part of a holding company, and you couldn’t branch. You go back 25 or 30 years, that’s what Kansas City was. In the metro area, a ton of banks, relative to the size of this metro area, all because of the state line.


Q: So what’s changed?

A: Fast-forward 30 years, all those laws changed, and things morphed to where there was no differentiation between what was owned by holding companies and what wasn’t. There are still some remnants of smaller banks in Kansas. But some big national banks have come into the market, with x-number of branches. Those bigger banks are finding out that the Midwest isn’t a bad place to plant their flag.


Q: We’ve pulled some pretty granular data from the FDIC and wanted to ask you about some of the trend lines it shows. The biggest 10, of which you all are a part, has seen its combined deposit market share rise from just under 62 percent in 2014 to more than 69 percent last year. Should that matter, and if so, at what point might that be a concern to business borrowers or individual customers? 

A: If you think about Kansas City specifically, we are a middle-market town. Our market in terms of C&I loans, for example, involves a lot of family owned manufacturing companies and distribution companies. That type of make-up, for want of a better term, of industry in the Kansas City metro area is appealing to everybody—small banks, banks like us and the larger banks. When you think of a national, Kansas City is probably less attractive, although some of the bigger ones are here for the consumer plays as much as the commercial. We have competition from banks much smaller, from those that are our size and from the much larger ones, across our service spectrum and even with different-size loans. There could be two or three smaller banks bidding on a loan, as well as a larger one. That’s not an easy answer. But there is a lot of money chasing not enough good deals. How do you compete? You lower your rate or lose some of the structure—for example, where you might require personal guarantees, but the bank across the street doesn’t. 


Q: What’s the impact of that dynamic on borrowers?

A: Not much, as long as whoever has that market share is still providing good service, competitive products and competitive prices. If it becomes something closer to a monopoly and they don’t serve the community, that’s a problem. But those problems can correct themselves. The depositor, whether it’s a commercial entity, consumer or government agency, has the ability to move accounts if banks are not providing good service at the right price or with the right product. 


Q: On the talent side, the FDIC says regional bank employment overall is down about 6.65 percent over that same period, but total compensation is up by more than 28 percent. What does that tell you about the costs of acquiring and retaining the people you need to succeed?

A: Like everything else, it’s very competitive. I can’t speak to the FDIC numbers, but with the broader question about the competition for talent? Absolutely. By the nature of it, that may be driving higher compensation costs. But that’s not a new phenomenon. Talent is always an issue in all markets; I think every banker would tell you that across the country. We’re always looking to find the best talent in the market, and everybody wants that same talent.


Q: Is the younger generation not as interested in banking, or do they have issues with what’s required to be a successful lender? 

A: I don’t have a good answer for that. We’re hiring good, smart people out of college, and we’re really pleased with that talent pool. Banking is an easy industry to learn; there are a lot of skills that you can use in other industries. It’s not unusual for someone to be in banking for five or 10 years, then leave to work for a customer, or some entity outside of banking. 


Q: So retention is as big a challenge as finding the right talent in the first place? 

A: Retention is always an issue. But when we have openings, trying to attract strong performers with all the skills you look for, it’s always a challenge as well. 


Q: Another FDIC number here: Net income for the 85 banks still operating in this region last year was a combined $1 billion-plus in 2020, up 85 percent from 2015. What does that tell you about the collective health of the regional banking market? 

A: I think broadly speaking, the last five years produced a very strong economy. We had loan growth, we had low unemployment— just an improving economy overall. It’s not unusual that the strength of this sector is going to, in some degree, follow the strength of the economy. When you think about the last five years, that’s been largely the case. Now with COVID-19, 2020 was a difficult year for a lot of reasons. But over that 5-year horizon, banks have seen improved incomes; that’s not surprising. 


Q: What stood out about 2020? 

A: The Paycheck Protection Program spiked lending volumes. I think you’ll see a large percentage of those loans being forgiven this year. It started last April 3 when the applications were first accepted. Speaking for us, and I think it’s true across the industry, in the second quarter, April, May and June, we saw a spike in loans. The expectation was a lot would be forgiven toward the end of 2020, and I think that pushed out a little, particularly for the smaller ones. They changed the application process and some of the rules around automatic forgiveness. I think the payoffs from forgiveness will be more of a 2021 phenomenon.  


Q: While interest income for all banks over that time was up 35 percent, non-interest income was up significantly more, at 51.73 percent. Does that suggest something is changing with the nature of how banks make their money? If so, what’s changing? 

A: All banks are trying to increase fee income. We’ve always had excellent mix of non-interest vs. interest income, but you have to have your foot on the gas on both fronts, at the same time.


Q: On the lending side, residential construction loan volume was up 50 percent over that period, but multifamily surged nearly 120 percent. Is that latter figure sustainable, or do you see the end of that boom coming—and if it’s the latter, where might bank capital best be redeployed to help drive revenues? 

A: Well, first of all, multifamily would be in commercial, separate from residential. Those are two very different things. But the demand has stayed very strong for multifamily. And even through the pandemic, we’ve not seen a decline in demand for multifamily. Is that a surprise? Everything relative. With the multifamily during the pandemic, the initial though was that we would see a slowdown. We really didn’t do much as far as existing multifamily properties; I think the PPP helped get money to tenants to make payments at the height of that period from April to June, when the PPP loans were getting out. With new projects for multifamily that are starting right now, those won’t really be hitting the market for another 12 to 18 months. The belief among developers is that the pandemic will be behind us when those new projects hit the market. 


Q: Aside from those longer-term mega trends, how has the past year, coping with the COVID crisis and engaging with the PPP directives, challenged your organization or affected relationships with customers? 

A: We’ve made a very conscious effort to communicate at all levels. You can’t over-communicate in an environment like this. Our office did an outstanding job staying in front of customers and prospects, making sure that the message was, “we’re open for business.” We want to do what we can to support our customers, and to do what we can for prospects to let them know we’re a great bank to do business with. We have had to communicate differently when we couldn’t meet. We’re used to doing things face to face with in-person meetings, so when that gets taken away, you have to react, and I think we’ve done a really nice job with that. There’s been a concerted effort to stay in touch with clients and prospects.