Hartford Business Journal

22 HARTFORDBUSINESS.COM | JANUARY 9, 2023 Stephen Lewis is the president and CEO of Thomaston Savings Bank. HBJ PHOTO | STEVE LASCHEVER As banks battle for talent, interest rates will weigh heavily on commercial loan demand in 2023 By Greg Bordonaro gbordonaro@hartfordbusiness.com T he performance of the banking industry often mirrors the perfor- mance of the overall economy. That's why it should be of little surprise that Connecticut bankers are keeping a close eye on interest rates, inflation and other economic indicators to get a sense of whether a much-de- bated recession will strike in 2023. Since the pandemic began, Connecticut banks have held up relatively well financially. Through the first three quarters of 2023, the 31 banks headquartered in the state saw slightly higher profitability and sizable increases in assets, deposits and loans. HBJ recently talked to four bank CEOs about the industry's 2023 out- look. They included: • Matthew Hummel, market pres- ident and commercial sales leader of KeyBank ($187.7 billion in assets); • Lesa Vanotti, president and CEO of Torrington Savings Bank ($927.8 million in assets); • Stephen Lewis, president and CEO of Thomaston Savings Bank ($1.6 billion in assets); and • Michael Weinstock, executive vice president and Hartford regional president of M&T Bank ($197.7 billion in assets). Here are some trends to watch. Interest rate pressure Thomaston Savings' Lewis said the Federal Reserve's interest rate hikes have caused borrowing costs to significantly increase on all loans including mortgages, commer- cial and consumer debt and credit cards. He said deposit and loan interest rates will continue to rise in 2023. So far, deposit rates have increased at a slower pace but that could change this year as customers seek out investment and deposit products that pay higher rates. "As such, I expect banks seeking to retain existing customers to significantly increase rates," Lewis said. "And banks will offer account opening incentives to attract Lesa Vanotti Matt Hummel new customers." KeyBank's Hummel said higher interest rates, inflation, expectations of an impending recession, and gen- eral geopolitical unrest are creating a level of economic uncertainty and volatility that's impacting commercial loan demand, which he expects to soften over the next year. "We are seeing a softening in M&A activity, corporate real estate and commercial lending activities in general as business owners take a pause on investments to wait out the market volatility," Hummel said. "While current incremental interest rate increases from 3% to 6% are not yet taking a huge economic toll, they are certainly driving a psychological one as buyers experience sticker shock and sellers see their asset valuations decreasing." Vanotti said rapidly rising interest rates have also slowed the housing market, and home prices that soared during the pandemic remain high, essentially pricing first-time home- buyers out of the market. "Housing has a ripple effect on other parts of the economy, furniture, appliances and other home goods," she said. Battle for talent As of October 2022, the total U.S. labor force was approximately 3 million workers below pre-pandemic levels, according to M&T Bank's Weinstock. "In Connecticut, we're seeing a battle for talent in the banking indus- try as we're looking to identify and grow tenured and seasoned people," he said. "For newer (employees) to the industry, we must focus on investment in training and profes- sional development." Lewis said banks are most in need of technical talent in areas such as data analytics, credit analysis and IT. Vanotti said local banks have benefited from recent merger activ- ity, which has made available some experienced bankers. But banks are struggling to find talent to staff branches, which have traditionally served as a key talent pipeline. "In addition, we have many areas where the skill sets are transfer- able to other industries: account- ing, IT, HR, marketing, so we must INDUSTRY OUTLOOK | BANKING Michael Weinstock INDUSTRY OUTLOOK | REAL ESTATE gave rise to significant NIMBYism in the industrial market. Several Greater Hartford towns — like Windsor, South Windsor and Enfield — weighed or implemented warehouse development morato- riums or new restrictions on large- scale projects amid growing traffic and other concerns from residents. Ross said he counted at least five big-box developments (ranging in size from 345,000 square feet to 1.5 million square feet) that were rejected in 2022 in the towns of South Windsor, Newtown, Willington, East Granby and Cromwell. Those increasing barriers to entry for new development, in addition to a lack of large industrial-zoned sites in Connecticut, could further strain the market in 2023, and send some developers and tenants currently in the market for space to neighboring states, Ross said. Pricing concerns With the cost of goods, construc- tion materials and capital continuing to rise — or at least remaining at elevated levels — it could create a drag on the industrial market. Rising interest rates, for exam- ple, have created uncertainty in the capital markets, slowing the level of investment transactions, Ross said. As a result, "some potential sellers have delayed placing properties on the market, with other sellers pulling fully launched sale opportunities from the market," he added. If that continues into 2023, it will be further signs of a slow down, Ross said.

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