Q&A talks about Connecticut banker’s 2015 expectations with Stephen P. Reilly, president and CEO of Northwest Community Bank in Winsted, who will be the 2015 president of the Connecticut Bankers Association.
Q: How was 2014 for the Connecticut banking industry and what do you and your fellow bankers anticipate most about 2015?
A: The majority of Connecticut banks will report very positive earnings for 2014. However, earnings did continue to be challenged by the extended low interest rate environment. That said, there were also some favorable movements in rates that provided banks with the opportunity to secure investment gains in their investment portfolios.
In terms of lending, residential mortgage production subsided from the levels seen during the 2013 refinance wave, with 2014 predominantly being a purchase-mortgage market, which has had fits and starts throughout the year.
Economic conditions have been very soft this year as has loan demand, however, it’s important to note that the asset quality on banks’ balance sheets has remained very strong. In 2015, we expect to see a continuing pressure on our net interest margin and earnings with the expectation for little or no movement in interest rates.
A slight improvement in loan demand is expected and we hope to see a pick-up in business lending. At the end of the day, it will be another challenging year for earnings in 2015, but the resiliency of the Connecticut banking industry will remain and provide for another year of positive earnings.
Q: What are the two or three things that worry you most about next year’s outlook?
A: The geopolitical risks we face are greater than ever and a negative development in the Middle East, Ukraine, China, etc. could send our economy into a tailspin and back into recession.
This coupled with the looming deficits at the state and federal level are of great concern and are having a negative impact on the confidence of consumers in our economy. In particular, the business sector has been lacking confidence for an extended period of time and is sitting on the sidelines until they witness sustained improvement in the economy.
With small business providing such a strong contribution to our national gross domestic product, this is a major concern, particularly to those of us who rely heavily on lending to this industry.
Q: The adaptations Northwest and its fellow U.S. banks have had to make to comply with Dodd-Frank, are they pretty much done and are they really as onerous as some have made out?
A: Implementation of Dodd-Frank is far from done and, yes, these regulations are extremely onerous to all banks throughout our state. Each one of these regulations comes with pages upon pages of changes that our staff must review, decipher and then implement.
We’ve each had to significantly increase our staffs to address these changes and adapt to an incredibly high level of regulatory burden. In 2015, we will continue to face a number of new regulations including final rules for the Homeowners Flood insurance Act and changes to the Home Mortgage Disclosure Act, to name a few.
With each of these comes a significant level of analysis that is required for our complete understanding and implementation. Regulation is certainly needed in our industry but not to this level and needs to be calibrated such that it is appropriate to the size and risk profile of our banks.
Q: As more Connecticut and Massachusetts banks expand into each others’ turf, how do you see that scenario playing out?
A: New competition is always good for business and I would expect most of these expansions to be successful. Many of our branches are located in low growth or overbanked market places and there is often the need to stretch geographically to develop business. And crossing state lines is not much different than banks stretching over county lines.
Yes, there are different rules that you must abide by, of course, but these are simply strategies to grow business in other markets where banks feel the market is underserved and opportunities exist.
Having operated in this economic recovery for several years now, banks are seeking new opportunities to offset these weak economic conditions and crossing state lines is one viable option.
