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Banking & Finance 34 2014 Economic Forecast www.wbjournal.com Worcester Business Journal Here are five things to watch for in 2014: More Profits This year has been very good to the nearly 30 banks headquartered in Central Massachusetts. Profits in the region's banking sector over the first three quarters are up over the last four years and rose more than 13 percent from 2012 to 2013, according to data from the Federal Deposit Insurance Corp. (FDIC) Why are earnings up more than 13 percent between 2012 and 2013? That's thanks to a steep decline in loan loss provi- sions, or money set aside to cover estimated losses in a bank's loan portfolio. For Central Mass.-based banks, those provisions, for January through September, plummeted from $30.7 million in 2012 to $9.4 million in 2013. Bigger Banks Less Visible, Yet More Popular National and regional banks have decreased their physical footprints in Central Massachusetts over the past three years while still managing to take market share away from locally based institutions. The 19 non-local banks have decreased their local branch count from 186 in 2010 to 180 in 2013, accord- ing to the FDIC, while local banks increased theirs from 170 to 173. Yet the region's local banks saw their market share slip from 52.5 percent to 51.5 percent. Why's that? Bank of America — the biggest bank in Central Massachusetts — is largely behind this phenomenon. The rise of mobile banking has allowed it to cut its local branch count from 44 to 39 over the past three years while growing its deposit base 22 percent from $3.10 billion to $3.78 billion and market share from 15.4 percent to 16.5 percent. Altogether, Central Massachusetts bank branches grew their deposit base more than 14 percent, from $20.12 billion in 2010 to $22.95 billion today. Banks Stay Active The deposit and loan volumes for Central Massachusetts banks rose for the third consecutive year in 2013. The amount of loans issued from January to September totaled $8.8 billion, $9 billion, $9.8 billion and $10.4 billion in 2010, 2011, 2012 and 2013, respectively, according to the FDIC. The real estate and commercial sectors have enjoyed three con- secutive years of loan growth, but local small-business lending fell by a little over 2 percent in 2013. Meanwhile, deposit growth in Central Massachusetts banks has been steady, from $11.9 billion through the first three quarters of 2010 to $13.1 billion for the same period in 2013, according to FDIC data. Michael Hewitt, president and CEO of Oxford-based Hometown Bank, expects strong lending and deposit growth, but at a slower pace, in 2014. "I think the growth will continue, but we're cau- tious," he said. Focus On Capitol Hill Financial leaders breathed a huge sigh of relief when Congressional leaders announced an agreement that would stave off sequester cuts and a partial gov- ernment shutdown in 2014. The 2013 government shutdown in October brought uncertainty to businesses across the region, said Victor Matheson, associate professor of economics at the College of the Holy Cross in Worcester, while the first year of mandated federal spending cuts harmed defense contractors and firms that depend on research and development grants. But one hurdle remains: The country is expected to exceed its debt limit in early February. Republicans have eventually agreed to raise the debt ceiling during previous showdowns, but local banks would face a doomsday scenario if there is no compromise this time. That's because a debt default would break down the cash reserves system, Matheson said, the bedrock of current bank lending practices. "The things that have the potential to wreck the economy are disasters of our own making," Matheson said. Interest Rates Should Rise The Federal Reserve opted not to reduce its monthly bond purchases in 2013 out of fear that doing otherwise would derail the economic recovery. But tapering is likely to begin in 2014, Matheson said. The Fed's monthly purchase of $85 billion in mort- gage-backed securities and treasuries kept interest rates historically low, prompting a flurry of home- buying and refinance activity, Matheson said. But the mere threat of tapering last summer caused the interest rate on a 30-year home mortgage to creep up from 3.35 to 4.57 percent. Rising interest rates as a result of tapering would likely reduce home and auto loan activity for local banks, Matheson said. Banks are already experiencing a slowdown in loan applications due in part to higher financing costs and guarantee fees on loans from the Federal National Mortgage Association (Fannie Mae), said William Walsh, CEO of Millbury Savings Bank. Matheson expects the Fed to take up tapering in the second half of 2014. n By michael novinson Worcester Business Journal Staff Writer B ankers in Central Massachusetts are keeping one eye on the local economy for signs of recovery and the other on Washington for signs of trouble. Income statements for area financial institutions have improved significantly over the past three years, and banks across the region dodged a bullet when House and Senate leaders this month agreed to a deal that would avert budget gridlock in 2014. Bank executives expect a steady rebound in 2014, unless changes in federal policy manage to muck things up. 5 Things To WaTch Amid Strong Performance Signs, Banks Still Watch Feds 1 3 2 5 4 Central Mass.-Based Banks See Improved Picture Profits and deposits for banks headquartered in Central Massachusetts are up over the last four years. $50 $60 $70 $80 9 12 $15 2010 2011 2012 2013 2010 2011 2012 2013 PROFITS from January through September (In Millions) DEPOSITS from January through September (In Billions) $78.3M $55.7M $13.1B $11.9B Source: Federal Deposit Insurance Corp.