ByGary S. Corner , Rajeev R. Bhaskar
Springfield, Mo., is a mid-sized metropolis nestled in the Ozark Mountains in the southwest corner of the state. The local economy is heavily dependent on health care, education, manufacturing, retail and tourism. The gross metro product for Springfield in 2007 was $14.5 billion, giving it a national rank of 127 among metro areas. Solid economic growth has attracted many banks to operate in the area. Recent reports indicated, however, that there was some weakness in the banking sector.
To analyze the Springfield market, we performed a comparative study by looking at four mid-sized markets representing a cross section of the Eighth District outside of the four major metropolitan statistical areas (MSA). Besides Springfield, the other four markets were Columbia, Mo., Fayetteville, Ark., Jonesboro, Ark., and Jackson, Tenn. The study entailed comparing Springfield's economic and banking statistics with those of the four metropolitan areas.
Table 1 compares economic data for Springfield with that of the other four MSAs; in terms of population and economic output, Springfield is somewhat larger than the average of the other MSAs. It compares fairly equally on the other metrics of unemployment, population growth rate, per capita income and cost of living. Springfield does not appear to be experiencing any unique economic shocks, such as big factory closings. Conditions there resemble what's typically happening in other parts of the nation.
However, in our analysis of banking conditions, we observed that of the five markets, Springfield showed some extra weakness on a number of metrics. (See Table 2.) At year-end 2008, return on assets at all Springfield banks was -0.15 percent, compared with 0.56 percent for Jonesboro (the second lowest) and 1.02 percent for Columbia (the highest). For the other metrics examined—loan loss reserves, CAMELS ratings and leverage ratio—Springfield banks ranked in the middle. Only one other metropolitan area (Fayetteville, 2.42 percent) had a higher proportion of nonperforming loans than Springfield (1.84 percent).
Springfield banks have higher levels of commercial real estate (CRE) concentration and noncore funding ratios compared with banks in the other areas. These observations, along with some of the other metrics, point to an extremely competitive market in Springfield.
Springfield has had a decent share of banks open since the 1990s that have contributed to the crowded local financial services environment. Currently, 22 banks are headquartered in Springfield, compared with 12 in the second highest MSA. In addition, 18 banks that are headquartered elsewhere operate branches in the Springfield market. When we applied the Herfindahl-Hirschman Index (HHI) to Springfield, a measure that attempts to capture the level of competition within a market by using the market share of all institutions operating in the region, we saw that Springfield has a very high level of competition. The value of HHI varies from zero to 10,000; the lower the number, the more competitive a market is. The HHI for the Springfield market is 730, the lowest of all metro areas in the study. See Table 2 for HHI scores of the other MSAs.
Springfield's overcrowded market observation has been echoed by local representatives of other regulatory agencies and banking leaders. It has also been noted that the market has not experienced a significant economic downturn in recent history. Consequently, some institutions may not have an institutional history of working through stressful economic periods. This lack of experience affects the competitive forces at work and influences credit underwriting, pricing and deposit practices.
In general, we do observe some extra weakness in the Springfield market compared with the other MSAs, although nothing we would categorize as severe. This weakness, we believe, is due to the relatively higher level of competition. Springfield has always been an attractive banking market with newer banks adding to the pressure on growth and earnings at existing banks. Until recently, banking conditions were largely unaffected by the increase in competition. The funding and asset deployment strategies in such a competitive market, though, are proving to be less resilient in an economic downturn.
|Springfield, Mo.||5 MSA Average|
|Population Growth Rate||2.40%||2.20%|
|Current Total Workforce||220,026||130,280|
|Gross Metro Output (in billions)||$14.50||$9.20|
|Current Per Capita Income||$29,577||$30,107|
|Cost of Living Index||87.4||89.2|
SOURCES: Springfield Business Development Corporation, Bureau of Labor Statistics, Bureau of Economic Analysis, Bureau of the Census and Council for Economic Activity and Research
|Springfield, Mo.||Columbia, Mo.||Fayetteville, Ark.||Jonesboro, Ark.||Jackson, Tenn.|
|Banks Headquartered in Town||22||8||12||6||3|
|Total Assets (in millions)||$5,888||$1,982||$12,961||$3,356||$571|
|Return on Assets||-0.15%||1.02||0.68||0.56||0.96|
|Nonperforming Loans / Total Loans||1.84%||1.05||2.42||0.76||1.29|
|Loan Loss Reserves / Nonperforming Loans||94.97%||141.30||67.82||189.06||98.2|
|Tier 1 Leverage Ratio||8.83%||8.16||8.0||8.25||9.14|
|CRE to Total Loans||30.26%||26.35||28.12||27.7||21.9|
|Herfindahl-Hirschman Index (HHI)||730||1407||1943||1634||1474|
SOURCES: Call Reports and CASSIDI (Federal Reserve Bank of St. Louis). Numbers in red indicate notable differences when compared with the other metropolitan areas' banks.