Pub. 8 2017 Issue 2

www.wvbankers.org 6 West Virginia Banker A MESSAGE FROM THE PRESIDENT & CEO By Sally Cline A ccording to the FFIEC’s State Average Report for all insured commercial banks headquar- tered in West Virginia, bank perfor- mance remained solid in 2016, with a slight uptick in noninterest expense (4bp) and a modest decline in the net interest margin (2bp). Little change was reported in provision for loan and lease losses (decline of 1bp). No change was reported in noninterest income or realized gains/losses on the sale of securities. WV’s commercial banks reported a 2016 return on average assets of 0.69%, compared to 0.72% in 2015. Although profitability remains stable, the return on average assets for banking organizations continues below pre-crisis levels when WV commercial banks consistently reported a return on average assets at or near 1%. West Virginia’s 54 commercial banks re- ported net income of $313.6 million for 2016, an increase of about 3% over 2015. Comparatively, WV banks reported an 11% growth in earnings in 2015 over the previous year, only a 1% growth in 2014, and an 11% growth in 2013. Surprisingly, 20 banks, or a little over 1/3 of all WV commercial banks, reported a decline in earnings, and 12 reported a decline greater than 10%. Reasons for the decline varied for these 12 banks, with about half reporting an increase in noninterest expenses. The others reported declines in interest and non- interest income. Only one reported an increase in provision expenses. Loans and leases grew 4.8% in 2016 and credit quality continued to modestly im- prove as total past due and nonaccrual loans decreased from 3.2% at year-end 2015 to 3.1% at year-end 2016. Simi- larly, net losses to average total loans declined from 0.19% to 0.16%. Restruc- tured loans, nonaccrual loans and other real estate owned represented 16.2% of equity capital and reserves at year-end 2016. Provision expenses continued to decline to 0.11% of average assets, compared to the recent high of 0.38% in 2011. WV banks continue to be adequately capitalized with a tier one leverage cap- ital ratio of 10.9% and an average cash dividend payout ratio of 42.8%. Overall banking conditions in West Virginia were similar for 2015 and 2016. Nonetheless, the economic environ- ment remains challenging, which partly explains why West Virginia has not been a focal point for bank acquisi- tions. Our state witnessed several years of lackluster performance as market conditions for the coal industry deteriorated further and natural gas producers struggled with increased output amid large debt obligations and lower prices. Furthermore, it is anticipated that growth over the next five years will lag the nation as a whole. In general, the WV banking industry has little exposure to direct energy assets relative to its loan portfolio, but most all have been impacted by loans extended to businesses and households that are dependent on the energy sector. This situation is not likely to dissipate until new economic development strategies are deployed. Notwithstanding the state of the econ- omy, another challenge is increasing competition from nonbank service providers. Several bankers I contacted cited competitive challenges from cred- it unions and the Farm Credit System. Credit unions are now fairly indistin- guishable from commercial banks and have grown to control a significant share of the banking services market. The Farm Credit System retains inherent advantages as a government-sponsored enterprise. Both enjoy pricing subsi- dies due to their federal tax-exempt status and through the support and cooperation of their primary federal regulators, both have experienced expanded powers that have strayed beyond their original mission and The State of Banking in West Virginia Summer 2017 7 West Virginia Banker scope. These factors enable them to have an unfair com- petitive advantage over banks. This challenge will no doubt continue until Congress reacts favorably to the industry’s call to change the status quo. When asked how banking conditions are likely to change go- ing forward, consolidation is on the minds of a lot of bankers right now. In 1984, WV had 227 banks. Today, there are 57 with another 17 doing business here. West Virginia has not had a new bank charter since 2003. Looking ahead, consoli- dation will be driven by the confluence of higher fixed regula- tory costs, low growth nationally resulting in a continued low interest rate environment, and rapidly changing technological and financial innovation. Some will consolidate due to their inability to consistently earn their cost of capital, while others, particularly in rural communities, will sell due to the inability to attract new talent to replace those aging out in current senior management positions. As for technology, bankers are serving communities increas- ingly in a digital ways, and as a result, the number of bank offices is declining. Bank offices peaked in 2011 at 671. As of June 30, 2016, WV banks reported 646 offices, a decline of almost 4%. Simultaneously, WV deposits grew from $29.2 billion to $31.5 billion, an increase of approximately 8%. The closure of brick and mortar offices is driven by changes in customer preferences such as mobile banking and remote deposit. Research shows, however, that branches remain vital to an overall retail banking strategy as well as helping to achieve compliance with the Community Reinvestment Act to ensure the availability of credit and services to all segments of the customer base. As banks continue to migrate their customer transactions to less-costly self-service channels, branch networks will need to evolve into more efficient and effective sales channels. Moreover, all this technological change must happen against the backdrop of growing cyber- security risks, which will also require ongoing investment to stay ahead of potential threats. These are indeed interesting times, and banks must continu- ally reevaluate and reinvent themselves to remain relevant and profitable. While no one knows what our industry will look like in ten to twenty years, community banks that focus on relationships and remain open to modernizing, streamlining and digitalizing their banks will survive and remain a vibrant segment of the West Virginia financial services industry.  West Virginia’s 54 commercial banks reported net income of $313.6 million for 2016, an increase of about 3% over 2015.