The number of Kansas-based banks and thrifts continues to shrink, and the decline is even sharper among small banks.
That’s according to an Eagle analysis of Federal Deposit Insurance Corp. data between 2004 and 2013.
The analysis showed that the number of banks and thrifts with headquarters in Kansas declined by nearly 22 percent between 2004 and 2013, dropping from 372 to 291.
The decline was nearly 41 percent for banks and thrifts with less than $100 million in assets. Their numbers dropped from 269 to 160.
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The consolidation trend produced more financial institutions with more than $100 million. That segment grew in Kansas, increasing from 103 in 2004 to 131.
The decline in the numbers of banks and thrifts is part of a national trend. According to FDIC data the total number of institutions in the U.S. has declined 24 percent in the past decade. And just like in Kansas, the decline was steeper – nearly 50 percent – among institutions with less than $100 million in assets. But unlike Kansas, institutions with more than $100 million in assets declined nearly 3 percent in the period.
Bankers and industry officials in Kansas said a number of forces are contributing to industry consolidation, mostly through the acquisition or merging of small banks into bigger ones. Bank failures during the financial crisis of 2008 account for a smaller portion of the bank and thrift declines in Kansas.
The trend is unlikely to reverse.
“I don’t know anybody who is making an argument that there will be more banks headquartered in Kansas 10 years from now,” said Tom Page, CEO of Emprise Bank.
Since Shawn Mitchell joined the Community Bankers Association of Kansas as its president and CEO 5 1/2 years ago, he’s been closely watching the trend.
As his Topeka-based association’s name implies, his lobbying organization counts small banks as the majority – but not all – of its members.
“We are almost the same size in numbers of banks that are members, yet we’ve lost 50 banks during that period,” Mitchell said. “We’ve been losing a lot of smaller members but adding members who happen to be the larger, acquiring banks which tells me we’re doing right representing community banks.”
Mitchell declined to say exactly how many banks are members of the association.
He said the regulatory environment is driving the consolidation trend among smaller banks, as are aging owners and CEOs who are looking to retire and don’t have younger investors or colleagues in the pipeline to pass on ownership or leadership.
“If you’re a $100 million bank, maybe you can afford a compliance officer (to keep on top of increasing, new federal regulations),” Mitchell said. “If you’re a $50 million bank, that’s nearly impossible.”
He said some banks are finding ways around hiring a compliance officer by adding those duties to an existing employee’s workload. Other small Kansas banks are exploring ways to share a compliance officer, with each bank paying a share of the officer’s salary.
But the perfect solution has yet to be found, Mitchell said. “Smaller banks are still trying to figure it out,” he said.
Mitchell doesn’t think declining rural populations are as much a driver of consolidation as are regulatory costs and aging ownership, but Emprise’s Page does.
“Everybody talks about regulatory burden, and it is absolutely real and it is just crushing these small banks, just the cost of paying somebody to stay on top of regulations,” Page said. “(But) the fortune of small banks is also tied to small towns. And whether it’s school consolidations, losing your post office or losing your grocery store, that all affects banks.”
Mitchell said that at the same time bank numbers are declining, no new banks – or de novo banks – are forming, which he thinks is a function of stiffer capital requirements following the financial crisis.
“That also has something to do with this,” Mitchell said.
Small bank perspective
Steve Carr and David Harris were the last in Wichita to start banks, in 1999 and 2005, respectively.
And both of their banks fall into the category of less than $100 million in assets: Carr’s Community Bank of Wichita has $70 million in assets and Harris’ RelianzBank has $51 million in assets.
Both executives said if they had to do it all over again but in 2014, they still would.
“Anybody in their right mind would pause, given the avalanche of new regulations banks are having to contend with, along with competition and everything else,” Carr said. “But if I was 48 (again) and in a situation like it is, I think I would because of my passion and desire to have my own bank. It’s awfully strong.”
Harris would, too, but with a major caveat. “Instead of raising $5 million in capital, I would raise $15 to $20 million in capital,” he said. “And instead of shooting to be a $50 to $75 million bank, I’d shoot to be a S200 to $300 million bank.”
Harris said the business is a lot more fragmented and competitive than it was when he started RelianzBank. The local economy “is not growing by any measurable amount coupled with the intensely growing regulatory burden and increasing expenses.”
“You cannot make a small bank viable long term,” he said. “I’m a small bank, so that tells you it’s on my mind.”
Harris said in the past six months, he’s decided RelianzBank needs to “push harder to become a larger institution.” The economies of scale of having double or triple the bank’s current assets will make it easier to spread the bank’s costs and to compete with bigger banks on commercial loans. He said bigger banks have the asset size that allows them to offer rates and terms on loans with which his bank, right now, has difficulty matching.
“When we’re competing there’s only so much we can give because we’ve got to make something,” he said. “Our profitability point is going to need to be higher” than the bigger banks.
Carr, on the other hand, said he thinks his bank is in a better position than most small banks because his bank is based in an urban area and has the capacity and ability to make the loans that his rural counterparts don’t have as easy access to.
Harris thinks consolidation in the industry will continue. So do Page and Mitchell.
“Unfortunately I do not see that easing up,” Mitchell said.
Page said consolidation has its upside and downside. The upside would be for banks to expand through acquisitions or mergers. One downside may be the industry becoming a little less influential because it has fewer people working in it.
“In general I would think it would help the industry be a little more financially stable and predictable in terms of financial performance,” he said. But overall, “that’s a hard one to know.”
Shrinking banks and thrifts
The number of banks and thrifts in Kansas and the U.S. has been falling in the past decade, with the greatest declines occurring among small banks. The declines are the result of mergers and acquisitions as well as bank failures following the financial crisis in 2008.
|Year||Kansas small banks||U.S. small banks||Kansas large banks||U.S. large banks||Kansas total||U.S. total|
*Small banks are defined as banks with less than $100 million in assets, while large banks have more than $100 million in assets.
Source: Federal Deposit Insurance Corp., State Banking Performance Summaries, Dec. 31, 2004 through Dec. 31, 2013.