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market where your margin is being compressed by 30 to 50 percent?"
The Midwest, St. Louis in particular, is among the most expensive in the country in terms of cost of funds rates, Terry
says, making the margins plight that much tougher.
"Money rates in St. Louis - and we're certainly a part of that - are among the highest in the United States, and it has
been that way for years," he said. "Even compared to New York, Los Angeles and other major cities, St. Louis' cost of money
is higher. Some banks have had to introduce or increase service charges as a means of dealing with slimming margins, but
we're not willing to do that."
Larry Ziglar is president and chief executive officer at First National Bank in Staunton. Most bankers will agree, he
says, that their margins are headed downward.
"We are working with narrower margins and we will continue to see some decay as we go forward," said Ziglar, "and not
just because of competition. Usually when you price loans, the prime used to mean something. But that index is not really of
value anymore, because so many banks are pricing loans less than that."
The prime rate used to be reserved for a bank's best customers, according to Ziglar. "As an industry, we probably got out
of that pattern about five to seven years ago, though," he said. No one uses that as a gauge anymore. Now, it's all about
who wants to cut the rate and live with the risk."
Setting slim margins against the backdrop of stiff competition, size can matter, Ziglar says. "The multi-regional banks
are set up to assume more risk. When they're nationwide, they have the ability to set a higher rate in some markets to take
on more risk and gain market share in others," he said. "Smaller banks that are located in one community or in one region
generally aren't equipped to do that."
When the Fed lowered the Federal Funds Rate - the interest that banks charge each for the use of federal funds - in
September by half a point, one would think that banks could take advantage of that and lower their deposit rates by half a
point, but this regional market didn't allow for it.
"Competition is just too steep to be able to do that," said Ziglar. "Banks in this market are very competitively seeking
loan growth."
In a more traditional environment with healthier margins, banks across Southwestern Illinois would be seeing a yield
curve that slopes rather than one that is relatively flat, according to Bart Solon, president and chief operating officer at
Partners Bank.
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"Typically our short-term funding costs us a lot less than longer-term funding," Solon said. "But what has happened for
the past several years is that we've pretty much been getting 5 percent plus, and it hasn't mattered whether we've invested
it for two days or five years. What happens in the banking environment is that if we don't have that slope to the curve,
then our funding bucket has the same cost. Essentially right now, our average cost hasn't been too far off from what our
highest rate is, and that has really affected our margins," he added.
Solon sees the banking industry, in terms of tight margins, as preparing to emerge from the crisis. "I think it started a
couple of years ago and hopefully, as an industry, we're at the bottom," he said. "In the final analysis, it all comes down
to this: Can you put your product out at prices that are competitive and still maintain enough spread to generate a
reasonable amount of return for your shareholders?"
A lot of banks, now that margins are squeezing, Solon says, are trying to rein in the other variables, the ones within
their control. "They're looking at their general overhead. Can they work smarter? Can they work more efficiently so they can
grow without adding more people? Or, in some cases, if they have some attrition, can they continue to grow without going
back to previous staffing levels?" he said.
Dave Kuhl is chairman of the board of the Illinois Bankers Association and chairman of Freestar Bank in Champaign. Kuhl
says the topic of thinning margins has been a frequent one among the IBA's 400-bank-member statewide organization over the
past several years.
Illinois is a very unique state," said Kuhl, "in that it was one of the last states to join the branch banking
environment. Outside of Texas, we still have the largest number of chartered banks in the country. There are a lot of
chartered banks competing against each other, in addition to a significant number of ag (agricultural) banks and credit
unions competing for market share."
New banks are constantly emerging in well-established communities, said Kuhl, many of them which may have had one or two
long-time banking institutions that are now feeling the pressure of a new competitor after their market share.
"Competition is a good thing," he said, "But it's just that much more difficult for existing institutions that are
already facing tight margins. As new competitors move in, one way to compete is to offer a higher deposit rate and more
attractive loan rates…and what that does is cause others' margins to shrink. You can't control slim margins. Very few banks
compete on credit quality. That's bad business, and it's not the way to gain market share. So we have to continue gaining
other pieces of the banking relationship," he added.
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