Demographic Destiny for Community Banks?

In their best-selling mid-20th century books of U.S. electoral politics, analysts Richard Scammon and Ben Wattenberg were fond of saying that “demography is destiny.” The same is true in the community banking sector.

As populations age in rural areas and shift from suburbia and the country to big cities—and as the baby boomers give way in the workforce to millennials—demographic changes will be felt keenly by community bankers. During a recent roundtable discussion with four top community bank executives, strategies for navigating these changes came to the fore.

Growth a challenge in rural markets

Demographic patterns of migration between urban and suburban markets and rural hinterlands continue to drive change in the banking industry. In rural areas, “the biggest challenge is growth of any kind,” says Jeffrey Smith, chairman of the $764 million-asset Ohio Valley Banc Corp., based in Gallipolis in rural southeastern Ohio. Challenges include net outmigration as young people move for school or in search of jobs.

Peter Judkins, a banker in rural western Maine, observes that more than 90 percent of his state’s population growth takes place in Maine’s three largest urban areas. “The death rate is faster than the birth rate in our state,” he explains. “So, there’s a real concern—even if there were opportunities—that there won’t be people to fill those opportunities.”
Declining opportunities remain a challenge in the towns served by Judkins’ $345 million Franklin Savings Bank, based in Farmington. “We saw the shoe industry go down. We saw the textile industry go down. Now the paper industry is being challenged pretty significantly. I don’t know where it’s all heading,” he says.

Meanwhile, banks in markets on the receiving end of demographic shifts are leveraging those opportunities. Jim Cornelsen is president and CEO of the $1.2 billion Old Line Bank in Bowie, Md., a suburban community just outside of Washington, D.C. The D.C. area is experiencing the opposite trend of rural markets as educated professionals in their 20s and 30s flock to revitalized center-city neighborhoods, along with a healthy share of older adults downsizing from suburban homes and moving into multifamily buildings.

Old Line has capitalized on this trend in CRE lending, but has also had to shift its branch strategy. “A lot of our clientele has moved back into the District,” Cornelsen says. “Branches just don’t need to be as close together, but you’ve got to do it with branches”—and city rents are high. Old Line has responded by shrinking its branch network by a net 20 percent net in the past year even as it opens new ones. “I think most banks are scared to do consolidations,” he adds, but he says that banks can get away with spacing branches farther apart and with smaller footprints.

Millennials and the shift in retail banking technology

Retooling the retail banking operation is a key strategy for handling another demographic shift—the growth of the millennial generation (roughly, those aged 18 to 35). For bankers, the generation and its preference for virtual, instant, peer-to-peer financial services is exemplified by Smith’s 30-year-old daughter, who is still on her first pad of checks from the account she opened with Ohio Valley Bank at 18, since she conducts her banking via her mobile devices.

All the bankers around the table agreed that streamlining the retail banking experience is part of their strategy. The Midland-based FirstCapital Bank of Texas has reformatted all of its branches to take out traditional teller lines, says bank president Jay Isaacs. FCB, with $985 million in assets, also offers drive-up interactive teller machines in drive-through lanes. ITMs are very useful in high-traffic and high-employment areas, he says.

While Judkins’ bank has invested in remote deposit capture, mobile banking and other technologies, in an aging market he has to retain much of the existing retail infrastructure for older customers. “You still have to have the branches open with the people and staff in them to support that,” he says. However, Smith notes that in Ohio Valley Bank’s first reformatted branch, once older customers are introduced to the interactive service option, they use it on subsequent visits. (Younger customers gravitate to it immediately.)

Like many bankers, Isaacs and Smith have millennial advisory boards to help guide their banks’ strategies. At Smith’s bank, advisory board members serve a paid term for three years. “That’s where many of the new ideas that we think we need to be entertaining are coming from, and some of them are not even our customers,” he says, adding that the bank acts on the ideas they supply. “If we don’t, we’re wasting our money.”

Smith adds that new financial technologies offer a chance to counteract the demographic headwinds in rural areas. His bank has customers who opened their accounts in high school and stayed with the bank after moving out of the area. With remote deposit capture, “if you really want to, you can stay there if it suits you,” he says. “We’re trying to bring in a couple of high schools to try to promote that idea. If you can do it, it pays off down the road.”

Regulatory pressure continues

While having high-growth industries close by is a boon for local banks, it creates risks and concerns of its own. Isaacs says that oil prices remaining in the $40 per barrel range for more than a year is “going to create some pretty significant problems for our customer base.” With Midland—one of FCB’s three main markets—at the heart of the west Texas oil patch, much of the economy is oil-driven and the local banks are on their regulators’ radar screen for extra scrutiny.

The dip in oil has caused FirstCapital Bank’s robust loan growth rate to slip a few percentage points. “We see that [rate] continuing, but we’ll have to be more cautious especially in the oil and gas side,” Isaacs says. While FirstCapital Bank has only about 10 percent of its portfolio in oil and gas loans, the entire Midland economy is driven by the sector. “If you own a doughnut shop, it’s driven by oil and gas.”

In the Washington, D.C., area—dominated economically by the federal government—there’s little commercial and industrial lending, and business lending is mostly for commercial real estate, Cornelsen notes. “It’s a huge CRE market, and the challenge is keeping the regulator happy,” he says. “If you’re in our market, it’s pretty high-velocity loan growth. Net-loan growth is probably somewhere around 15 percent to 20 percent sometimes in our market.”

In 2015, regulators turned up the heat on CRE with guidance on high-velocity CRE and on managing concentration risk as the sector continues to grow. “We’re doing fine and we feel we’re ahead of the game, paying close attention to our CRE risk as one should be doing these days,” Cornelsen says. “My concern is that regulators may come up with something different on CRE on a nationwide basis and totally close the door to us locally.”

Speaking up for regulatory relief

The ever-growing regulatory burden from Washington remains top-of-mind for bankers when they think about impediments to growth. Judkins’ bank has increased its focus on commercial lending due “primarily to the over-regulation of the consumer mortgage business”—Franklin Savings Bank’s historical bread and butter. For example, in 2004, Franklin closed 949 mortgages totaling $68.5 million with no compliance officer, one underwriter and four loan processors. Last year, it closed just 380 mortgages totaling $43 million—but with a full-time compliance officer, two underwriters and four processors.

Isaacs echoes the concern about mortgage regulation. During Take Your Lawmaker to Work Week last fall, FirstCapital Bank compared an eight-page stack of papers necessary to fulfill legal requirements for a property sale in Texas to the two-inch stack of documents required by federal regulators. “It sold the message very clearly with our congressman.”

Efforts like ABA’s Take Your Lawmaker to Work Week help send a message to staff across the bank, from the teller up, that advocacy is a priority. Cornelsen makes a point of bringing several staffers to the ABA Government Relations Summit to expose them to industry advocacy. “I think last year I had eight or nine over here,” he says. “They loved it. We’re going to continue that because they thought it was a mark of accomplishment to be selected.”

Other bankers emphasize staff and director contributions to BankPac, especially via payroll deduction. At FirstCapital Bank, Chairman Ken Burgess agreed in 2014 to shave his head if the eligible employees contributed $30,000 to BankPac. Isaacs upped the ante by offering to do the same if $50,000 were raised. The result: FCB employees contributed $54,000 to BankPac and both men went bald for the occasion.

This article originally appeared in the March/April 2016 issue of the ABA Banking Journal.

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