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That’s Where the Money Is
Despite an uncertain economy,
banks small and large now share positive outlook
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Business New Haven
11/2/1998
By: Susan Banfield
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It's been a tough decade for banking. Beginning with a recession that caught nearly every bank off guard and hit them hard, the past eight years have also witnessed the savings and loan crisis, innumerable gobblings up of smaller banks by larger ones.
How are things shaping up now? And with the possibility of another recession looming, will the decade close in the same disastrous way it began?
The surprising answer is that, despite economic uncertainty, most banks, small as well as large, are doing well and looking optimistically toward the future.
One of the most prominent features of the story of banking in the '90s has been the incessant march toward consolidation that has taken place. There have been countless mergers and purchases of smaller banks by larger ones. From approximately 30,000 banks nationally, we are now down to about 10,000, according to James Schepker of Fleet Financial Corp. Most bankers are predicting that the pace of the acquisitions and mergers will slow, but by no means cease.
“You will see the acquisitions slowing down quite a bit,” says James Moynihan, senior vice president and managing director of the Financial Institutions Division at the Hartford brokerage firm Advest. The reason, according to Moynihan, is the coming of the year 2000. “You're not going to see much done for the next 12-18 months, now with Y2K coming on. The regulators have been pretty hard on banks with regard to the Y2K problem.”
Charles Terrell, president and CEO of New Haven Savings Bank, agrees that the uncertainty caused by the Y2K issue will negatively impact acquisitions. However, Terrell also cites the recent downturn in the stock market - and the obvious fact that most of the good candidates have already been acquired.
Not all the “good candidates” are gone, though, and because there are still prime acquisitions to be made, most bankers believe the trend toward consolidation will continue, if not at the breakneck pace to which we've become accustomed.
Citizens Bank, for example, has made a number of acquisitions over the last five years: New England Savings Bank, Coastal Federal Savings, Farmers & Mechanics, the Bank of New Haven, and most recently branches of Branford Savings. CEO Jim Claffee is upfront about saying that Citizens is still “definitely in an expansion mode; we are looking for opportunities to grow contiguously.” (Closest to home, that means Citizens will be looking to expand from the Middletown area up into Hartford.)
Claffee cites two main reasons for the continuation of the merger-and-acquisition trend. The first, he says, is that “Banks need to get a larger critical mass in order to continue to grow.” The second: “Banks are trying to get good locations in the markets they are trying to attract.”
This second reason helps to explain why several area bankers have said they expect to see BankAmerica buying up one of New England's several large banks some time soon. Says Phil Margolis of BankBoston: “BankAmerica is now coast to coast. They will want to fill in the Northeast.”
“We've seen a trend toward mega-deals,” notes First Union's chief bank economist, Joel Naroff. “Would Fleet or First Union get involved in such a merger? It wouldn't be surprising.”
Despite the ongoing march of acquisitions, many of the state's smaller banks have remained independent and will continue to do so. In fact, community banks could even be said to be making something of a comeback.
“The window of opportunity for a well-run community bank has never been so wide open as it is today,” says Moynihan. The reason: “The average customer feels at sea without a rudder with the Fleets, the BankBostons. They're looking to their community banks for help and support.”
In the New Haven area alone, several new community banks are opening their doors. One is Castle Bank & Trust (in organization), which is slated to open for business in Meriden some time in the first quarter of 1999.
“I think [community banks] are definitely making a comeback,” says Castle's Larry McGoldrick. “The pendulum has swung so far in one direction - banks have become much more efficient - but in doing so they have taken the personality out of banking.
“I think there will be continued mergers,” McGoldrick adds. “I don't think that will stop. But at the opposite end of the spectrum, a lot of community banks will develop.”
Robert J. Oca, president and CEO of the Bank of Westport, which just opened October 1, says he decided to start his new bank because he “believed the local businesses and consumers were not being serviced as they ought. We felt strongly there was a need.” Oca made a point of hiring local people who both live and work in the Westport area.
Existing community banks also report that business is good. “We continue to gain market share in our community,” reports Donald Kanoff, senior vice president of commercial banking at the Milford Bank. “From profitability to customer satisfaction, everything is going well.”
New Haven Savings Bank's Terrell cites several reasons, beyond dissatisfaction with larger banks, for the current success of community banks like his own. “A part of the economy that has been doing very well is the smaller-business market. That's the sector where the level of service community banks provide is best utilized.”
Terrell also notes that the drop in interest rates has created a lot of opportunities for mortgage financing, both of home and commercial mortgages.
An additional boost to community banks will be provided by the creation of the Northeast's first “bankers' bank.” A bankers' bank is one that is owned by investor banks - typically small community banks - and which pools the resources of these investor banks to provide them with services such as electronic banking at a more affordable “group” rate, competitive with those that can be obtained by larger banks.
Presently there are 17 bankers' banks in operation across the country. Bankers' Bank Northeast opened in Glastonbury on September 8. Thirty-five Connecticut and Massachusetts community banks are members, including Milford Bank, New Haven Savings Bank, and Guilford Savings Bank.
With community banks able to offer more of the products that larger banks have long touted as their edge over smaller institutions, as well as more personal, community-based service, how are the larger banks responding?
“The financial-services industry has never been more competitive,” says Fleet spokesman Schepker. Yet, he adds, “Competition always forces an increase in quality.”
“The beauty of the banking industry is that there's niches for every organization,” says First Union's Naroff. “Competition is good. It keeps [banks] sharp, makes them better.”
In general, the larger banks as well as the community banks in the area are posting good to very good results, and are much better positioned to face a possible economic downturn. While it is true that the stocks of nearly all local banks have fallen off significantly of late, most bankers say the lower stock prices are not indicative of the health of their institutions.
“When things were good, bank stocks led the pack,” says BankBoston's Margolis. “They had further to tumble in low times.”
Margolis reports that BankBoston's earnings have been excellent (profits were down this quarter for the first time in five years), and that the return to shareholders has grown.
“Banks are doing very well,” says Moynihan. “There's been more increases in dividends than we've seen in years.”
It seems, too, that this state of health will not be too much affected by an economic downturn. Of the larger banks in the area, only one, BankBoston, has any significant international presence likely to be affected by events in Asia, Russia and Latin America. “We've been more of a U.S. bank, not a big risk-taker,” says First Union's Naroff.
“Fleet has kept its business in the U.S., specifically in the Northeast, which has kept it performing well,” adds Schepker.
The community banks, even more than the larger institutions, are pretty well insulated from the ripple effects of events abroad.
Bankers also say that, unlike the last recession, when banks were as much a cause as hard-hit victims, should present-day economic uncertainty turn into another recession, banks will be much better prepared to deal with the situation.
“For the most part, banks learned their lessons,” says First Union's Naroff. “They have much more capital, are much more diversified than they were in the late 1980s. Even though Connecticut's done well, we didn't go out and build a lot of buildings. If there is a recession, you won't have the real estate problems of the early '90s.”
Citizens' Claffee agrees: “I think everybody is better prepared,” he says.
Larry McGoldrick of Castle admits that if there is an economic downturn, “It will affect banks.” But, he adds, “A well-managed should be able to survive.”
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