In November of 2005, Simsbury Bank & Trust opened a new branch in Canton. Located just west of the town green and featuring a drive-up ATM, the branch seemed poised to attract new deposits in Canton, but also to provide added convenience to existing customers in neighboring Simsbury. The doors opened six months after a new Hartford Federal Credit Union opened just down Rte. 44 in West Simsbury.
Three months after Simsbury Bank arrived, First National Bank of Litchfield opened up shop about 1,500 feet down the road.
And six months after that, CitiGroup — one of the biggest financial companies in the world — opened a sparkling new branch in nearby Avon.
Suddenly, Simsbury bank was feeling more squeezed than pleased.
The experience in Canton and the surrounding area –- where four new branches opened in a 15 month period –- is emblematic of the retail banking competition in all of Hartford County in recent years. Banks have been adding branches, often the expensive de novo sort, and doing it fast. In Hartford County, 28 financial institutions now have a presence.
But with continuing pressure on interest rate returns and escalating real estate values, some banks are indicating that the gung-ho era of branch-building may be coming to a close.
Straight Talk
Peter J. Ostrowski, founder of the bank analysis firm Ostrowski & Co., with offices in Cheshire, said the tough competition in Connecticut towns is being duplicated in the rest of the Northeast, and it is no surprise some banks had decided to slow branch expansion.
“I think it’s really a couple of things,” Ostrowski said, pointing to the inverse yield curve and the crowded market. An inverted yield is when short-term interest rates exceed long-term interest rates, resulting in banks borrowing money at rates higher than they can loan it out at.
“The combined effect is pretty significant on earnings, particularly for smaller banks,” he said.
Ostrowski said community banks in particular could expect to feel burdened by greater competition on rates and slower growth in deposits for new branches.
Martin J. Geitz, president and CEO of Simsbury Bank, said he has no regrets, so far. “We are very pleased with the two new branches,” he asserted. Just seven months after opening the Canton branch, Geitz opened another branch in Bloomfield, last summer.
But he said with so many other financial institutions opening branches in the same retail pockets, the “hot money” in deposits that a bank could expect to pick up with a new branch is no longer a sure thing.
Geitz counts six new bank and credit union branches that have opened since 2004 in the five towns the bank serves.
That is cause for concern, which is reflected by the bank’s annual report. In it, Geitz and Board Chairman Lincoln S. Young explain that the bank’s decision to maintain interest rate margins –- rather than lower rates in pursuit of deposits –- meant “slower growth of the new branches than anticipated.”
Geitz said retail competition made it a tough decision.
“It makes it difficult with all the new branches to grow branches as quickly as we had hoped,” he said.
Other banks are in the same predicament.
In the middle of the pack in terms of Hartford County market share, Enfield Federal Savings opened branches in East Windsor in October of 2005 and in Ellington in April 2006.
It made the opposite decision as Simsbury, opting to lower rates and aggressively seek deposits. But in its annual report, the bank similarly noted that it could be some time before the new branches start making money, hurting earnings.
Slow Going
“It’s much slower than we anticipated. But the traffic counts have been good, and we expect that both branches will be successful,” said Enfield Federal President and CEO David J. O’Connor.
He pointed to another source of competition: internet banking.
“Sometimes it’s the competition that you don’t necessarily get to see, like the online institutions, ING and Citi,” he said.
Connecticut Bank & Trust held an opening ceremony for its newest branch, in Windsor, last week, and has plans for a new branch in Rocky Hill later this year or early next. But President David A. Lentini indicated the bank will likely pause there. He said branches can’t necessarily expect to make a profit in a two or three year span.
“I think it might be a little longer even, because the margins are slimmer,” he said.
Geitz said Citibank stuck in his mind as one of the only banks that continues to shill out for new locations.
“I have not heard of others aggressively opening branches,” he said.
