Is Springfield overbanked? To find out, Springfield Business Journal Editorial Director Eric Olson sat down with area bank executives Shaun Burke of Guaranty Bank, Joe Turner of Great Southern Bank, Doug Neff of Commerce Bank and Rob Fulp of Springfield First Community Bank. They talked about the southwest Missouri banking landscape, federal regulations and diversification.Rob Fulp: The four of us don’t get together that often, maybe at a (Springfield Area Chamber of Commerce) event.
Doug Neff: Probably never, really.
Fulp: We have never been all together at one time.
Shaun Burke: I would say that it’s true.
Fulp: Maybe the chamber’s annual dinner, a mile apart.
(group laughter) Eric Olson: In one word, how would you characterize the banking industry?
Fulp: Dynamic. I have to put a bracket, and say optimistic as well.
Joe Turner: Competitive.
Neff: Joe, you stole my word. I’ll say healthy.
Burke: I’ll say changing.
Olson: Looking at Federal Insurance Deposit Corp. numbers, as of last year, there were 40 banking institutions operating 192 branches in the five-county metropolitan statistical area. What do those numbers say to you?
Turner: I think it’s overbanked. We subscribe to a service that analyzes the nation. They look at number of households per branch, number of businesses per branch, deposits per branch. You look at our MSA, and it would indicate there are probably 30 to 40 percent too many banking centers in this area. It does speak to the quality of the Springfield area. People see a lot of opportunity here. The economy is strong. It helps the consumer to have that much competition. It keeps all of us on our toes.
Olson: Is there a national average, in terms of per capita?
Turner: Something like 1,100 or 1,200 households per branch might be normal, and we are around 800.
Neff: Coming from several other markets, I can say with out a doubt that this one has a lot in it. Are we overbanked? I don’t know. That’s not for me to answer; it’s for the shareholders to answer. That comes back to a return on expectation and what does banking look like going forward. That drives the number at the end of the day.
Olson: Are you hearing that from your shareholders, that the Springfield market is healthy?
Neff: Yeah, I guess. From our performance, I think the market is healthy. It leads to a discussion on consolidation of the industry. These two things are tied together.
Burke: It’s reflective of the strength of our economy. For the most part, the banks are healthy, but that could be a challenge going forward, to be as profitable and see the growth they have seen over the last 20 years. There have been a lot of changes.
Olson: Twenty years ago, there were 35 institutions operating 115 branches, so more growth on the branch volume. A little over three branches per bank then; now it’s about five.
Neff: Twenty-some years ago, there were 15,000 banks in the county. Now there are 6,800. In the next 10 to 12 years, are there going to be half that many?
Turner: What we have found in Springfield is you reach a certain size, and then you sort of have to look elsewhere as well. You can only get so big just in Springfield. Our loan portfolio is about $3 billion, a little bit more, and maybe 20 percent is in Springfield. I think it would be hard to grow an institution much past $1 billion just in town. Doug’s may be bigger than that.
Neff: It’s relatively the same as yours.
Turner: There is just enough good competition in Springfield. You have to look outward.
Olson: We are still seeing banks come to this area, Simmons First National Bank being one, Southern Bank another. Given the climate we have just laid out, what is the draw for other bankers to come here?
Turner: A couple things, we established loan production offices in Dallas and Tulsa recently. Those are two very competitive loan markets as well. We are starting from zero, so any growth we have is accreted to our current balances. It’s different when you buy someone in the market.
Neff: Those banks were here already, so they were making an acquisition in market. That’s a little different than just coming here. They are adding mass and eliminating cost to layer the revenue stream.
Burke: You get the efficiency of the acquisition world by eliminating duplication and you get the immediate asset pickup, but first and foremost they looked at the strength of our market. It’s diverse and not dependent on any one industry.
Olson: Do you see that M&A activity continuing?
Burke: I think you are going to see it pick up in pace, both here and in the region. The economic drivers are going to force it. The economy is still poised for slow growth, so opportunities are fewer.
Fulp: I agree. I think it’s a true benefit local and statewide a lot of efficiency. From a market share and shareholder value, it really enhances that. Joe mentioned something, he’s at 20 percent here. That’s good. You don’t want to put it all in one region.
Neff: Over time, there will be fewer banks and fewer locations. We lost almost 900 banks nationwide in the last two years, and there has only been two new banks formed since 2010. There are no new banks because of the regulatory burden. It’s just rough right now. Consolidation even seems faster than the old days.
Turner: Even though we are saying there are a lot of banks, relatively, it’s a small number. So much of M&A activity is driven by when the board, when management, decides it’s time to do something different. Nationwide, it’s easier to acquire somebody. There is a pace to the market. There were no deals in 2008, ’09, ’10, because of the poor credit market, so there is pent-up demand for people to sell.
Burke: Missouri is No. 5 on the number of bank charters. We will see it.
Olson: I thought of Springfield First Community Bank as we talked about startups and the need to go beyond. Is that on the radar?
Fulp: No, I think you need to be careful in that M&A world, not to put all your assets in one region. To do what’s best for the shareholders, you have to get away from a regional base.
Olson: Are you approaching that tipping point for SFC?
Fulp: Not at this time.
Olson: Is Great Southern still aggressive in looking outside the market?
Turner: We definitely do look. We have never really done an open bank deal. We have bought five banks and all have been closed from by the FDIC. We will definitely look, but we recognize it’s not easy to make one of those deals work. I was talking to an investment banker about what percentage of M&A deals done were good for the acquiring company and he said 20 to 25 percent. The acquirer wants to announce it and the market likes it, but five years down the road, is it a good deal? We are cautious.
Olson: What about financial institutions buying just outside their normal portfolio? In the case of Simmons from Arkansas, making that move for Trust Co. of the Ozarks. Is that a surprise to any of you sitting here?
Neff: I didn’t see it coming, but I’m not surprised they would want to own it. It’s a natural fit into our industry.
Burke: I didn’t see it. The principals have some long-standing ties, so it makes sense. Simmons is very aggressive right now.
Fulp: Perhaps there could have been some common ownership, so that would make sense.
Neff: The trust business is a low-capital and big-fee business. If you can figure out a way to cover more of that overheard with a fixed-fee base, that’s really accreted to your earnings and especially your return on equity.
Olson: Dodd Frank.
Turner: Never heard of him.
(group laughter)Olson: Is it fully settled now? Where are we at?
Turner: I don’t even think we know. There have been some things come out of it. The new capital rules, those are a result. There will be lots and lots of rulemaking under Dodd Frank. It will be interesting to see how it all shakes out.
Fulp: When might that be?
Turner: It will be in the years to come. None of us have our arms around it and know where it’s going.
Burke: I was just at a national bankers’ meeting and they are less than a third of the way through writing. It’s gonna change, it’s not gonna be repealed. We have to chip away at the things that are an overreach. The reality is, until there is a tremendous outcry from the public, they are not going to have the ammunition to reverse course on it. Combine that with the competitive nature of all of our banks, and we are going to satisfy all of our customers, despite all the news rules. It’s changing fundamentally how we look at everything.
Olson: What has been the net effect so far?
Neff: The biggest effect it has had is taking profitability out of the system. We have all had to layer on expense of compliance officers and other types of audit functions we didn’t have in the past.
Turner: Compliance costs, for larger banks like Commerce, cost a tone of money. It hasn’t necessarily filtered down to banks our size, but it will.
Neff: I’m worried when they continue to strip the profitability out of the system that we won’t invest in technology to build the things up. You have to make money on products to be able to build new products. It’s hard to reinvest back in those.
Olson: Are you guys seeing some of the same mistakes that brought us here?
Turner: I see competitive pricing, but I don’t see crazy deal structure. I’m talking mainly on the commercial side. Mortgages are much better underwritten, too. Is there pricing out there that might not make sense, probably, but I don’t see wild deal structures.
Neff: I think that’s fair. We all see a deal we wouldn’t have done that way, but it’s not crazy. It’s a good time to borrow money.
Olson: When do you predict the next financial crisis?
Turner: It’s really hard to predict. What we just got through, there wasn’t anything like that for the previous 75 years. There does seem to be relatively severe recessions that seem to roll around regularly. It could be a geopolitical cause or an asset bubble.
Fulp: It will happen. If we could figure out when, we wouldn’t be bankers. The good thing is, we are much better prepared for it with the capital levels in the industry. If you look at the diversification of the balance sheet, we don’t have the concentration of risks we had going into it. Community banks weren’t the main culprits, but the reality is we participated greatly in creating inventory. We just kept building developments and subdivisions.
Interview excerpts by Features Editor Emily Letterman, eletterman@sbj.net
