Bank offices found vital to health of community

This Fifth Third branch in downtown Toledo opened in October 2010, replacing one the bank closed a block away a year before. THE BLADE Enlarge | Photo Reprints

A shuttered neighborhood bank branch is more than just a milestone marking the passing of a few local jobs on the road to an all-electronic banking system. Depending on its location, a recent study argues that neighborhood bank branches can make the difference between area residents being able to access credit for mortgages and car loans or being forced to do without.

The study by the Federal Reserve Bank of Cleveland looked into the local banking systems in Ohio's Lucas, Cuyahoga, Mahoning, and Franklin counties to see whether the closing of bank branches in low to moderate-income neighborhoods in the last 10 years had an impact on access to credit and loan outcomes.

It found something that area bankers say they've known for years: The better bankers know their customers, the better served those customers are.

"Brick-and-mortar branches provide tangible benefits to consumers, especially in low and moderate-income neighborhoods," said co-authors O. Emre Ergungor, an economist with the Cleveland Fed, and Stephanie Moulton, a professor of Public Policy in Ohio State University's John Glenn School of Public Affairs.

"A physical bank presence leads to at least two measurable benefits: it makes it possible for credit- worthy borrowers living there to obtain loans, and it leads to lower rates of default among them."

In looking at the four counties, the study found that Lucas County had lost a net of five of 127 bank branches since 2003, while Mahoning had a net loss of 5 of 84 branches, and Cuyahoga lost 7 of 430 branches, with losses concentrated in city centers. Franklin County -- which hasn't suffered the same level of economic distress as the home counties of Toledo, Cleveland, and Youngstown in the last eight years -- added 34 branches to its 310, the study found.

Looking specifically at neighborhood-level mortgage data, the researchers found a direct link between credit availability and the loan's success and whether it had originated in a local bank branch.

"We find that low-income home buyers who obtain their mortgages from banks with branches in their neighborhoods are less likely to default than home buyers who use banks without a branch in the area or mortgage brokers," the study states. "While the average default rate for [those with low credit scores] was around 20 percent, the default rate of those borrowers who took their loans from a local bank was up to 4.3 percentage points lower."

Ms. Moulton said, "We can't force bank branches to locate in an area where it wouldn't be financially advantageous for them," but they could "partner with nonprofit or other agencies already there on the ground" to provide the type of "soft information" that bankers typically gather from their customer relationships to help serve those in low and moderate-income neighborhoods. She said that credit unions, not included in the study, would be beneficial to neighborhood customers who might go unbanked.

"The closer you are to the customer, the more you know about the customer, the better you are able to serve the needs of your customers," Jim Hoffman, president of KeyBank's northwest Ohio District, said. "Branches are going to be here for a long time because people want them, especially those looking for advice."

Linda Ewing, senior vice president for community affairs with Fifth Third Bank for northwest Ohio, said her bank has committed to keeping its brick-and-mortar branches in lower-income neighborhoods. The bank recently built a branch near Lagrange Street and Manhattan Boulevard, replacing its downtown Toledo branch when a nearby branch was forced to shut with the closing of the Nicholson Building. "Relationship truly is key … ," she said.

To that end, Fifth Third, Huntington National Bank, KeyBank, and eight other local financial institutions have teamed up with the city this year to launch Bank On Toledo, a program to educate people -- especially low-income families -- on the benefits of using a banking institution rather than check-cashing stores that usually charge high fees. The banks, along with Charter One Bank, Directions Credit Union, FirstMerit Bank, Great Lakes Credit Union, Nueva Esparanza Credit Union, PNC Bank, State Bank and Trust Co., and Toledo Urban Federal Credit Union, are trying to reach the approximately 30 percent of local households that don't use the banking system.

Sharon Speyer, Huntington Bank's northwest Ohio regional president, said though the percentage of customer electronic transactions grows daily, local bank branches still provide an important service and aren't going anywhere.

"We still see quite a bit of traffic in our branches, and I think our customers are voting with their feet," she said. "I think a lot of people like that face-to-face interaction."

Contact Larry P. Vellequette at: lvellequette@theblade.com or 419-724-6091.