By Roberta Hollinshead

Trends in the Washington state banking industry are generally positive coming into 2018.

The 44 state-chartered and three nationally-chartered banks headquartered in Washington are stable and the financial condition of these institutions has continued to improve.

To best summarize the condition of the state’s banking industry, I will focus on three C’s: consolidation, competition and, most importantly, community.

Consolidation

The most dramatic change in the industry as a whole continues to be the pace of consolidation. In Washington, there were 80 state-chartered banks at year-end in 2009, and this is down to 44 state-chartered banks today. From 2009-13, 18 banks failed and the rest of the decline in charters is a result of mergers.

There has been no de novo, or new, banking activity in the Northwest since Liberty Bay Bank in Poulsbo was chartered in July 2009.

On a national level, at year-end 2009, there were 8,012 federally-insured banking institutions and that number is down to 5,787 as of June 30, 2017, according to the Federal Deposit Insurance Corporation, or FDIC. This is a dramatic 38 percent decline in the number of federally-insured banking institutions. The pace of new bank formation nationwide is well below the pace of those institutions merging out.

The causes for continued consolidation have been largely market conditions and low investor returns. Banks derive profits by the spread or margin they earn between assets (primarily loans) and what they pay for their liabilities (primarily customer deposits).

Historically low interest rates over the past decade have compressed these margins. At the same time, there has been increased regulation on all banks, including community banks, as a result of the financial crisis. These regulations, combined with the soaring costs of technology and cybersecurity, have continued to hamper profitability and therefore investor returns. The pendulum does appear to be swinging back in some regards with pending federal legislation (S.2155 – Economic Growth, Regulatory Relief, and Consumer Protection Act) to roll back regulations primarily for community banks.

Most banks also stand to benefit by the reduction in the corporate tax rate to 21 percent stemming from the Tax Cuts and Jobs Act of 2017. Improved profits should drive investor interest in community banking, and potentially spur some new investments into community banking. As I always say, Washington is open for business!

The mission statement of the Department of Financial Institutions, or DFI, is to “regulate financial services to protect and educate the public and promote economic vitality.”

Despite the consolidation and reduction in the number of institutions, banking assets have continued to grow in Washington state. Combined state-chartered banks hold more than $57 billion in assets as of September 30, 2017, which represents a 7 percent annualized growth rate from the previous year. Loan growth is the primary driver averaging 11 percent, and exceeding the national loan growth rate of 6.5 percent, according to the FDIC.

Ensuring consumers and businesses have access to credit is critical to DFI’s mission regarding economic vitality and the loan growth we are seeing in the industry is a very positive economic indicator. Community banks primarily focus on small business, commercial real estate and, especially in Eastern Washington, agricultural lending.

Competition

How consumers and businesses access banking services and credit is changing, and competition in the financial services industry is fierce. There has been a blurring of the lines between types of financial service providers: banks, credit unions, online lenders and fintech providers. The word “fintech” describes the whole array of technologies, which are rapidly changing consumers’ expectations about how they interact with their financial institutions.

There is an ongoing debate on how community banks will compete with fintech companies. The reality is that fintech companies will continue to rely on and build partnerships with financial institutions that have relationships with customers and consumers. The community banking industry is well positioned to work with fintech companies to bring consumers and businesses the services they demand.

Community banks have built their business models on relationship-based banking, and as a result, will continue to be strong competitors to other types of financial institutions or service providers.

Community

The historic success of the community banking business model has been founded on supporting communities and building relationships. In my 16-plus-year tenure as a bank regulator, I have heard countless stories about how community banks have supported economic development and small business entrepreneurs in the markets in which they operate.

Community First Bank is the only state-chartered bank headquartered in the Tri-City region.

However eight state-chartered community banks have continued to expand and today operate numerous branches in this market.

While each state-chartered bank contributes in a meaningful way to the economic vitality of the region, I recently heard a great example of a local bank supporting the Tri-City community. Eric Pearson, chief executive officer of Community First Bank, explained how the bank and its Board of Directors are actively involved in helping with the financing of the new Boys & Girls Clubs of Benton and Franklin Counties’ Kennewick clubhouse.

He explained that this project has been in the making for some time and has tremendous community support. The members of the bank’s board, who are all local, personally contributed a combined $500,000 to the capital campaign. In addition, the bank is providing the construction financing to get the project off the ground, while the club is collecting the pledges from the community.

This is the heart of community banking. Not all financial institutions would be willing or able to finance a community project and contribute in such a meaningful way.

Regardless of the consolidation or fierce competition, the focus on building relationships and supporting communities has not changed and continues to be the reason why community banks are critical to the economic vitality of the state.

Roberta Hollinshead is the director of banks for the state Department of Financial Institutions.