As bankers, you are accustomed to external forces that transform the way you do business. Disruptions to your business model, including, but not limited to, new regulations, intensifying competition, emerging technologies, and changing customer expectations, have become a way of life. To succeed, you and your leadership team must frequently pivot to accommodate the changing needs of the marketplace and your stakeholders.
The global pandemic is a recent and obvious example of an unplanned interruption. The impact of COVID-19 was unavoidable on your business, your local economies and your communities, and your flexibility in responding to the pandemic was tested beyond measure. The challenges of the past 16 months have provided a new lens by which to view the strengths, vulnerabilities, and resiliencies of our industry. Banks that offered consumer-friendly technology while still maintaining close personal ties to their customers and communities by phone, video conferencing, or scheduled appointment were best positioned to thrive during these unprecedented times.
While the pandemic brought out the best in bankers and the banking system as a whole, it could also, unfortunately, serve as an accelerant for further consolidation. To no one’s surprise, the pandemic hastened the demand for digital banking services. Even your most senior customers were forced to bring out their digital devices and learn to become more tech-savvy with the help and encouragement of family and friends. Although some of your customers, young and old alike, will go back to banking the way they used to, it will not be near the numbers pre-pandemic.
Another issue that could drive further consolidation within our borders is the state’s changing demographics. According to the census data released earlier this year, West Virginia, one of three states to lose population since 2010, had the largest percentage loss of any state at 3.2%. According to census results, though there have been some years with slight upticks, the population has been on an overall decline since the 1950s.
It has been shown that median age and the net migration rate are particularly relevant to community banks within their markets. West Virginia’s net outflow of residents combined with an aging population is likely to hinder bank asset growth compared to banks headquartered in states with a net inflow of residents and a younger population. It has also been shown that community banks headquartered in net outflow states often have lower commercial lending volumes than other institutions. Combined, slower balance sheet growth and lower commercial lending portfolios could feed into higher consolidation rates in the future.
As the CEO of a trade association, I am the last person to want to see more bank consolidation, but it is the reality of what is happening. Since joining the Association in 2015, I have witnessed 13 bank sales, with another expected to close by year-end. Over a six-year period, the number of banks headquartered in WV declined from 60 to 47, while the number of market participants declined from 78 as of June 30, 2015, to 68 as of June 30, 2020,. Over the same period, the number of offices within West Virginia declined from 657 to 598.
Many market watchers indicate the time is ripe for a new wave of bank consolidation. Still, I believe community banks can successfully emerge from the health crisis and continue to be successful despite depopulation and other disruptors threatening your business model. Those that survive the wave over the next 10 years must continue to focus on improving operational efficiencies, enhancing fintech capabilities, strengthening customer relationships, planning for management succession, and building resilience to future crises. To grow your loan pipeline, expansion into higher growth markets should also be a consideration.
The pandemic is another example that illustrates how valuable the banking system is in providing services and stability to our communities. Community banks have a profound economic and social impact within the state of West Virginia by using their resources, expertise, and philanthropic spirit to improve and give back to the places where their employees live and work. I hope the information we have learned through the pandemic serves to deepen our understanding of the evolving community bank business model and the vital role of community banks in our financial system.