Stability KC Can Bank On

PUBLISHED JULY, 2023

As scare headlines go, this one was quite fetching: “U.S. Bank Deposits Down $1 Trillion Since April 2022.”

Give them full marks for accuracy; that declaration was entirely true. But headlines have never been big on context. Upon further review, as they might say in the NFL, while deposits were down that much between April of last year and midyear 2023, it’s worth noting that the starting point for that measurement was an all-time high for bank deposits in the U.S.

Dig a little deeper, and you’ll see that deposits not only were not depleted within the nation’s banking system, they were, in fact, up more than 10 percent year-over-year by the end of 2022. 

That’s hardly a run on the Bailey Savings & Loan.

And it’s worth noting that investors didn’t yank those dollars to eat them: Much of that withdrawal from traditional bank-deposit instruments was reallocated in pursuit of greater yield. This year’s 17 percent pop in equities markets had the effect of dragging a lot of dollars off of the sidelines.

Not just nationally, either. Banks in the Kansas City region didn’t rise to the national averages, but they still realized an increase of 4.73 percent in combined deposits, with nearly $4 billion more pouring in. The $85.84 billion held by 120 banks in the region as of the start of this year also represented an all-time high.

Much was made this spring of the potential impact that might follow the collapse of some national leviathans, including Silicon Valley Bank in California and Signature Bank in New York, with some pundits declaring that investors would lose confidence in the nation’s banking system.

Those banks, however, had unusual business models and some shortcomings with regulatory and best practices standards. If you ask regional bankers, there’s little concern that depositors are taking money out to stuff under their mattresses.

“Really, the deposit runoff began around March of this year; the big thing to look at now will be when banks start reporting their second-quarter results to the FDIC,” says Brent Giles, recently named CEO for Hawthorn Bank. “Did we see deposit inflows or outflows? I think most banks are doing what it takes to maintain deposit levels.”

That means following the lead of the Fed, which has raised rates by nearly 5 percentage points since the inflation alarms began ringing in early 2022. People with insured accounts of less than $250,000 had been in investor agony for years in a near-zero-rate environment; today, many banks are indeed attempting to keep those holdings in place with interest rates approaching—and in some cases, above—5 percent.

“Now, banks are offering very attractive deposit rates to maintain liquidity,” Giles says. “For a period, banks were offering rates significantly below the two-year treasury yield. A lot of depositors left the system chasing yields on treasuries,” which have retreated from a 2022 high of 5.06 percent in March and stood at 4.74 in mid-July. By raising their own rates, Giles said, banks “have been able to attract those deposits back.”

Somewhat more tempered in his assessment is Ernie Goss, whose Omaha research firm teams with Creighton University to poll bankers in a 10-state region to track sentiment on economic trends.

That study’s checking deposit index plummeted to a record low in April by a considerable margin for checking accounts but only slightly for CDs and other savings instruments. “The deposit indices indicate the change in deposits, not the level of deposits,” Goss noted.

Still, he said the record-low checking deposit index was a real concern. Two straight record-setting lows with checking deposit indices point to higher deposit outflows even for community banks, he said.  “Only 15.4 percent of bank CEOs in Creighton’s survey see the banking insolvency crisis as over, while the remaining 84.6 percent expect banks to continue to report insolvency challenges.”

The survey also revealed a bit of resentment brewing in the C-suites of community banks, with one respondent lamenting that “the liquidity problem will continue for some time, and we will see more regulation because of it.  And as a bonus for their being late to the table,” he said of regulators, “we will all pay higher FDIC payments for as long as we can see.”  

In the Kansas City market, that presents particular challenges for small banks—and there are many. Reflecting this region’s status as one of the most competitive banking markets in the nation, the FDIC shows 120 banks operating between Topeka and Sedalia. 

Much of that competitiveness, though, is anchored below the top tier. The 10 largest banks in this market account for nearly 70 percent of the region’s deposit market share. That leaves 110 others to scrap it out for the remaining 30 percent share. Fewer than 25 banks have as much as a 1 percent market share; 95 others are fighting the good fight at less than 1 percent each.

This is not entirely a bad thing, says Jim Rine, president and CEO of UMB Bank, No. 1 on that market share list with 25.92 percent of the region’s deposits.

“Kansas City has always been a competitive market for deposits, and that will continue, regardless of environment, which is a benefit to businesses and consumers,” Rine said. Locked in a battle with Commerce Bank for market dominance for years, UMB has pulled away in the past five years and has now more than doubled the deposit holdings of its “Kemper Cousin.” And Commerce is the only other regional bank with a double-digit market share, at 11.52 percent. Combined, they hold more than 38 percent of deposits here, easily surpassing national brands like Bank of America, Wells Fargo, and U.S. Bank.

 You don’t build that kind of dominance without offering something to stand out from the pack. Rine, then, has reason to boast when he says, “Our deposit success is directly tied to our strong customer relationships and our ability to be flexible, nimble, and responsive to their specific needs. Our customers work directly with decision-makers and know they will receive prompt, strategic advice and service. This is one of our main differentiators and why we’ve continued to be the deposit market leader in Kansas City. Simply put, we are a customer experience organization.”

If you factor in increasing regulatory costs and other industry dynamics, banks at the other end of the spectrum will continue to feel enormous pressure. Since 1985, the nation has seen the number of banks fall from an all-time high of 14,417 to 4,136 today—a decline of 71.3 percent.

That, Giles says, isn’t over.

“I think there will continue to be consolidation in the Kansas City market, and it’s probably going to be at or above the national figures,” he said. “But that won’t be due to poor health; I think the Kansas City banks are in good health, so I don’t believe it’s going to be the result of serious financial trouble. It’s more about getting the size and scale to produce satisfactory returns for shareholders.”

What’s broken, he says, are not the financial conditions facing community banks. “It’s the business model,” Giles says. “You can’t earn as much with tight margins and increased costs. The need to scale and thrive will drive consolidation.”