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THE STATE OF BANKING IN KANSAS 2014 A special report from: The Center for Banking Excellence – The University of Kansas School of Business 2014
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THE STATE OF BANKING IN KANSAS
2014 A special report from: The Center for Banking Excellence – The University of KansasSchool of Business 2014
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The Center for Banking Excellence is funded in part bya generous grant from the Capitol Federal Foundation.The center also thanks the Federal Deposit InsuranceCorporation for providing generous access to bankingindustry data.
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TABLE OF CONTENTS
2014
DIRECTOR’S NOTE
STATE OF KANSAS BANKING 2014
U.S. SENATE TESTIMONY ON SYSTEMIC RISK
KANSAS BANKS: TOP 10% LISTS
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DIRECTOR’S NOTE
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It is often said that Europe has a bank-centered financial system, while the U.S. has a markets-centered financial system. This is a true statement from about 10,000 feet up. But at ground level it obscures some important features.In both the U.S. and in Europe, most business enterprises are privately held firms that rely heavily on local banks for financing. This is nowhere truer thanin Kansas.
Kansas has more banks per capita than any state other than Alaska. This arithmetic dictates that the typical Kansas bank is a small community
bank: most Kansas towns are too small to support a large local bank, and most Kansas businessesbenefit greatly from their close relationships with small local lenders.
But as times and technology have changed, the traditional Kansas bank has faced increased challenges. Scores of small Kansas banks have exited the industry over the past decade—most have been acquired by other nearby community banks, while a handful have failed. The economy wide financial crisis, the glacial pace of the economic recovery, and the ever-increasing costs of bank regulations have all served to accelerate this industry consolidation.
Such are the challenges facing Kansas banks: They survived the “great recession” that suppressed the demand for their financial services; they are weathering the effects of Federal Reserve monetary policies that have compressed their profit margins; and many of them remain too small to fully exploit their com-munity bank business model. But Kansas banks and Kansas bankers have notable strengths. We have absolutely no doubt that the best Kansas banks will thrive in the coming years despite facing increased competition, by evolving with technological and regulatory conditions that are beyond their control and by doubling down on their primary strategic focus of helping local businesses and households solvetheir financial problems.
It is our hope that the information contained in this report is useful for framing both the strengths of the Kansas banking industry and the challenges facing the typical Kansas bank.
The Center for Banking Excellence has three broad missions: (1) Conduct research aimed at better understanding the condition and performance of the U.S. banking industry and, by extension, Kansas banks. (2) Perform outreach to the greater Kansas banking community, in the form of academicconferences, industry conferences and executive education. (3) Serve as a conduit betweenUniversity of Kansas students and the greater Kansas financial services industry.
We encourage banks and bankers to participate in the Center’s various activities. For more information, please consult the Center’s website at business.ku.edu and click on research.
Yours,
Robert (Bob) DeYoungCapitol Federal Distinguished Professor in Financial Markets and InstitutionsDirector, KU Center for Banking Excellence
STATE OF KANSAS BANKING 2014
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Wichita is the largest city in Kansas. But Kansas City, Missouri, casts a very large economic andfinancial shadow on Kansas. So for the purposes of this report, we will pitch a big tent. We definea “Kansas bank” as any separately chartered commercial bank or thrift institution headquartered inKansas or in the counties that comprise the bulk of the economic activity on the Missouri side of the Kansas City metro area (Jackson and Clay counties).
So defined, the Kansas banking industry was comprised of 308 separate and distinct banks at the start of 2014. These banks held $115 billion in assets, $91 billion in customer deposits and $60 billion in loans. They generated $1.1 billion of after-tax net income, and paid $251 million in taxes, during 2013. The industry started 2014 about $2 billion larger than the year before, but its growth had slowed:Kansas bank assets grew at only a 1.7% annual rate during 2013, compared to a 4.7% rate ofgrowth during 2012.
The structure of the Kansas banking industry
The typical Kansas bank is a small bank. Indeed, by U.S. commercial bank standards, the typical Kansas bank is extremely small. About 90% of Kansas banks hold less than $500 million of assets, and 53% hold assets less than $100 million. By comparison, outside of Kansas only about 80% of U.S. banks hold less than $500 million of assets, with just 29% holding assets less than $100 million.
At the outset of 2014, 293 of the 308 Kansas banks held less than $1 billion in assets, a traditional (though not necessarily accurate) threshold used to define a “community bank.” The differences in size are even starker at the other end of the spectrum: The largest U.S. banking companies are 100 times larger than the largest “Kansas bank,” Commerce Bank, which held assets of around $23 billion at the beginning of 2014.
ROA2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0066989 0.0083429 0.0086538 0.0087967 0.004872 0.002984 0.005029 0.0070155 0.0076955 0.0075077$100M < Assets < $500M 0.0098538 0.0105767 0.0110979 0.0106834 0.0072967 0.0048773 0.0056492 0.0083046 0.0106453 0.0094745Assets > $500M 0.0101364 0.0136485 0.0122103 0.0114857 0.0038862 -‐0.003775 0.0019979 0.0055087 0.0102987 0.0125579
Margin2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0409899 0.0411159 0.0418377 0.041457 0.0413572 0.0417349 0.041592 0.0421319 0.0402946 0.0389905$100M < Assets < $500M 0.0398218 0.0399598 0.0403147 0.0396548 0.0396318 0.039926 0.0400548 0.0389476 0.0386384 0.0361871Assets > $500M 0.0361983 0.0365879 0.0392288 0.0380846 0.0367069 0.0371742 0.033574 0.0363037 0.0346342 0.0325021
NPLRatio2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0119015 0.0108514 0.010876 0.0139937 0.0219068 0.0313999 0.0311008 0.0295131 0.0281052 0.0231074
LoanAss 0.910376 0.943296 0.9427946 0.9293086 0.8813821 0.7512494 0.7113234 0.6863254 0.70346412004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.5320812 0.5624243 0.5887545 0.6052943 0.6091286 0.5884924 0.5821255 0.5660941 0.5576473 0.5798379
CoreAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.6137515 0.6177934 0.6241461 0.6420214 0.6554643 0.6676927 0.7748765 0.7958323 0.8125115 0.8242608
EqAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0990401 0.1048605 0.1087698 0.1128483 0.1109552 0.1096992 0.1111116 0.1186949 0.1210302 0.1204647
Number2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 263 256 252 242 234 219 208 200 179 170$100M < Assets < $500M 103 105 100 102 98 106 107 107 107 108Assets > $500M 29 32 33 35 37 35 32 32 32 31
Kansas non-‐Kansasless than $100M 53.4% 29.1%$100M to $500M 36.2% 50.7%$500M to $25B 10.4% 19.4%more than $25B 0.8%
assets < $100M
$100M < assets < $500M
$500M < assets < $25B
assets > $25B
ROAKansas 0.0076 0.0092 0.0103non-‐Kansas 0.0072 0.0092 0.0105 0.0106ROEKansas 0.067 0.084 0.097non-‐Kansas 0.061 0.086 0.091 0.096
-‐0.5%
0.0%
0.5%
1.0%
1.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Return on assets Kansas bank averages, 2004-‐2013
Assets > $500M
$100M < Assets < $500M
Assets < $100M
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Interest margin on earning assets Kansas bank averages, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐20
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent loans nonperforming Kansas bank averages, 2004-‐2013
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity to assets Kansas bank averages, 2004-‐2013
45% 50% 55% 60% 65% 70% 75% 80% 85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans to Assets Core Deposits to Assets
Kansas bank averages, 2004-‐2013
Core Deposits
Loans
Kansas
non-‐Kansas 0%
10%
20%
30%
40%
50%
60%
less than $100M $100M to
$500M $500M to $25B more than
$25B
DistribuHon of banks by asset sizes Kansas banks and non-‐Kansas banks, 2013
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on assets Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on equity Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
While the size of the banking industry (that is, its total assets) tends to grow and shrink along withthe size of the economy, the number of banks does not. The Kansas banking industry has consolidatedsubstantially over the past decade. At the beginning of 2004, there were 395 Kansas banks; sincethen, fully one-fifth (or 22%) of those banks have disappeared. Only 12 “Kansas banks” failed overthe past decade, while 87 banks were merged out of existence.
This consolidation trend is both ongoing—we should not expect it to stop any time soon—andasymmetric, occurring almost exclusively among the ranks of banks with assets less than $100million.
In contrast, the number of Kansas banks with assets between $100 million and $500 million has remained relatively stable over time, as has the number of Kansas banks with assets greater than $500 million. This is no coincidence. These larger banks tend to be more profitable, and this creates long-run pressure for the smaller banks to exit the market.
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nonperforming loans Kansas bank averages, 2004-‐2013
Nonperforming Loans to Total Loans
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The profitability of Kansas banks
The problem is not that Kansas banks are unprofitable in general. In fact, after adjusting for bank size, Kansas banks tend to be no more or less profitable than their U.S. peers. Return on assets (ROA) at Kansas banks with assets less than $100 million averaged 0.76% in 2013, compared to 0.72% for non -Kansas banks of similar size. The problem is that banks that are this small, regardless of their locations, are able to increase their profitability substantially by growing just a little bit larger. For example, ROA at Kansas banks with between $100 million and $500 million averaged 0.92% in 2013. This 17 basis point difference in return on assets, earned year after year, goes a long way to explaining why so many of the smallest Kansas banks have exited the industry—and are likely to continue to do so in coming years.
Profitability continues to increase, albeit at a slower rate, for banks that grow their assets above $500 million. ROA at Kansas banks with between $500 million and $25 billion in assets averaged 1.03% in 2013, for an additional 11 basis point increase. But on average, size-based improvements in ROA dimin-ish almost entirely beyond $25 billion of assets; although no Kansas banks are this large, the average ROA among these very large non-Kansas banks was 1.06% in 2013.
This pattern (from 0.76% to 0.92% to 1.03% to 1.06%) suggests that that “scale economies”—that is, the benefits that a bank captures from growing larger—are very substantial for the smallest banks butbecome less substantial and eventually nonsubstantial for larger banks. A conclusion that one might draw from these (very rudimentary) data: To capture the lion’s share of available scale economies, the typical Kansas community banking enterprise would want to operate in the neighborhood of $500 million in assets, but growing larger than this would not necessarily substantially improve returns. (1)
(1) A more detailed analysis of this argument can be found in DeYoung, Robert, “Economies of Scale in Banking” in Efficiency and Productivity Growth: Modelling in the Financial Services Industry, ed. Fotios Pasiouras, John Wiley & Sons, pp. 49-76, 2013.
ROA2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0066989 0.0083429 0.0086538 0.0087967 0.004872 0.002984 0.005029 0.0070155 0.0076955 0.0075077$100M < Assets < $500M 0.0098538 0.0105767 0.0110979 0.0106834 0.0072967 0.0048773 0.0056492 0.0083046 0.0106453 0.0094745Assets > $500M 0.0101364 0.0136485 0.0122103 0.0114857 0.0038862 -‐0.003775 0.0019979 0.0055087 0.0102987 0.0125579
Margin2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0409899 0.0411159 0.0418377 0.041457 0.0413572 0.0417349 0.041592 0.0421319 0.0402946 0.0389905$100M < Assets < $500M 0.0398218 0.0399598 0.0403147 0.0396548 0.0396318 0.039926 0.0400548 0.0389476 0.0386384 0.0361871Assets > $500M 0.0361983 0.0365879 0.0392288 0.0380846 0.0367069 0.0371742 0.033574 0.0363037 0.0346342 0.0325021
NPLRatio2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0119015 0.0108514 0.010876 0.0139937 0.0219068 0.0313999 0.0311008 0.0295131 0.0281052 0.0231074
LoanAss 0.910376 0.943296 0.9427946 0.9293086 0.8813821 0.7512494 0.7113234 0.6863254 0.70346412004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.5320812 0.5624243 0.5887545 0.6052943 0.6091286 0.5884924 0.5821255 0.5660941 0.5576473 0.5798379
CoreAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.6137515 0.6177934 0.6241461 0.6420214 0.6554643 0.6676927 0.7748765 0.7958323 0.8125115 0.8242608
EqAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0990401 0.1048605 0.1087698 0.1128483 0.1109552 0.1096992 0.1111116 0.1186949 0.1210302 0.1204647
Number2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 263 256 252 242 234 219 208 200 179 170$100M < Assets < $500M 103 105 100 102 98 106 107 107 107 108Assets > $500M 29 32 33 35 37 35 32 32 32 31
Kansas non-‐Kansasless than $100M 53.4% 29.1%$100M to $500M 36.2% 50.7%$500M to $25B 10.4% 19.4%more than $25B 0.8%
assets < $100M
$100M < assets < $500M
$500M < assets < $25B
assets > $25B
ROAKansas 0.0076 0.0092 0.0103non-‐Kansas 0.0072 0.0092 0.0105 0.0106ROEKansas 0.067 0.084 0.097non-‐Kansas 0.061 0.086 0.091 0.096
-‐0.5%
0.0%
0.5%
1.0%
1.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Return on assets Kansas bank averages, 2004-‐2013
Assets > $500M
$100M < Assets < $500M
Assets < $100M
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Interest margin on earning assets Kansas bank averages, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐20
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent loans nonperforming Kansas bank averages, 2004-‐2013
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity to assets Kansas bank averages, 2004-‐2013
45% 50% 55% 60% 65% 70% 75% 80% 85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans to Assets Core Deposits to Assets
Kansas bank averages, 2004-‐2013
Core Deposits
Loans
Kansas
non-‐Kansas 0%
10%
20%
30%
40%
50%
60%
less than $100M $100M to
$500M $500M to $25B more than
$25B
DistribuHon of banks by asset sizes Kansas banks and non-‐Kansas banks, 2013
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on assets Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on equity Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
ROA2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0066989 0.0083429 0.0086538 0.0087967 0.004872 0.002984 0.005029 0.0070155 0.0076955 0.0075077$100M < Assets < $500M 0.0098538 0.0105767 0.0110979 0.0106834 0.0072967 0.0048773 0.0056492 0.0083046 0.0106453 0.0094745Assets > $500M 0.0101364 0.0136485 0.0122103 0.0114857 0.0038862 -‐0.003775 0.0019979 0.0055087 0.0102987 0.0125579
Margin2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0409899 0.0411159 0.0418377 0.041457 0.0413572 0.0417349 0.041592 0.0421319 0.0402946 0.0389905$100M < Assets < $500M 0.0398218 0.0399598 0.0403147 0.0396548 0.0396318 0.039926 0.0400548 0.0389476 0.0386384 0.0361871Assets > $500M 0.0361983 0.0365879 0.0392288 0.0380846 0.0367069 0.0371742 0.033574 0.0363037 0.0346342 0.0325021
NPLRatio2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0119015 0.0108514 0.010876 0.0139937 0.0219068 0.0313999 0.0311008 0.0295131 0.0281052 0.0231074
LoanAss 0.910376 0.943296 0.9427946 0.9293086 0.8813821 0.7512494 0.7113234 0.6863254 0.70346412004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.5320812 0.5624243 0.5887545 0.6052943 0.6091286 0.5884924 0.5821255 0.5660941 0.5576473 0.5798379
CoreAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.6137515 0.6177934 0.6241461 0.6420214 0.6554643 0.6676927 0.7748765 0.7958323 0.8125115 0.8242608
EqAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0990401 0.1048605 0.1087698 0.1128483 0.1109552 0.1096992 0.1111116 0.1186949 0.1210302 0.1204647
Number2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 263 256 252 242 234 219 208 200 179 170$100M < Assets < $500M 103 105 100 102 98 106 107 107 107 108Assets > $500M 29 32 33 35 37 35 32 32 32 31
Kansas non-‐Kansasless than $100M 53.4% 29.1%$100M to $500M 36.2% 50.7%$500M to $25B 10.4% 19.4%more than $25B 0.8%
assets < $100M
$100M < assets < $500M
$500M < assets < $25B
assets > $25B
ROAKansas 0.0076 0.0092 0.0103non-‐Kansas 0.0072 0.0092 0.0105 0.0106ROEKansas 0.067 0.084 0.097non-‐Kansas 0.061 0.086 0.091 0.096
-‐0.5%
0.0%
0.5%
1.0%
1.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Return on assets Kansas bank averages, 2004-‐2013
Assets > $500M
$100M < Assets < $500M
Assets < $100M
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Interest margin on earning assets Kansas bank averages, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐20
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent loans nonperforming Kansas bank averages, 2004-‐2013
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity to assets Kansas bank averages, 2004-‐2013
45% 50% 55% 60% 65% 70% 75% 80% 85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans to Assets Core Deposits to Assets
Kansas bank averages, 2004-‐2013
Core Deposits
Loans
Kansas
non-‐Kansas 0%
10%
20%
30%
40%
50%
60%
less than $100M $100M to
$500M $500M to $25B more than
$25B
DistribuHon of banks by asset sizes Kansas banks and non-‐Kansas banks, 2013
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on assets Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on equity Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
13
It is important to note that these data do not mean that banks with only $100 million or $200 million of assets cannot be highly profitable. These figures are merely averages. A number of very small Kansas banks generate enviable earnings by exploiting local market power, by implementing idiosyncraticbusiness models and/or simply through exceptionally efficient business practices.
While larger bank size can yield benefits of higher earnings, larger size also tends to expose banksto greater earnings volatility. During the financial crisis, U.S. commercial banks of all sizes sufferedreductions in profits, but earnings plunged most dramatically on average for the largest banks.Earnings at Kansas banks followed the same pattern. Both before and after the crisis, large Kansas banks (assets greater than $500 million) exhibited higher profitability on average than at their smaller rivals. During the crisis, however, earnings at large Kansas banks plunged even further on average than earnings at small Kansas banks. In other words, the risk-return trade off at U.S. banks appears toincrease as banks grow larger.
ROA2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0066989 0.0083429 0.0086538 0.0087967 0.004872 0.002984 0.005029 0.0070155 0.0076955 0.0075077$100M < Assets < $500M 0.0098538 0.0105767 0.0110979 0.0106834 0.0072967 0.0048773 0.0056492 0.0083046 0.0106453 0.0094745Assets > $500M 0.0101364 0.0136485 0.0122103 0.0114857 0.0038862 -‐0.003775 0.0019979 0.0055087 0.0102987 0.0125579
Margin2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0409899 0.0411159 0.0418377 0.041457 0.0413572 0.0417349 0.041592 0.0421319 0.0402946 0.0389905$100M < Assets < $500M 0.0398218 0.0399598 0.0403147 0.0396548 0.0396318 0.039926 0.0400548 0.0389476 0.0386384 0.0361871Assets > $500M 0.0361983 0.0365879 0.0392288 0.0380846 0.0367069 0.0371742 0.033574 0.0363037 0.0346342 0.0325021
NPLRatio2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0119015 0.0108514 0.010876 0.0139937 0.0219068 0.0313999 0.0311008 0.0295131 0.0281052 0.0231074
LoanAss 0.910376 0.943296 0.9427946 0.9293086 0.8813821 0.7512494 0.7113234 0.6863254 0.70346412004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.5320812 0.5624243 0.5887545 0.6052943 0.6091286 0.5884924 0.5821255 0.5660941 0.5576473 0.5798379
CoreAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.6137515 0.6177934 0.6241461 0.6420214 0.6554643 0.6676927 0.7748765 0.7958323 0.8125115 0.8242608
EqAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0990401 0.1048605 0.1087698 0.1128483 0.1109552 0.1096992 0.1111116 0.1186949 0.1210302 0.1204647
Number2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 263 256 252 242 234 219 208 200 179 170$100M < Assets < $500M 103 105 100 102 98 106 107 107 107 108Assets > $500M 29 32 33 35 37 35 32 32 32 31
Kansas non-‐Kansasless than $100M 53.4% 29.1%$100M to $500M 36.2% 50.7%$500M to $25B 10.4% 19.4%more than $25B 0.8%
assets < $100M
$100M < assets < $500M
$500M < assets < $25B
assets > $25B
ROAKansas 0.0076 0.0092 0.0103non-‐Kansas 0.0072 0.0092 0.0105 0.0106ROEKansas 0.067 0.084 0.097non-‐Kansas 0.061 0.086 0.091 0.096
-‐0.5%
0.0%
0.5%
1.0%
1.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Return on assets
Kansas bank averages, 2004-‐2013
Assets > $500M
$100M < Assets < $500M
Assets < $100M
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Interest margin on earning assets Kansas bank averages, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐20
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent loans nonperforming Kansas bank averages, 2004-‐2013
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity to assets Kansas bank averages, 2004-‐2013
45% 50% 55% 60% 65% 70% 75% 80% 85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans to Assets Core Deposits to Assets
Kansas bank averages, 2004-‐2013
Core Deposits
Loans
Kansas
non-‐Kansas 0%
10%
20%
30%
40%
50%
60%
less than $100M $100M to
$500M $500M to $25B more than
$25B
DistribuHon of banks by asset sizes Kansas banks and non-‐Kansas banks, 2013
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on assets Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on equity Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
Kansas Bank Business Models
This strong sensitivity of large bank profits to the business cycle—compared to the relative stability of small bank profits over time—is an indication that banks’ business models tend to evolve as they grow larger. While large banking companies and small banking companies differ in numerous ways, two key differences—core deposit funding and noninterest income—help explain why larger banks experience more earnings volatility than smaller banks.
First, larger banks tend to shift their financing mix away from core deposits and toward a variety offunding sources with shorter effective durations. At the smallest banks both inside and outside of Kansas in 2013, non-core deposits, interbank loans, reverse treasury repos and other short-term instruments accounted for only about 5% of total asset funding on average. In contrast, the largest Kansas banks ($500 million to $25 billion of assets) financed about 10% of their assets on average with thesenon-core funding sources—about twice as much as at small Kansas banks. Moreover, the largestbanks outside of Kansas (more than $25 billion of assets) used non-core sources to finance about21% of their assets—more than four times as much as at small Kansas banks. Reliance on non-core funding can expose banks to liquidity risk—in other words, depositor and creditor runs—during periods of financial stress when short-term investors pull out of banks and seek safer harbors for their funds.And even if such banks are not hit by creditor runs, they will likely have to pay higher interest ratesto retain their short-term funding during times of financial market stress.
Second, larger banks tend to generate a larger share of their income from fee-based activities, and a reduced share of their income from interest-based activities. At the largest Kansas banks (assets more than $500 million), noninterest income accounted for 40% of operating income on average in 2013, compared to just 15% at the smallest Kansas banks (assets less than $100 million). Outside ofKansas—where the “large” banks are much larger—the same general pattern emerges: Noninterest income accounted for about 43% of operating income at the largest banks compared to only about 27% at the smallest banks, on average. Over a decade of research by academic and regulatory economists has concluded that streams of noninterest income from investment banking, brokerage, venture capital, insurance underwriting and other fee-based activities are more sensitive to the business cycle thantraditional interest-bearing activities such as lending and deposit-taking.(2)
(2) An early example of this research is Robert DeYoung and Karin P. Roland, “Product Mix and Earning at Commercial Banks: Evidence from a Degree of Total Leverage Model,” Journal of Financial Intermedi-ation, volume 10, 2001. A more recent example is Asli Demirgüç-Kunt and Harry Huizinga, “BankActivity and Funding Strategies: The Impact on Risk and Returns,” Journal of Financial Economics, volume 98, 2010.
15
Common size income statements for Kansas Banks* in 2013 Percentages of aggregate operating income within each size group
Asset size: All Banks Less than $100M
$100M to $500M
$500M to $25B
More than $25B
Interest Income 75.6% 98.9% 85.1% 70.7% -‐-‐ Interest Expense 9.8% 12.6% 11.5% 9.0% -‐-‐ Net Interest Income 65.8% 86.3% 73.7% 61.7% -‐-‐ Noninterest Income 36.2% 15.2% 29.7% 40.0% -‐-‐ Provisions 2.0% 1.5% 3.4% 1.7% -‐-‐ Operating Income 100.0% 100.0% 100.0% 100.0% -‐-‐ Noninterest Expense 71.3% 78.0% 74.6% 69.8% -‐-‐ Other items 0.4% 0.5% 0.3% 0.4% -‐-‐ Income before taxes 29.1% 22.5% 25.7% 30.6% -‐-‐ Taxes 5.3% 2.5% 3.9% 5.9% -‐-‐ Net Income 23.8% 20.0% 21.8% 24.7% -‐-‐ *”Kansas banks” also include banks in Jackson and Clay Counties in Missouri.
Common size income statements for non-‐Kansas Banks in 2013 Percentages of aggregate operating income within each size group
Asset size: All Banks
Less than $100M
$100M to $500M
$500M to $25B
More than $25B
Interest Income 88.9% 88.6% 90.1% 88.6% 69.1% Interest Expense 11.2% 11.9% 12.2% 10.9% 7.5% Net Interest Income 77.7% 76.7% 77.9% 77.7% 61.5% Noninterest Income 26.8% 26.6% 26.1% 27.0% 43.7% Provisions 4.5% 3.3% 4.0% 4.7% 5.2% Operating Income 100.0% 100.0% 100.0% 100.0% 100.0% Noninterest Expense 69.8% 81.5% 73.9% 68.2% 64.0% Other items 0.6% 0.5% 0.5% 0.6% 0.6% Income before taxes 30.8% 19.0% 26.6% 32.4% 36.7% Taxes 7.2% 2.5% 5.1% 7.9% 12.1% Net Income 23.6% 16.6% 21.5% 24.5% 24.5%
Common size balance sheets for Kansas Banks* in 2013 Percentages of aggregate assets within each size group
Asset size: All
Banks Less than $100M
$100M to $500M
$500M to $25B
More than $25B
Cash and reserves 7.4% 10.5% 6.5% 7.4% -‐-‐ Securities 35.0% 27.9% 31.7% 36.7% -‐-‐ Fed funds/repos 1.5% 2.3% 0.8% 1.6% -‐-‐ Net loans and leases 50.9% 55.1% 55.3% 49.3% -‐-‐ Allowance of losses 0.8% 0.9% 1.0% 0.7% -‐-‐ Trading assets 0.0% 0.0% 0.0% 0.0% -‐-‐ Other assets 5.1% 4.3% 5.7% 5.0% -‐-‐ Total Assets 100.0% 100.0% 100.0% 100.0% -‐-‐ Core deposits 74.7% 79.6% 77.0% 73.5% -‐-‐ Other deposits 4.7% 4.5% 6.4% 4.2% -‐-‐ Fed funds/repos 4.6% 0.9% 1.0% 6.0% -‐-‐
Other liabilities 5.3% 3.7% 4.6% 5.6% -‐-‐ Equity 10.7% 11.2% 11.0% 10.6% -‐-‐ Liabilities and Equity 100.0% 100.0% 100.0% 100.0% -‐-‐ *”Kansas banks” also include banks in Jackson and Clay Counties in Missouri.
Common size balance sheets for non-‐Kansas Banks in 2013 Percentages of aggregate assets within each size group
Asset size: All
Banks Less than $100M
$100M to $500M
$500M to $25B
More than $25B
Cash and reserves 7.4% 12.2% 8.5% 6.9% 13.0% Securities 21.9% 24.9% 23.0% 21.5% 19.8% Fed funds/repos 0.7% 2.3% 1.1% 0.5% 3.6% Net loans and leases 62.8% 55.7% 61.6% 63.5% 48.6% Allowance of losses 1.0% 0.9% 1.0% 1.0% 0.9% Trading assets 0.1% 0.0% 0.0% 0.1% 5.5% Other assets 7.1% 4.9% 5.8% 7.6% 9.4% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% Core deposits 71.2% 80.2% 78.1% 68.9% 55.5% Other deposits 9.4% 4.8% 6.3% 10.4% 19.0% Fed funds/repos 2.1% 0.5% 1.0% 2.5% 1.7% Other liabilities 6.0% 2.7% 3.9% 6.7% 12.7% Equity 11.4% 11.7% 10.7% 11.5% 11.1% Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0%
17
Increased bank size, and the changing business mixes that are typically associated with increasedbank size, show up clearly in banks’ net interest margins. Observers who lack an expert knowledgeof community banking are often surprised to learn that it is the small banks, and not the large banks,that traditionally earn the highest margins on their portfolios of interest-bearing loans and securities.A decade ago, in the years leading up to the financial crisis, the smallest Kansas banks werecollecting an average 4.1% margin on their earning assets, compared to an average of only about3.6% at the largest Kansas banks. This difference held up during the boom years and the financialcrisis years. By 2013, small Kanas banks were still beating the net interest margin at large Kansas banks, 3.9% to 3.2%.
The superior margins earned by small Kansas banks are mainly due to differences in the composition of banks’ asset portfolios. On average, small banks hold more high-yielding assets (loans are 55% of assets) than large banks (49%), and small bank hold fewer low-yielding assets (securities are 28% ofassets) than large banks (37%). The decline in interest margins for banks of all sizes during the past few years is the result of a low interest rate environment in which banks have had to reprice long-term loans and securities at lower interest rates.
How can we reconcile the low interest margins earned by large Kansas banks with their relatively high rates of profitability? Large banks offset their low interest margins in two main ways. First, they boost their revenue streams by generating substantially larger amounts of noninterest income, which averages about 40% of operating income at large Kansas banks compared to only 15% at small Kansas banks. Second, their larger size allows them to exploit scale economies that drive down their noninterestexpenses, which average which averages about 70% of operating income at large Kansas bankscompared to 78% at small Kansas banks.
ROA2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0066989 0.0083429 0.0086538 0.0087967 0.004872 0.002984 0.005029 0.0070155 0.0076955 0.0075077$100M < Assets < $500M 0.0098538 0.0105767 0.0110979 0.0106834 0.0072967 0.0048773 0.0056492 0.0083046 0.0106453 0.0094745Assets > $500M 0.0101364 0.0136485 0.0122103 0.0114857 0.0038862 -‐0.003775 0.0019979 0.0055087 0.0102987 0.0125579
Margin2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 0.0409899 0.0411159 0.0418377 0.041457 0.0413572 0.0417349 0.041592 0.0421319 0.0402946 0.0389905$100M < Assets < $500M 0.0398218 0.0399598 0.0403147 0.0396548 0.0396318 0.039926 0.0400548 0.0389476 0.0386384 0.0361871Assets > $500M 0.0361983 0.0365879 0.0392288 0.0380846 0.0367069 0.0371742 0.033574 0.0363037 0.0346342 0.0325021
NPLRatio2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0119015 0.0108514 0.010876 0.0139937 0.0219068 0.0313999 0.0311008 0.0295131 0.0281052 0.0231074
LoanAss 0.910376 0.943296 0.9427946 0.9293086 0.8813821 0.7512494 0.7113234 0.6863254 0.70346412004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.5320812 0.5624243 0.5887545 0.6052943 0.6091286 0.5884924 0.5821255 0.5660941 0.5576473 0.5798379
CoreAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.6137515 0.6177934 0.6241461 0.6420214 0.6554643 0.6676927 0.7748765 0.7958323 0.8125115 0.8242608
EqAss2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kansas 0.0990401 0.1048605 0.1087698 0.1128483 0.1109552 0.1096992 0.1111116 0.1186949 0.1210302 0.1204647
Number2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets < $100M 263 256 252 242 234 219 208 200 179 170$100M < Assets < $500M 103 105 100 102 98 106 107 107 107 108Assets > $500M 29 32 33 35 37 35 32 32 32 31
Kansas non-‐Kansasless than $100M 53.4% 29.1%$100M to $500M 36.2% 50.7%$500M to $25B 10.4% 19.4%more than $25B 0.8%
assets < $100M
$100M < assets < $500M
$500M < assets < $25B
assets > $25B
ROAKansas 0.0076 0.0092 0.0103non-‐Kansas 0.0072 0.0092 0.0105 0.0106ROEKansas 0.067 0.084 0.097non-‐Kansas 0.061 0.086 0.091 0.096
-‐0.5%
0.0%
0.5%
1.0%
1.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Return on assets Kansas bank averages, 2004-‐2013
Assets > $500M
$100M < Assets < $500M
Assets < $100M
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Interest margin on earning assets Kansas bank averages, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐20
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent loans nonperforming Kansas bank averages, 2004-‐2013
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity to assets Kansas bank averages, 2004-‐2013
45% 50% 55% 60% 65% 70% 75% 80% 85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans to Assets Core Deposits to Assets
Kansas bank averages, 2004-‐2013
Core Deposits
Loans
Kansas
non-‐Kansas 0%
10%
20%
30%
40%
50%
60%
less than $100M $100M to
$500M $500M to $25B more than
$25B
DistribuHon of banks by asset sizes Kansas banks and non-‐Kansas banks, 2013
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on assets Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
assets < $100M $100M < assets < $500M
$500M < assets < $25B
assets > $25B
Return on equity Averages for Kansas and non-‐Kansas banks, 2013
Kansas
non-‐Kansas
Kansas banks’ response to the crisis
For the current generation of bankers, the global financial crisis will likely be (let us hope!) the most dramatic economic event in their careers. Although the ups and downs that characterized the crisis—the housing bubble and the excessive lending that helped fuel it, followed by the crash in real estate prices and the ensuing weakness in aggregate demand—were not as drastic in the Kansas economy as elsewhere in the U.S. economy. But the post-crisis balance sheets of Kansas banks bear clear marks from the crisis.
During the years that led up to the crisis, Kansas banks (like banks all across the U.S.) became much more intensive financial intermediators. Balance sheet lending expanded on average from 53% of bank assets in 2004 to 61% of bank assets in 2008. Following prudent and conservative banking practices, the average Kansas bank funded these additional illiquid assets with stable deposits: Core depositsincreased on average from 61% to 67% of bank assets during the same time period. As a result, the loans-to-core deposits ratio, a key measure of bank balance sheet liquidity risk, barely increased.
But the credit risk that had been lying dormant on the books of Kansas banks came to life during the crisis. Nonperforming loans doubled in just two years, increasing on average from less than 1.5% of total loans before 2008 to more than 3% of total loans in 2009. The growth in banks’ loan portfolios reversed course and began declining—partly because banks were charging off existing loans that had stopped performing, partly because of a slowdown in credit demand from high-quality loan applicants, and partly because banks themselves became unwilling to supply new credit during uncertain economic times and under unpredictable regulatory conditions. On the other side of the balance sheet, the average Kansas bank experienced an embarrassment ofriches during the crisis. Core deposits increased dramatically, as investors, household savers andcorporate treasurers sought the safe haven of insured bank deposits. The FDIC encouraged this “flightto quality” by increasing deposit insurance limits from $100,000 to $250,000 per account. As a result, the loans-to-core deposits ratio—a traditional gauge of bank balance sheet illiquidity—shrank from about 0.94 just before the crisis to a low of 0.68 in 2012. In the wake of the financial crisis, with the U.S. economy growing very slowly, Kansas banks were drowning in liquidity but were not expanding credit.
19
45%
50%
55%
60%
65%
70%
75%
80%
85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans and core deposits Kansas bank averages, 2004-‐2013
Core Deposits to Assets
Loans to Assets
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity capital Kansas bank averages, 2004-‐2013
Book Equity to Book Assets
0
50
100
150
200
250
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of banks by asset size Kansas banks, 2004-‐2013
Assets < $100M
$100M < Assets < $500M
Assets > $500M
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nonperforming loans Kansas bank averages, 2004-‐2013
Nonperforming Loans to Total Loans
The near-term outlook for Kansas banks
The fortunes of local banks are intertwined with the health of their local economies. Local banks extend increasing amounts of credit during economic expansions and maintain a supply of credit to their core clientele during economic slumps. Economic expansions feed on new lending, and economic downturns find their bottoms due, at least in part, to resilient bank-borrower relationships. On the darker side,economic expansions can spawn severe economic slumps if banks and other lenders extend too much credit, fueling asset bubbles and their inevitable crashes.
Over the past five years, U.S. households have been recovering from a big crash. Consumers andhomeowners have been gradually paying down their debt levels while the values of their assets(homes, investment/retirement portfolios) have been increasing. With healthier balance sheets nowin place, and fewer households fearing unemployment, consumer spending has strengthened. In the U.S., consumer spending drives economic expansions, and business investment responds to economicrecoveries. But neither consumer spending nor business investment can be sustained without healthy banks that are willing and able to extend credit. Will banks be able to hold up their end of this bargain?
The regulatory restrictions under which banks operate have also been in flux since the crisis. The Basel III agreement of 2010-11 imposes stricter regulatory standards on banks in its signatory nations. In the U.S., higher minimum thresholds for both capital ratios and liquidity ratios will gradually come into effect in the coming years. How will these new regulations affect bank lending? The math is really quite simple: The additional restrictions on bank balance sheet leverage will add up to fewer loans per dollar of bank equity, while the new mandates to increase bank balance sheet liquidity will add up to fewer loans per dollar of bank assets. The eventual tradeoff between the negative impact of these newrestrictions on bank lending and economic growth—versus the potentially positive macroeconomiceffects from sounder banks and smoother business cycles—is too difficult to forecast.
45%
50%
55%
60%
65%
70%
75%
80%
85%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans and core deposits Kansas bank averages, 2004-‐2013
Core Deposits to Assets
Loans to Assets
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Equity capital Kansas bank averages, 2004-‐2013
Book Equity to Book Assets
21
The good news, however, is that Kansas banks are well on their way to meeting these new regulatory standards: the book equity-to-assets ratio at the average Kansas bank has increased from 10% in2004 to 12% today, and as discussed above, the loans-to-core deposits ratio at the average Kansasbank has reached an historically low level. (3) This suggests that as the U.S. economy continues its current expansion, the new regulatory restrictions requiring banks to reduce insolvency risk (hold more equity capital) and liquidity risk (hold more liquid assets) should not unduly hamper the ability ofKansas banks to provide credit to high-quality loan applicants.
As 2014 comes to a close, the Federal Reserve has called an end to its long time unconventionalmonetary policy—dubbed “quantitative easing”—which has been placing artificial downward pressureon long-term interest rates. Given that the Fed is likely to raise short-term rates only slowly, interestmargins should, at least for a time, widen at most banks. This will not only increase banks’ incentivesto lend but will also add to their bottom lines.
In conclusion, the state of banking in Kansas is improved health, gradual growth and guarded optimism. To be sure, much uncertainty remains—particularly in the international sphere—that can influence the health of the U.S. economy and hence the fortunes of Kansas banks. But compared to the financialtumult of the past decade, the typical Kansas bank should experience conditions in the coming yearthat feel much more like a normal banking environment.
(3) The loans-to-core deposits ratio is very similar in spirit to the net stable funding ratio prescribedby Basel III and soon to be implemented by the Federal Reserve for the U.S. banks. Researchers atthe University of Kansas School of Business find that the correlation between these two ratios isapproximately 85% for U.S. banks. (Robert DeYoung and Karen Jang, “Do banks actively managetheir liquidity?” research in progress, to be posted on the Center for Banking Excellence websitein early 2015.)
U.S. SENATE TESTIMONY ON SYSTEMIC RISK
23
Robert DeYoung
Capitol Federal Distinguished Professor in Financial Markets and InstitutionsUniversity of Kansas School of Business
Prepared statement:
U.S. Senate Committee on Banking, Housing and Urban AffairsFinancial Institutions and Consumer Protection SubcommitteeJuly 16, 2014
Thank you for the opportunity to address the committee this morning.
The Dodd-Frank Act contains many well-considered prudential standards aimed at reducing the systemic risk of U.S. financial institutions and by extension the systemic risk of the U.S. financial system. Some of these safeguards tighten up existing prudential standards, while others impose brand new prudential standards. These measures touch on nearly every risk function at modern banking companies, and the list is a long one.
From my perspective, these measures can be divided relatively neatly into two separate categories.
On one side, we have ex ante measures that try to limit banks’ exposures to and/or contributions tosystemic macroeconomic events. Some salient examples include higher capital and liquidity ratiosaimed at making bank balance sheets more resilient to systemic events, and regulatory stress testsdesigned to monitor the resiliency of bank balance sheets.
On the other side we have ex post measures that try to limit the amplification of systemic events (or contagion) caused when banks default on their financial obligations to creditors, borrowers, other banks or financial counterparties. This approach centers on the FDIC’s orderly liquidation authority, which is complemented by new stores information made available to the FDIC via resolution plans (or living wills) and price discovery via exchange traded derivatives positions.
It is my observation that we pay most of our attention to the ex ante systemic risk prevention measures —i.e., setting rules and limits for banks—and we tend to have relatively less confidence in ex post measures to contain systemic risk. The explanation for this, I think, is two-fold. First, we understand intuitively that for every dollar of risk that we can prevent beforehand, we will have one less dollar of risk to contain afterwards. And second, we are skeptical that regulators will take strong actions to seize and liquidate large insolvent banks during a deep recession or financial crisis. Given our intuition and our skepticism, we tend to stress ex ante risk prevention.
Minimum equity capital standards are the backbone of our ex ante risk prevention framework. The ideais that by increasing a bank’s capital buffer, it will have enough resources to continue operating during an economy wide financial event and to emerge from the crisis financially solvent. But such a worldrequires extremely high levels of bank capital. My research (with Allen Berger, Mark Flannery, DavidLee and Özde Öztekin) shows that in 2006, the average U.S. commercial banking company had nearlydouble the risk-weighted capital ratios necessary to be deemed well-capitalized by bank regulators,and that 95% of all banking companies cleared the adequately capitalized threshold by at least 300basis points. As we know, these outsized stores of equity capital were not large enough to preventhundreds of bank insolvencies in the years that immediately followed. The lesson here is that relyingon ex ante regulations to reduce bank failure risk—whether this means more capital, more liquidity,or more lending restrictions—may or may not prevent future crises but will surely impose non trivial costs on banks and will result in non trivial reductions in financial services provided by banks.
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In the shadow of the financial crisis, this may seem like a wise trade off—less lending and slowereconomic growth in exchange for a reduction in the severity of the next systemic financial event. But the orderly liquidation authority (OLA) powers in Dodd-Frank provide us with an historic opportunity to avoid having to accept this trade off. OLA should allow us to not only limit the contagious after effects of a systemic crisis but also to establish a newly credible regulatory regime devoid of the too-big-to-fail phenomena that have for so long fostered systemic risk in our financial system.
Indeed, this is a big claim. But the economic story is straightforward: When investors become convinced that large complex banks will be seized upon insolvency—with shareholders losing everything and bond-holders suffering losses—then credit markets and equity markets will more fully price bank risk-taking; profit-seeking banks will then face clear incentives to reject high-risk investments ex ante.
The political story, however, is far from straightforward. OLA requires bank regulators to crediblyestablish that they can and will seize, unwind and eventually liquidate large complex insolvent banks. The FDIC’s “single point of entry” plan for implementing OLA is a workable plan. Nevertheless, in my discussions with scores of banking and regulatory economists across the U.S., I meet with near uniform skepticism that the FDIC will be permitted to exercise its resolution authority during a financial crisis in which multiple large banking companies are nearing insolvency. Essentially, their belief is that thedeeper is the financial crisis, the greater is the probability that OLA will be suspended.
In my opinion, the most important actions that Congress and the Administration can take to limitsystemic risk in the U.S. financial system is to strongly and repeatedly enunciate their support of OLA and to pledge that they will not stand in the way of its implementation during a deep financial crisis. Our banking system is most effective when scarce economic resources are moved from poorly managed banks to well-managed banks. Hence, we don’t want a banking system that is devoid of bank failure. Rather, we want a banking system that is resilient to bank failure. OLA is the key to this resiliency.
Thank you for your time this morning. I hope that my remarks have been useful.
I look forward to your questions.
KANSAS BANKS: TOP 10% LISTS
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Top 10 percent of Kansas banks* in 2013: Assets
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Assets
Assets ($1,000) 1 Commerce Bank $22,943,132 2 UMB Bank, National Association $16,642,506 3 Capitol Federal Savings Bank $9,128,932 4 NBH Bank, National Association $4,890,328 5 Intrust Bank, National Association $4,364,875 6 Sunflower Bank, National Association $1,675,841 7 Armed Forces Bank, National Association $1,664,450 8 Fidelity Bank $1,560,571 9 Emprise Bank $1,549,015 10 H&R Block Bank $1,360,921 11 Country Club Bank $1,228,986 12 Metcalf Bank $1,213,287 13 North American Savings Bank, F.S.B. $1,161,463 14 Equity Bank $1,141,191 15 Kansas State Bank of Manhattan $1,099,031 16 CoreFirst Bank & Trust $942,578 17 The Morrill and Janes Bank and Trust Company $889,895 18 Central National Bank $845,160 19 CrossFirst Bank $843,001 20 Community National Bank & Trust $838,887 21 Landmark National Bank $826,507 22 Valley View State Bank $819,966 23 Security Bank of Kansas City $797,047 24 Farmers Bank & Trust $690,026 25 Bank of Blue Valley $608,412 26 The First National Bank of Hutchinson $599,709 27 National Bank of Kansas City $566,962 28 Missouri Bank and Trust Company of Kansas City $562,572 29 The Girard National Bank $561,138 30 United Bank & Trust $559,788 31 The Mission Bank $541,086
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
Top 10 percent of Kansas banks* in 2013: Return on Assets
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Return on Assets
ROA 1 Armed Forces Bank, National Association 8.33% 2 The Peoples State Bank 4.66% 3 H&R Block Bank 3.15% 4 Almena State Bank 2.49% 5 CBW Bank 2.47% 6 First Federal Savings and Loan Bank 2.36% 7 The First State Bank of Healy 2.21% 8 Kansas State Bank of Manhattan 2.16% 9 Community National Bank 2.04% 10 Peoples State Bank 2.02% 11 The Bank of Tescott 1.98% 12 Bank of Grandin 1.94% 13 The Bank 1.90% 14 North American Savings Bank, F.S.B. 1.90% 15 The Citizens State Bank 1.83% 16 Golden Belt Bank, FSA 1.83% 17 First Neodesha Bank 1.82% 18 Southwest National Bank 1.80% 19 Farmers Bank & Trust 1.75% 20 The Union State Bank of Everest 1.73% 21 First Commerce Bank 1.73% 22 The Kearny County Bank 1.69% 23 The First State Bank & Trust Co. of Larned 1.68% 24 Kaw Valley State Bank and Trust Company 1.64% 25 The Bennington State Bank 1.63% 26 National Bank of Kansas City 1.63% 27 Great American Bank 1.61% 28 The First National Bank and Trust Company of
Junction City, Kansas 1.60% 29 The Citizens State Bank of Cheney, Kansas 1.59% 30 The Farmers and Merchants State Bank of Argonia 1.58% 31 The Farmers State Bank 1.54%
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
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Top 10 percent of Kansas banks* in 2013: Return on Equity
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Return on Equity
ROE 1 Armed Forces Bank, National Association 40.68% 2 Almena State Bank 32.05% 3 Kansas State Bank of Manhattan 23.74% 4 Peoples State Bank 23.44% 5 Community National Bank 22.06% 6 Southwest National Bank 21.36% 7 The Farmers and Merchants State Bank of Argonia 21.11% 8 CBW Bank 20.76% 9 First Neodesha Bank 19.72% 10 The Bank 19.56% 11 First Federal Savings and Loan Bank 18.14% 12 The Farmers & Merchants State Bank of Cawker City 17.69% 13 The Bank of Tescott 17.49% 14 The Union State Bank of Everest 17.49% 15 The Farmers State Bank 17.38% 16 The Citizens State Bank 17.34% 17 First Commerce Bank 17.01% 18 Central Bank and Trust Co. 16.89% 19 Farmers and Merchants Bank of Mound City, Kansas 16.79% 20 The Peoples State Bank 16.46% 21 The Bendena State Bank 16.31% 22 First Option Bank 15.70% 23 Missouri Bank and Trust Company of Kansas City 15.69% 24 Bank of Grandin 15.31% 25 Citizens State Bank and Trust Co., Ellsworth, Kansas 15.05% 26 Chetopa State Bank & Trust Co. 14.97% 27 Kaw Valley State Bank and Trust Company 14.90% 28 The Farmers State Bank of Aliceville, Kansas 14.85% 29 State Bank 14.83% 30 The Bennington State Bank 14.65% 31 FirstOak Bank 14.48%
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
Top 10 percent of Kansas banks* in 2013: Net Interest Margin
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Net Interest Margin
Net Interest from
Earning Assets
1 The Peoples State Bank 7.18% 2 The Farmers and Merchants State Bank of Argonia 6.29% 3 New Century Bank, National Association 6.20% 4 Great American Bank 6.17% 5 Almena State Bank 5.91% 6 FirstOak Bank 5.83% 7 The Dickinson County Bank 5.40% 8 The Baxter State Bank 5.26% 9 Peoples State Bank 5.26% 10 Community First Bank 5.04% 11 Mid-‐America Bank 5.02% 12 State Bank of Downs 4.90% 13 Towanda State Bank 4.80% 14 The Farmers State Bank of Blue Mound 4.68% 15 Metcalf Bank 4.63% 16 Andover State Bank 4.62% 17 Central Bank of Kansas City 4.59% 18 Emerald Bank 4.54% 19 The Lyndon State Bank 4.53% 20 Community Bank of Wichita, Inc. 4.53% 21 Alterra Bank 4.50% 22 Leonardville State Bank 4.48% 23 Southwest National Bank 4.47% 24 TriCentury Bank 4.44% 25 The Lawrence Bank 4.43% 26 Merit Bank 4.42% 27 The Wilson State Bank 4.42% 28 Roxbury Bank 4.42% 29 The Union State Bank of Everest 4.38% 30 Heritage Bank 4.38% 31 The Security State Bank 4.37%
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
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Top 10 percent of Kansas banks* in 2013: Noninterest Income
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Noninterest Income
Noninterest Income (% of
Operating Income)
1 The Federal Savings Bank 92.9% 2 National Bank of Kansas City 90.1% 3 Peoples Bank 78.5% 4 TriCentury Bank 78.3% 5 Armed Forces Bank, National Association 76.1% 6 CBW Bank 76.1% 7 H&R Block Bank 72.8% 8 Bankers' Bank of Kansas 62.0% 9 Farmers Bank & Trust 61.7% 10 First Federal Bank, FSB 58.4% 11 North American Savings Bank, F.S.B. 57.8% 12 Country Club Bank 49.4% 13 Central National Bank 48.3% 14 Community National Bank 47.9% 15 UMB Bank, National Association 42.6% 16 Commerce Bank 41.2% 17 Intrust Bank, National Association 39.2% 18 First Bank Kansas 38.5% 19 The First National Bank and Trust Company of
Junction City, Kansas 38.5%
20 Central Bank of Kansas City 37.8% 21 CoreFirst Bank & Trust 37.8% 22 The First National Bank of Hutchinson 36.0% 23 Landmark National Bank 34.3% 24 BANK VI 32.9% 25 Citizens Savings and Loan Association, FSB 31.9% 26 Bank of Labor 31.1% 27 ESB Financial 29.8% 28 Almena State Bank 29.5% 29 First Option Bank 29.5% 30 Summit Bank of Kansas City 28.5% 31 Sunflower Bank, National Association 28.2%
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
Top 10 percent of Kansas banks* in 2013: Efficiency Ratio
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Efficiency Ratio
Efficiency Ratio
1 The Farmers State Bank of Aliceville, Kansas 0.353 2 The Solomon State Bank 0.366 3 The First State Bank of Healy 0.392 4 The Bank 0.414 5 The Citizens State Bank 0.415 6 The Peoples State Bank 0.416 7 Farmers & Merchants Bank of Colby 0.418 8 First Federal Savings and Loan Bank 0.429 9 The Bank of Holyrood 0.447 10 Bank of Grandin 0.453 11 The Bank of Tescott 0.457 12 Capitol Federal Savings Bank 0.472 13 Farmers National Bank 0.485 14 Kansas State Bank of Manhattan 0.489 15 The State Bank of Bern 0.494 16 The First State Bank, Kiowa, Kansas 0.495 17 H&R Block Bank 0.509 18 The Bennington State Bank 0.513 19 Peoples State Bank 0.517 20 Garden Plain State Bank 0.518 21 Community National Bank 0.534 22 Farmers and Drovers Bank 0.536 23 The Kearny County Bank 0.541 24 The First National Bank of Scott City 0.546 25 The Stockgrowers State Bank 0.549 26 First National Bank in Fredonia 0.549 27 First Commerce Bank 0.551 28 State Bank 0.557 29 The First State Bank 0.559 30 The First State Bank 0.562 31 Guaranty State Bank and Trust Company 0.563
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
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Top 10 percent of Kansas banks* in 2013: Loans-to-Core Deposits
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Loans-to-Core Deposits
Loans-‐to-‐Core
Deposits 1 First Federal Savings and Loan Bank 1.72 2 H&R Block Bank 1.55 3 The First National Bank of Syracuse 1.37 4 Capitol Federal Savings Bank 1.36 5 RelianzBank 1.35 6 The Federal Savings Bank 1.34 7 The Peoples State Bank 1.32 8 Community First Bank 1.29 9 The Farmers & Merchants State Bank of Cawker City 1.26 10 Guaranty State Bank and Trust Company 1.20 11 Great American Bank 1.20 12 Southwest National Bank 1.19 13 BANK VI 1.16 14 Community First National Bank 1.14 15 Mid-‐America Bank 1.13 16 Millennium Bank 1.12 17 Fidelity Bank 1.11 18 Swedish-‐American State Bank 1.10 19 Security State Bank 1.09 20 North American Savings Bank, F.S.B. 1.09 21 Legacy Bank 1.09 22 The Lawrence Bank 1.08 23 Western National Bank 1.08 24 Merit Bank 1.08 25 Central Bank and Trust Co. 1.08 26 Peoples State Bank 1.08 27 First Commerce Bank 1.08 28 The Citizens State Bank 1.07 29 Freedom Bank 1.07 30 Central Bank of Kansas City 1.07 31 State Bank of Downs 1.07
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
Top 10 percent of Kansas banks* in 2013: C&I Lending
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: C&I Lending
C&I Loans (% of
Assets)
1 Stanley Bank 38.9% 2 Alterra Bank 30.8% 3 Missouri Bank and Trust Company of Kansas City 27.1% 4 Merit Bank 26.1% 5 Community Bank of Wichita, Inc. 26.0% 6 Summit Bank of Kansas City 25.9% 7 Intrust Bank, National Association 23.7% 8 University Bank 23.3% 9 RelianzBank 23.0% 10 Community First Bank 22.6% 11 CrossFirst Bank 22.5% 12 Kaw Valley Bank 20.7% 13 Freedom Bank 20.7% 14 State Bank of Downs 20.0% 15 The Citizens State Bank 19.0% 16 The Wilson State Bank 18.5% 17 UMB Bank, National Association 18.5% 18 TriCentury Bank 18.2% 19 Security State Bank 18.2% 20 Leonardville State Bank 17.7% 21 Bank of Blue Valley 17.5% 22 The First State Bank of Healy 17.1% 23 Fidelity State Bank and Trust Company 17.1% 24 The First State Bank of Ransom 16.6% 25 Community First National Bank 16.4% 26 Community Bank of the Midwest 15.9% 27 Security Bank of Kansas City 15.8% 28 Peoples Bank and Trust Company 15.8% 29 BANK VI 15.1% 30 America's Community Bank 14.9% 31 The Bennington State Bank 14.9%
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
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Top 10 percent of Kansas banks* in 2013: Small Business Lending
(*) “Kansas banks” include banks in the state of Kansas, Jackson County, Missouri, and Clay County, Missouri.
The State of Banking in Kansas !"#$
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Top 10 percent of Kansas banks* in 2013: Small Business Lending
C&I Loans less
than $250,000 (% of Assets)
1 The Wilson State Bank 18.5% 2 TriCentury Bank 15.9% 3 Almena State Bank 14.2% 4 The St. John National Bank 13.5% 5 Community Bank of Wichita, Inc. 13.2% 6 The Riley State Bank of Riley, Kansas 12.9% 7 Home Bank and Trust Company 12.5% 8 The Citizens State Bank and Trust Company 12.4% 9 Union State Bank 12.3% 10 The Citizens State Bank 11.8% 11 The Farmers & Merchants State Bank of Cawker City 11.6% 12 The Bank of Holyrood 11.0% 13 The First State Bank 10.5% 14 Citizens State Bank 10.5% 15 Farmers and Merchants Bank of Mound City, Kansas 10.1% 16 Union State Bank 10.1% 17 Ford County State Bank 10.0% 18 Swedish-‐American State Bank 9.9% 19 New Century Bank, National Association 9.7% 20 Farmers State Bank 9.3% 21 Goppert State Service Bank 9.0% 22 The Gorham State Bank 9.0% 23 Peoples Exchange Bank 8.9% 24 The Citizens State Bank 8.8% 25 The Howard State Bank, Howard, Kansas 8.7% 26 Kaw Valley State Bank 8.7% 27 The Valley State Bank 8.5% 28 State Bank of Downs 8.5% 29 The Baileyville State Bank 8.3% 30 The Peoples State Bank 7.9% 31 Merit Bank 7.6%
* ”Kansas banks” include banks in the state of Kansas, in Jackson County, Missouri and in Clay County, Missouri.
