Southwestern Illinois and St. Louis metro statistics defy a nationwide trend showing a “pruning” of bank branches since 2010, one that analysts say is bound to continue.
According to research firm SNL Financial, in 2012 U.S. banks and thrifts closed 2,267 branches, leaving the total nationwide at approximately 93,000, the lowest level since 2007. SNL expects the figure to drop to 80,000 over the next decade, putting the total closer in line with 2000 levels.
“There are two converging trends behind the pruning of branches,” said Nancy Bush, SNL contributing financial analyst. “First, there’s the need for banks to cut costs. That’s the overwhelming driver. They’ve been hit hard by a combination of a regulatory clampdown - including the Durbin (credit card) amendment - and low interest rates. Today banks can go out into wholesale markets and fund themselves more cheaply, which is a complete reversal of the normal pattern.”
A second converging trend that has greatly impacted the decrease in number of bank and thrift branches across the U.S., says Bush, is one that continues to emerge: the increasingly virtual modes in which people are choosing to bank, thanks to technology. “They’re just not branch dependent anymore,” Bush said. “The Gen X-ers (those born after the post-WW II baby boom, 1960s-early 1980s) and the Gen Y-ers (born 1980s-early 2000s) are banking from their iPhones and their Androids. Even though mobile banking has been going on for awhile now, the banks are just beginning to see, as a result of the banking crisis, that these trends have significantly taken hold. It’s simply not the norm, but it’s going to be the standard,” she added. “It represents a big different universe of banking behavior.”
Bob Meara, senior analyst in the banking group at Celent, an IT research and consulting firm specific to the global financial services industry, also believes that the U.S. is on the cusp of a sizable decrease in the number of bank branches - and that technology is the driver.
After four decades of building branches, the nation will see a reverse trend begin to take hold, according to Meara and fellow analyst Stephen Greer, who together authored a report for Celent, “Branch Boom Gone Bust: Predicting a Steep Decline in US Branch Density.” The two analysts say banking, from a macro perspective, is still grappling with how to respond to the huge shift in customer behavior.
“The U.S. retail banking branch network has yet to respond to the obvious migration of customers to new digital alternatives,” said Meara. “Branch growth over the last 40 years has dramatically exceeded U.S. population growth. In 1970, there were approximately 107 branches per million individuals. By 2011, that had grown to 270 branches per million. There’s every reason to suggest branch densities would be substantially lower now than 30 years ago, but just the opposite has occurred. Given this trend, a slow but inexorable reduction in U.S. branch density seems unavoidable. Beyond simply reducing the number of operating branches, what is needed is a fundamental redesign of retail operating models. Rather than resisting the trend, banks should welcome it and reinvest the savings.”
In Southwestern Illinois, however, the numbers paint a brighter picture and are not in line with the national trend. According to the FDIC, from June 30, 2005 through June 30, 2012, the number of commercial bank branches and thrifts in both Madison and St. Clair counties increased slightly. In Madison County, the total number of commercial bank branches, based on FDIC data, increased year over year from 85 in 2005 to 91 in 2011 but decreased by 2 last year. Madison County’s savings institution branches also increased year over year from 6 in 2005 to 10 in 2011 and 2012. In St. Clair County, the trend was similarly positive; the total number of commercial banks grew from 84 in 2005 to 92 in 2012, with a single-branch decrease from 2007 to 2008.
Statistics provided by the Federal Reserve Bank of St. Louis also show the number of branches serving the entire St. Louis metro area increased - by 60 branches - from 2005-2011, though the total decreased slightly - by 7 branches -between 2011 and 2012. The St. Louis Fed’s Eighth District territory includes parts of the states of Illinois, Indiana, Kentucky, Missouri, Mississippi and Tennessee, as well as the entire state of Arkansas. Its data does not include thrifts.
Julie Stackhouse, senior vice president of banking supervision and regulation at the Federal Reserve Bank of St. Louis, says what the trends are showing on a national level points to reorganization that is taking place in the banking industry.
“What you’re going to see in the national data, in part, is that the number of head offices continues to fall,” Stackhouse said. “There’s no question that we’ve seen some structural changes. The story we’re hearing when we speak with bankers in our district is that the stand-alone physical facility, particularly in the rural community, is still very important, at least for now. In the larger community, we know that account openings and lending are usually done at a physical facility. To the extent that lending remains a personal touch activity, the physical facility will continue to play a key role.”
Dennis Terry, president and chief executive officer at First Clover Leaf Bank in Edwardsville, says Southwestern Illinois’ bank branches appear to have withstood the recession and then some.
“One of the factors that comes into play in the (Federal Reserve) Eighth District, if you look at their footprint, is that it includes a more rural composition, and a composition of small towns. They are not home to any of the mega-banks,” said Terry. “If you consider that geographic region, it is not populated by larger cities. That is likely why our statistics don’t match those you may read about on the subject of the pruning of bank branches across the U.S. It’s not surprising they’re seeing a pruning of branches in the large metro areas such as the city of Chicago, where you have the mega-banks and they’re experiencing a reduction.”
What often happens, Terry says, is that the very large banks are “pushing” technology on their customers. “The smaller banks, like ours, offer technology, but we don’t push it. It’s there for those who want it. If you think about it, technology really does diminish the need for a building. But on the flipside of that, as a community bank, you have a brick-and-mortar presence in order to legitimize your presence in the marketplace. Long-term, that represents a true dilemma for the community bank.”
A bill sponsored by U.S. Rep. Rodney Davis (R-Illinois) and announced on the campus of SIUE aims to prevent Americans from having to choose between keeping their unemployment benefits and seeking the additional workforce training needed to find a job.
Opportunity KNOCKS (H.R. 1530) broadens the definition of “approved training” in what Davis and Southwestern Illinois leaders say is currently an overly complicated, often restricted Workforce Investment Act system. As it now stands, unemployed workers who seek training through programs at universities, community colleges and other technical schools risk losing their unemployment insurance benefits if the program is not specifically approved by the WIA.
Davis announced the bill recently at the National Corn-to-Ethanol Research Center in University Park on the campus of Southern Illinois University Edwardsville. The venue was fitting, he says, given that NCERC director John Caupert told the congressman about the need for such legislation during Davis’ visit to the biofuels training center during campaign season last fall.
“It was right here, just a few feet from one of our fermentation tanks, where Congressman Davis and I discussed the need for this bill,” said Caupert.
“I shared with him the story of a few of our people who were paying for their training to enter this new bioeconomy with money out of their own pockets, just to ensure that they weren’t risking losing their unemployment benefits.”
H.R. 1530, which is co-sponsored by U.S. Reps. Ami Bera (D-Calif.) and Jerry McNerney (D-Calif.), makes certain that workers who are seeking an industry-recognized certificate, an apprenticeship or an associate or baccalaureate degree will not be at risk of losing these benefits, Davis says.
The bill’s language specifies that such programs must be approved by each state’s workforce investment agency as well, and include any program on the state’s eligible training provider list as developed under the Workforce Investment Act of 1998.
The law was enacted to replace the Job Training Partnership Act and certain other federal job training laws with new workforce investment systems or workforce development. Enacted during President Bill Clinton’s second term, it represented an attempt to encourage business to participate in the local delivery of workforce development services. The primary vehicle for this was Workforce Investment Boards or WIBs, which were to be headed by private-sector members of the local community. A majority of board members were also required to represent business interests.
“The barometer of our success in workforce investment is the community college system,” said Davis. “But we have to give our workers the training to make that happen. Today there are 12 million unemployed Americans. This past March, the Dept. of Labor reported that people with only a high school diploma had an unemployment rate of 7.6 percent, nearly twice that of unemployment rates among college graduates. Those without a high school diploma are experiencing unemployment rates of more than three times that of high school graduates, yet there have been nearly 7.3 million job openings posted since the beginning of 2013. H.R. 1530 - the Opportunity Knocks Act - aims to help unemployed Americans get the training and education they need to start applying for the millions of available jobs,” he added.
In the bioeconomy industry, Caupert says, investment in education and workforce training is critical to ensure competent, qualified people for the future.
“Bio Economic Research Associates estimates that by 2016 an additional 380,000 new jobs could be created in rural America from the biofuels industry alone,” Caupert said. “By 2022, it estimates more than 800,000 new jobs could be created. Since January 2007, the National Corn-to-Ethanol Research Center has trained more than 600 unemployed or underemployed individuals and provided them the skills necessary to succeed in the new bioeconomy.”
David Stoecklin is executive director of Madison County Employment & Training. Stoecklin is a big supporter of any measure that promotes vocational training to equip the local, regional, statewide and national workforce to meet what he says is an obvious, growing demand.
“High unemployment exists at the same time as a skilled labor shortage,” said Stoecklin. “The vocational arts in our high schools have disappeared, and ‘alternative’ education has all but disappeared. Under the current scenario, if workers are not enrolled with us (Employment & Training), the feds won’t waive it. The bottom line, status quo, is that you have to be available and looking for work in order to meet the basic eligibility requirement to receive unemployment insurance benefits. And if you’re going to school, you’re not ‘available.’ But if you’re enrolled in WIA, they waive the job criteria. I think the principal inherent in H.R. 1530 is a good thing. It will afford people who are collecting unemployment and are in recognized programs the opportunity to complete that coursework/training, and the feds will weigh their work search as a factor. But the real test of this bill is going to be in getting it to people soon enough so that they’re able to act quickly, if they’ve been laid off, and get enrolled.”
Chancellor Julie Furst-Bowe says Davis’ legislation is a plus for the university because it’s a win for Southwestern Illinois.
“This legislation positively impacts the non-traditional student,” said Furst-Bowe. “Any opportunity that allows SIUE to help train the regional workforce and better people’s ability to successfully participate in the regional economy is a plus for this institution and Southern Illinois. This is legislation that works for SIUE and our region, now and in the future.”
It’s a borrowers’ market with too many lenders chasing too few strong loans, according to a survey of senior loan officers conducted by the Federal Reserve Bank Board in April.
The Fed survey revealed that many banks were easing standards on commercial and industrial loans and many of those respondents cited increased competition as the reason for doing so.
While this was a national survey, the findings hold true here in Illinois, according to Linda Koch, president and chief executive officer of the Illinois Bankers Association.
“There’s not a lot of new loan demand in Illinois,” Koch said. “It’s been improving but there is still a lot of uncertainty among commercial borrowers. That can be attributed to the poor economy, the fiscal crisis of the state of Illinois and the uncertainty that’s out there regarding their (business owners’) current costs, compliance costs and future costs like health insurance.”
One issue that’s a big contributor to the lack of loan demand but that doesn’t get a lot of recognition, according to Koch, is the need for real estate appraisals. She says that today every loan - whether it’s a new loan or a loan renewal - requires a new appraisal. Prior to the financial crisis of 2008 and the subsequent Dodd-Frank Wall Street Reform and Consumer Protection Act, it was possible for banks to rely on appraisals that were as much as five years old. That, she says, is no longer the case.
“We all know the value of property is not what it used to be five or six years ago and commercial borrowers are cautious,” Koch said. “They’re nervous that the value of their collateral or property isn’t what it used to be and so they’re approaching things very cautiously when they’re expanding, growing their business or opening a new business.”
There are still high-quality, financially credible commercial borrowers out there, according to Koch, but there are fewer of them; and those who fit that category are approaching expansions cautiously.
“Buyers are looking for the best deal,” Koch said. “And with interest rates the way they are, they’re shopping and they are absolutely shopping for the best deal. Illinois is home to more banks and branches than virtually any other state in the country, so there are a lot of options for the borrower, a lot of banks to choose from - not to mention non-traditional bank options that are out there as well.”
Another factor that’s spurring lender competition, according to Koch, is that banks are flush with cash. Consumer savings rates, she says, have increased substantially since 2006, and that provides a lot of money for banks to lend. Consumers and business owners are still in an accumulate cash mode, egged on by the uncertainty in the economy.
“Not every bank is well capitalized,” said Koch, “but the vast majority of banks in Illinois are very well capitalized. They have a lot of liquidity, they have a lot of money to lend and they are waiting for the opportunity. They’re ready to lend. We couldn’t say that five years ago when the crisis first hit and banks were setting aside a lot of capital to insure themselves against loss.”
Brad Rench, regional president of First Mid-Illinois Bank & Trust, says the shrinking loan margin environment is making life difficult for banks that subsist solely off loans and deposits. He says First Mid-Illinois Bank has a broad range of products it can offer to business customers: trust services, wealth management, farm management, brokerage and insurance. This full complement of business services, he says, not only helps make the bank a better partner to the business owner but also helps the bank navigate through this low-margin, interest rate environment.
“It’s going to be harder for banks to survive just off loans and deposits due to the huge competition and shrinking interest margins,” Rench said. “Banks that have strong non-interest income will be better positioned to compete in this tough environment.”
Rench has been in the banking business for more than 30 years. Over those three decades, he says, he has not seen interest margins below 3 percent - but they are coming close now.
“It’s going to be tough for the banks to operate on those kinds of margins,” Rench added, “because one bad hiccup and they’re in trouble.”