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The Lull Before The Storm
2020 is a year none of us will ever forget. The COVID-19 pandemic has impacted us socially, financially, mentally and, of course, health wise. Its lingering effects will help shape our society for the foreseeable future. Add to that an historic presidential election and a year of social justice and we find ourselves experiencing multiple events that are unprecedented in my lifetime. All of this has put a damper on bank mergers this year as credit quality uncertainty and deeply reduced bank stock prices negatively impacted bank deals. But, I sense, this has set the stage for further significant consolidation in the decade ahead.

The Driving Forces
The effects of the pandemic have worn down many management teams and boards. Historically low interest rates and resulting narrowing margins have put enormous pressure on bank earnings. Once the PPP is paid off, some loan deferrals turn to losses, and refinancing inevitably slows down, we will get a better sense of what earnings will look like going forward. Pressure will weigh heavily on smaller banks to stay profitable as technology accelerates in importance throughout the banking industry. By the same token, with slower organic growth and skinny margins reflecting the Federal Reserve’s low interest rate policy, the mid-tier regional banks will feel compelled to leverage their technology by acquiring smaller banks in order to maintain earnings expectations.

How Much Consolidation Will Ensue
Frankly, it wouldn’t surprise me if the number of banks was cut in half by the end of this decade. I really think competitive forces will drive further consolidation hard. Technological advances have clearly been accelerated by the pandemic. People of all ages were encouraged and forced to do much of their banking remotely, with online banking, direct deposit, remote deposit capture, and managing your account via some electronic devices now the norm. We are there now. Credit and debit card use have been encouraged and often demanded during the pandemic, foreshadowing a cashless society in the future.

Is All of This Good or Bad?
I think this is a terrific question. In some ways further consolidation is scary and perhaps it will occur less in more remote communities. However, the economics of banking seem to be driving it in that direction. Fewer and smaller physical branch sites seem inevitable. We have seen personal service replaced by the convenience of devices, and shopping for mortgage loans and other services delivered as mere products. The whole retail sector has been transformed and is going through a metamorphosis, and banking is not immune. I’m old school and still like my morning newspaper, but unfortunately can see that also disappearing. Old habits are hard to break, but nearly everyone today carries a tiny little electronic gadget, which really is a powerful computer. The future is now, like it or not.