Missouri dodges bank failures in 2013

Things are starting to look up for the banking industry. For the first time since the Great Recession began, no Missouri banks failed last year.

While the recession officially lasted 18 months – December 2007–June 2009, according to the National Bureau of Economic Research – its effects can still be felt throughout the banking industry.

Springfield’s Southwest Community Bank was the most recent casualty in the Ozarks, closing its doors in 2010, and adding its name to a total of 10 Missouri banks that closed since 2009.

The southeastern United States continues to take the blunt of closures across the industry. In 2011, institutions in Florida, Georgia and neighboring states represented 47 percent of the 92 bank closures in the U.S., according to the Federal Deposit Insurance Corp.

However, there are a few bright spots on the horizon. According to the eighth district Federal Reserve Bank of St. Louis, bank failures have steadily dropped to 24 last year from a high of 157 in 2010. Despite the continued closures, the FDIC reports the costs associated with failed banks decreased rapidly in 2013, falling nearly 90 percent from a 2010 peak of $22.2 billion.

The first bank startup in the U.S. since 2010, the Bank of Bird-in-Hand in Bird-in-Hand, Pa., opened in 2013. Locally, Springfield First Community Bank opened its doors during the recession in 2008 and has since grown to become the ninth-largest area bank, holding nearly $300 million in assets and a 3 percent deposit market share, according to Springfield Business Journal list research through third-quarter 2013.

Springfield region Commerce Bank President Bob Hammerschmidt, a 40-year banking industry veteran, said there’s a simple explanation as to why the Ozarks has fared better.

“It is the Show-Me State,” he said. “I think this reflects, in part, the conservative show-me attitudes of bankers in Missouri.”

Hammerschmidt said the core of the banking crisis came down to when bankers nationwide who didn’t embrace that attitude and stopped looking at the big picture.

“When you look at the banks that failed, I think you’ll find that they were taking a project-by-project view of each loan, lending to someone with multiple LLCs for different properties or projects,” he said. “Instead of asking, ‘Is this good for the customer, as well as my bank?,’ these lenders ignored the global financial view of each borrower, often to the detriment of both parties.

“You have to keep the attitude that you don’t loan money to someone just because it’s good for your bank. It has to be a good idea for that person, too. And it’s what our national banking system needs to get back to.”

Kansas City-based Commerce Bancshares Inc. (Nasdaq: CBSH) was one of three Missouri-based banks – along with fellow K.C.-based UMB Financial Corp. (Nasdaq: UMBF) and Central Bancompany (OTC: CBCY) in Jefferson City – to be ranked in the Top 20 on the 2014 Forbes Best Banks list. Hammerschmidt said all three have maintained a common-sense business approach to banking on the local level.

Dynamic growth
From 2009-11, Springfield First Community Bank posted 149 percent revenue growth to about $9.97 million and again increased 70 percent from 2010-12 to revenue of $12.5 million on $296 million in assets.

Despite the growth, which landed the bank on SBJ’s 2012 and 2013 Dynamic Dozen list of the fastest growing companies, the process hasn’t been easy.

SFC Bank Vice President Jan Baumgartner said after raising $22 million in startup capital, the bank received the last charter to be granted in Missouri since the crisis began. The recessionary turmoil didn’t force any adjustments to the initial startup plan in terms of assets and liabilities, but regulatory changes, substantially increased FDIC insurance and swelling health care costs for the bank’s employees proved a challenge.

“We are required now to have more capital,” she said. “In addition, our balance sheet liquidity has had to increase more than we anticipated. But in our case, we’ve had more than enough profit growth and loan growth to make up for that.”

The bank attained profitability within its first 12 months and went on to surpass its original three-year target by 21.5 percent.

Baumgartner said when SFC Bank filed for its charter in May 2008, the bank was confident in the strength of its leadership and business model. However, in the months until the Sept. 22 approval of its application, leaders watched the stock market slip, investment banks unravel and the housing crisis come to a head in the conservatorship of Fannie Mae and Freddie Mac. But once the bank was open for business, it turned out that the financial turmoil played to their advantage.“There were a lot of loans and bank failures tied to lending practices,” she said. “But we opened the bank with a clean balance sheet, with no loans on the books – no toxic assets, so to speak. And when a bank has issues with loans, you spend a lot of time and energy on that. We only had to focus on going out and generating new business.”  

The new normal
SFC Bank President Rob Fulp joined the bank in 2011 and agrees with Hammerschmidt that while the broader financial industries have taken the majority of public relations backlash from the recession, there is still a basic expectation that must be met – especially by community banks.

“There’s a tremendous education process that is occurring on behalf of our industry,” Fulp said. “We as bankers certainly don’t want to do anything that will put customers in a position where they won’t succeed.”

Fulp said the Ozarks is poised to continue its recovery during the next few years, based on prevalent new construction and a Jan. 8 Bureau of Labor Statistics report. Through  November 2013, the report shows Springfield’s metroplitian statistical area has Missouri’s second-lowest unemployment rate, at 4.6 percent, and a year-over-year addition of more than 2,000 jobs.

“It isn’t this way across the state,” Fulp said. “And it doesn’t happen by accident. It takes a lot of work on the part of the city, the chamber and area leaders.”

Hammerschmidt doesn’t consider the activity a full rebound.

“There has been a lot of deleveraging, and people have been unloading a lot of debt,” he said. “Banks are all adjusting to the new normal, which is 2- to two-and-a-half percent growth annually.”

Having entered the industry in 1974 amid an oil- and stock market-driven recession, the veteran banker views such cyclical corrections as difficult but necessary. However, with the current nationwide consumer debt-to-disposable income ratio falling to around 100 percent from a 2007 high of 120 percent, Hammerschmid said microeconomic adjustments will continue to slow the overall recovery.

“People have refinanced and lowered their payments but still owe a huge amount,” he said. “The U.S. economy is 70 percent consumption-based, and when people use their money to pay down debt, less spending occurs. That has a domino effect. ”

Citing a study by the Boston College Center for Retirement Research, Hammerschmidt also pointed out 53 percent of people currently in the workforce have inadequate savings for retirement, and many of them have begun playing catchup. Coupled with the pay-down of hefty debt, the habits have impacted consumer spending, according to an April 2013 U.S. Bureau of Labor Statistics report. In 2011, the Consumer Spending Index rose 3.3 percent – the first increase in three years – but still remained 1.5 percent below prerecession levels.

Fulp noted Hammerschmidt’s “new normal” for the industry also means the days of the proverbial banker’s hours are long gone.

“It extends way past five o’clock,” Fulp said. “You have to stay late and start early.”

With technology rapidly changing the face of retail and commercial banking and increased competition among the remaining institutions, banks also will face an ongoing standardization of business models and products – particularly mortgages – that will make it more difficult to compete, according to the 2014 banking outlook by financial services provider Deloitte LLP.  

Looking forward, Hammerschmidt said he’s concerned about ethics in banking and the prevalence of predatory loan practices by credit card companies and short-term lenders. But he is confident the conservative environment that sustained Missouri’s banks through the recession will help to insulate against future run-ups such as that which helped cause the financial crisis.

“Some other places, in a competitive situation, banks will follow whatever offer the guy down the street is making,” he said. “In Missouri, most of us just take a step back, look on and say, ‘Well, that will work itself out over time.’”

Fulp said while much is different in the new reality of the banking industry, there are some things that will never change.

“This business is all about strong relationships,” he said. “Those that have them will survive, and those that don’t will struggle.”