The gloom-and-doom talk about the fate of community banks overlooks one important element: A lot of them are among the region’s most financially secure.
Earlier this year, a commentary in Forbes took note of how major national banks had a stranglehold on growth in that sector, wielding consumer-friendly tech tools to secure nearly half of all new deposit-account openings last year—despite having less than 25 percent of the nation’s branches.
In contrast, community banks accounting for half the bank branches in the U.S. netted just 20 percent of deposit growth since the year 2015. “If smaller banks can’t find a way to start offering better digital services without spending billions of dollars,” the author intoned, “we’ll begin to see the twilight of the American community banking era. The sun may begin setting on ‘community banking.’ ”
To which community bankers in the Midwest might respond with three choice words: “Not. So. Fast.”
According to FDIC data crunched by LendingTree.com and a supplemental analysis by Ingram’s, consumers in the Kansas City area and beyond should be particularly heartened: The numbers reflect an unusual level of financial stability among community banks operating in the two-state region. That’s based on figures used to com-
pile what’s known as a bank’s Texas Ratio, which calculates comparative risk of financial failure by assessing factors like non-performing assets, loan-loss reserves and tangible common equity.
As the Texas Ratio score appro-aches 100 percent, banks face increased scrutiny from regulators, who in most cases will respond at that point—if they haven’t already—with inquiries into management’s plans to shore up a bank’s finances. Missouri and Kansas, combined, have 213 banks with at least $100 million in assets, and 274 below that threshold.
The stability of that universe is readily apparent in FDIC statistics that produce Texas Ratio scores, with 48 of those banks with a perfect zero, and 122 at less than 1 percent. At the other end of the scoring spectrum, 53 banks post double-digit scores, but only two are higher than 50 percent (50.9% and 61%)—still well below the 100 percent threshold that signals regulators that trouble may be brewing.
Not surprisingly, of the 27 banks with Texas Ratios that exceed 20 percent, all are located in rural areas, where small banks have been hammered in recent years by falling commodity and land prices. Those have caused farm incomes to plunge, putting loans on precarious footing. More telling is that nearly 65 of all banks in the two states had Texas Ratios of less than 1 percent, barely a blip on the scoring radar. And within that impressive subset, 17 banks in the two-state area had scores of precisely zero.
As for the big boys, the two biggest banks in the Kansas City market came in with ratios that barely registered: Commerce Bank, at 1.2 percent, and UMB Bank, at 2.5 percent. Of the nine other regional banks with assets above $1 billion, only one of the banks had a score in double-digits. One comparative measure of how stable community banks are in this region is the roster of banks nationwide with Texas ratio scores of zero:
There are only nine banks with assets of at least 1 billion that have met that standard—identical to the number of community banks in the two-state region that have done the same. And a broader measure of the overall health of banking nationwide: In the large-bank category, the highest ratio was 34.14 percent by Beal Bank of Plano, Texas—still well below the threshold that would have inquiring minds on notice with federal banking regulators.
All of that comes against a national backdrop that has seen the combined Texas ratio for U.S. banks fall from a precipitous 32.6 at the peak of the Great Recession, the second quarter of 2009. In an almost unbroken descent since then, it stair-stepped down to 7.4 percent through the first quarter of 2019. That’s a sign that the nation’s banks have dramatically shored up their financial positions.
For some of the region’s most secure banks, though, there was never much of a need to circle the wagons and rebuild loan portfolios. Solid loans have been wired into their DNA for decades.
“In the back of your minds, it’s like a basketball game: You do the right things, with the goal of winning,” says Dan Bolen, founder and CEO of Bank of Prairie Village. “In order to avoid problems, there are about 1,001 things you need to do,” but the biggest of those, perhaps, is being selective. “We’ve not felt the need to grow for the sake of growth itself,” he said. “Bad loans are what really sink banks. You can talk tech and regulation and everything else, but it’s bad loans. At the end of the day, it’s all about asset quality.”
One powerful predicate for making good loans, bankers say, is having good customers. Banks that make a significant portion of their revenue from penalty income, such as overdraft fees, are chasing a revenue ghost that will come back to haunt them.
“I think it hurts the culture if you’re making money on overdrawn accounts,” Bolen said. “We focus on people who want to save their money and want to pay back their loans. There’s nothing deep there—like a lot of things, it’s pretty simple.”
Another area bank owner—who asked not to be identified in print—agreed with Bolen on some of the fundamental issues that define community banking. And he says his bank takes the same kind of approach to ensure that its portfolio is even more secure than the numbers on those loan documents might suggest.
“When we close a loan, if someone’s paying on the due date, to me, that’s almost late,” he said. “I don’t like making collection calls, so we get very, very little non-interest income. Our customers don’t write bad checks. We’re a traditional bank; we make a spread on money paid out on deposits and what we bring in on loans. I see some of our peers making more in service charges in a two-week period than we do in a whole year.”
With the loan structure on solid ground, his bigger concern is how regulators continue to pile onto community banks. That produces some unintended consequences, he and other bankers say, because in order to meet the costs of compliance, some smaller banks may be tempted to veer away from fiscally conservative practices as they chase the additional revenue they need to meet the new demands.
“If you want community banks to survive, you have to address some issues. Regulation has made it tough for us to do well,” he said. His bank has never foreclosed on someone’s primary residence, not even in the downturn a decade ago, “but then the government comes in and re-regulates home lending so I can’t even make a home loan now,” he said. “If you’ve never foreclosed on someone, it seems to me you’ve done something right.”
As he looks ahead, Bolen sees the future of his community bank grounded in the same success principles that it has embraced since its founding in 2003. “Intellectual capital will be at a premium,” he said. “There are good bankers out there, and you want to have the best bankers you can have. But the days of people sitting behind a desk and waiting for people to come in will not continue. You have to have people who can both sell and make loans and understand the business basics of both.”