Hartford Business Journal

36 Hartford Business Journal • December 22, 2014 www.HartfordBusiness.com Industry Focus E c o n o m i c F o r E c a s t Watch List CT banks: More of the same in 2015 By Gregory Seay gseay@HartfordBusiness.com I n 2015, Connecticut's banks, thrifts and credit unions will likely have another strong year. Coming off a 2014 that provided them noteworthy gains in loan and deposit growth, Connecticut's finan- cial institutions will continue to warm to federal consum- er-safety and risk- limiting guidelines set out under the Dodd-Frank Wall Street Reform and Con- sumer Protection Act. Bankers issue the stan- dard caveat: The direction of long-term interest rates and the local, national and global economies remain wild cards that could materially alter their performance course in 2015. That aside, many lenders in and outside Con- necticut will con- tinue beefing up their risk- ma nagement and compli- ance teams to avoid fall- ing short of state and federal banking rules. Several of the state's regional lenders and larger community banks say their internal stress- testing, as well as that of regulators, has shown they are well fortified against an unexpected financial calamity. The cross-border expansion by Connecticut and Massachu- setts banks is also likely to gain momentum in 2015, led by the pending merger of Massa- chusetts lenders Berkshire Bank and Hampden Bank. Berkshire has Hartford area bank operations. New, but small- er branches that rely on chairless "pods'' and videoconferenc- ing technology to provide more personalized customer service will remain in vogue. The Connecticut-Mas- sachusetts banking market overlap may prompt a hand- ful of lenders in both states to consider merging to achieve greater economies of scale and a larger market toehold. Last year, a pair of cross- state rivals merged to create United Bank in Glastonbury. Steady resurgence in Connecticut's housing market will yield increas- ing demand for mortgages. Lenders are partnering with the Connecticut Housing Finance Authority (CHFA), the state's quasi-public arm, to issue to low- and moder- ate-income borrowers home loans that bear below-mar- ket interest rates from lever- aging the state's credit rating into bond sales. n Q&a Interest rates, loan demand weigh heavily on banks' '15 outlook Q&A talks about Connecticut bank- er's 2015 expectations with Stephen P. Reilly, president and CEO of North- west Community Bank in Winsted, who will be the 2015 president of the Connecticut Bankers Association. Q: How was 2014 for the Con- necticut 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. How- ever, earnings did con- tinue to be challenged by the extended low inter- est 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 pro- duction 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, how- ever, 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 chal- lenging year for earnings in 2015, but the resiliency of the Connecticut bank- ing 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 devel- opment in the Middle East, Ukraine, China, etc. could send our economy into a tailspin and back into recession. This coupled with the looming defi- cits at the state and federal level are of great concern and are having a nega- tive impact on the confidence of con- sumers 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 wit- ness sustained improve- ment 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 fel- low 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 regula- tions 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 signifi- cantly 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 num- ber of new regulations including final rules for the Homeowners Flood insur- ance Act and changes to the Home Mort- gage Disclosure Act, to name a few. With each of these comes a significant level of analysis that is required for our complete understanding and implementa- tion. Regulation is certainly needed in our industry but not to this level and needs to Continued Banking&Finance Gregory Seay W a t c h L i s t STepHen p. Reilly president and CeO, northwest Community Bank

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