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Banks weigh relevance of brick-and-mortar branches

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Last year, as employment finally returned to prerecession levels in San Diego County, every major industry added new workers to their local operations except one: financial services, thanks to the public's growing use of online and mobile banking to handle their banking needs.

During a year in which the county’s total number of jobs grew by 3 percent, employment in lending-related jobs dropped by more than 6 percent, from 18,800 workers in November 2013 to 17,600 in November 2014. That's the lowest number of workers since 1995, when the industry was rebuilding from the post-Cold War recession.

“Banking activity has been one of the weak links in a chain of positive gains in the regional economy," said Lynn Reaser, economist at Point Loma Nazarene University and a former economist for Bank of America Corp. (NYSE: BAC).

Reaser said there are several reasons for the decline.

“Business loan demand is still fairly weak, since businesses are still cautious about investing large amounts in expansion and their internal cash flow is enough to cover major developments," she said. "Also, demand for mortgage refinancing has dropped off, since most individuals who qualify for refinancing have already done it at least once or twice already."

Those changes tend to be cyclical, rising and falling along with economic trends. But banks are also adapting to longer-lasting structural changes in the marketplace, specifically in technology: An increasing number of customers are using their personal computers and smartphones to carry out their banking business, without ever visiting a branch.

"The wave of technology continues, which is true of all industries, but seems to be affecting financial institutions particularly strongly these days," Reaser said.

"Many customers still value going to actual branches, but others, especially in the millennial generation, might never want to go unless they have a real problem with their account or want to take out a major loan. Banks are going back and forth over whether to have a large number of ways of interfacing with them, or whether to cut their costs by closing branches and cutting staff."

David Ely, professor of banking at San Diego State University, said that there's no evidence that online-only banking represents a major threat to the traditional bricks-and-mortar institutions, despite the success of a limited number of Web-based lenders, such as La Jolla's Bank of Internet (Nasdaq: BOFI).

While the need for an actual branch will diminish over time as people get more comfortable with mobile banking and online services, Ely said the bigger traditional banks — such as BofA or Citigroup (NYSE: C) — are able to offer online services that are comparable to the purely online lending operations. "I haven't seen any evidence that has significant advantage to purely online services."

The shift to online and mobile banking gives the large institutions an advantage since they have more financial resources to devote to technological research, development and deployment, which has enabled the multibillion-dollar banks at the upper rungs of the ladder to steadily increase their market share while many smaller banks, such as those with below $300 million, have been slipping.

“Industry consolidation — mergers and/or acquisitions — has had the greatest impact on FDIC-insured institutions with less than $300 million in assets," said a 2015 forecast published last month by The Financial Brand online magazine. "Correspondingly, these institutions are reporting that they manage fewer branch offices.”

In the meantime, some of the big banks are expanding their branch network even as they pump money into online services. Wells Fargo & Co. (NYSE: WFC), for instance, is adding seven to 10 branches in Southern California this year, including one in Carlsbad this month and another in Del Mar, said Celia Lanning, the bank's regional president for the San Diego region.

Lanning said the bank has not given up on millennials for bricks-and-mortar services. Working with the Gallup polling organization, Wells Fargo learned that most millennials want to know more about how to manage their money. In fact, a higher percentage wants to learn about money management than any other age group.

"So even if the millennials are not coming into bank locations to conduct basic transactions, they're coming in for financial advice and know-how," she said. "They still do very much value being able to walk into a location and build a relationship with financial experts, our bankers."

Lanning said that even though size does matter in terms of an institution's ability to roll out new technologies, customers also value person-to-person contact with bankers, which continues to leave niches for smaller community banks.

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