Turning the Corner
Jeff Sullivan says the ‘drill’ is now part of doing business — an important part, and an expensive part.
He was referring to a recent exercise at Springfield-based New Valley Bank, in which a cyber attack was carried out and the staff’s response was chronicled, scored, and evaluated.
“You come in the morning and your screen is black — what do you do now?” said Sullivan, president and CEO of the institution. “Then someone gets an email, and it’s says, ‘pay X amount of ransom by the end of the day.’ What do you do? They test your preparedness for things that can happen.”
This simulated cyber attack is one of many aspects of disaster planning at the bank — there’s another drill where there’s a tripledemic and no employees can come to work — and at all banks, large and small. It represents aspects of a “brave new world,” as Sullivan called it, and one of many ongoing challenges and expenses for financial-services institutions.
And there are many others. They include:
• Continually growing competition, both from non-bank financial institutions (NBFIs) and players within the industry, including regional and national powers such as JPMorganChase, which has opened 75 branches in Massachusetts, including several in the 413 in an aggressive bid for market share;
Jeff Sullivan
“You come in the morning and your screen is black — what do you do now? Then someone gets an email, and it’s says, ‘pay X amount of ransom by the end of the day.’ What do you do? They test your preparedness for things that can happen.”
• The many aspects of technology, including the need to keep up with the larger players with deeper pockets while also correctly gauging what customers want and not investing for the sake of investing;
• Artificial intelligence, specifically the need to understand this emerging technology and then deploy it in ways that improve the customer experience and overall efficiency while maximizing the time of human talent;
• Margin compression, a function of rapidly rising interest rates and corresponding huge increases in the cost of deposits in 2023 and early 2024. Interest rates are coming down, and the situation is easing, but there will be a lag;
• A still-sluggish housing market marked by fewer sales because people don’t want to trade a lower-rate mortgage for a much higher one, and a virtually nonexistent refi market; and
• The ongoing need to grow, and the question of how to accomplish this given all of the above.
These issues and others were addressed by several area banking leaders as BusinessWest asked them to put 2024 in perspective and speculate on what they expect to happen over the next several quarters.
“The rate increases by the Fed really hammered bank margins and, therefore, bank profitability; it was a tough grind in 2024,” said Matt Sosik, president and CEO of bankESB, who described this year as one in which the price was paid for 500 basis points worth of interest-rate increases that started early in 2023. “Most banks are just now starting to turn the corner.”
Most area banks were fortunate to have their balance sheets structured in a way that allowed them to be resilient and absorb the blows, and even record decent, if less-profitable, years in 2024, but the rate hikes still took a toll, Sosik went on, adding that, as rates come down (the Fed approved another drop earlier this month), margins will start to improve. But there will be a lag, just as there was when rates started climbing.
Matt Sosik
“The rate increases by the Fed really hammered bank margins and, therefore, bank profitability; it was a tough grind in 2024. Most banks are just now starting to turn the corner.”
As for technology, it remains the quintessential combination of challenge and opportunity for banks. The opportunity comes in the form of improved service to customers and thus the ability to retain and perhaps grow market share. The challenge comes with keeping up, the cost of keeping up, not paying for something customers don’t want, and keeping customer information safe.
“You don’t want to be chasing shiny objects or next greatest thing,” said Matt Garrity, president and CEO of Florence Bank. “You really want to be rooted in understanding what it is your client wants from you and that you’re delivering the best possible product, the best possible service, to address what they’re after.”
By All Accounts
As he told BusinessWest that “banks have hit bottom,” Sosik acknowledged this might not be the best way to describe the current state of the industry.
But it works.
“We’ve seen the bottom, and we’re on the upswing,” he said, adding that, as interest rates come down and pressure on margins eases, banks should see some improvement on the bottom line. “There will be positive earnings impacts in the fourth quarter and into 2025, and slow movement back toward more normal margins.”
Matt Garrity
“You don’t want to be chasing shiny objects or next greatest thing. You really want to be rooted in understanding what it is your client wants from you and that you’re delivering the best possible product, the best possible service, to address what they’re after.”
Overall, while 2024 was, indeed, a grind, most area institutions fared comparatively well because they took a conservative approach, although performance, meaning profitability, was off from previous years due to the margin squeeze resulting from a slow, persistent, 550-basis-point increase in interest rates over roughly a year, which was largely unprecedented, by most accounts.
As a result, most institutions in this region were simply less profitable than usual, said Sosik, noting that 2025 should see the pendulum continue its swing back to where bottom lines were a few years ago.
Sullivan agreed, and projected improvement on everything from margins to the yield curve, although it may come at a slower pace than the industry would want.
“The bond market has sensed inflation being persistent, and it shows by the long-term rates running back up over the past two months,” he noted. “That is actually normalizing the yield curve; an investor should get paid more for locking her money up for a longer time period.
“The inverted yield curve that we’ve had the past two years [short-term rates higher than long-term] is really bad for community banks, so this change back to a normal yield curve is welcomed,” he added. “We’ll see about whether the Fed cuts interest rates a lot next year; there is now talk that the short-term rate reductions will be slower, but Trump will want them to be faster to juice the economy.”
But there are several caveats that make it difficult to project how pronounced a bounceback will be seen over the next few quarters. Indeed, while there is general agreement on perhaps another 100 basis points worth of rate cuts in the year to come, there is less consensus on the prospects for a recession or what will happen with inflation.
Dave Glidden
“As rates decline and the pressure relieves a little on margins, banks, if they’re smart, will stay laser-focused on the cost of funding and their deposit mix.”
Indeed, Glenn Welch, president and CEO of Freedom Credit Union, said the kinds of tariffs on foreign products trumpeted by President-elect Trump could cause inflation to spike — and have other repercussions.
“If those tariffs are put in place, we’re going to see higher inflation, and then the Fed won’t be able to drop interest rates as quickly as many are projecting,” he noted.
Meanwhile, although interest rates are expected to continue their downward trend, there will be a lag when it comes to the overall impact on deposit rates, especially with banks hard-focused on protecting their deposit bases.
“The competition for deposits will continue through the balance of this year and into 2025,” said Dave Glidden, president and CEO of Middletown, Conn.-based Liberty Bank, which has expanded its footprint into Western Mass. “Each bank will have to make their own decisions based on their deposit composition and cost of funding overall, but I expect that the rates on deposits won’t come down as fast as the Fed drops interest rates because deposits are the lifeblood of banks. As rates decline and the pressure relieves a little on margins, banks, if they’re smart, will stay laser-focused on the cost of funding and their deposit mix.”
Points of Interest
Glidden didn’t really want to speculate too much on Chase Bank’s strategy of adding new branches; like others, he preferred to talk about his own institution.
But he said the Jamie Dimon-led institution’s aggressive push is yet another indication that competition continues to increase — and come from seemingly everywhere.
That includes NBFIs, also known as NBFCs (non-bank financial companies), such as investment banks, hedge funds, private equity funds, private mortgage lenders, and other players. And it includes area banks and credit unions that are continually expanding their footprints — in this region, this state, and into neighboring Connecticut. It even includes the federal government. “People can get better rates on T-bills than they can get in the banks,” Sullivan said.
Dan Moriarty
“Organic growth is becoming tougher and tougher. But as the bigger banks get bigger, we feel we can provide services and faster response times for small to mid-size companies. That’s our niche, and that’s what we’ll continue to focus on, but it’s getting tougher.”
As for Chase’s move, Glidden said there is lot of science and analytics behind it, and the bank, which he called the “900-pound gorilla,” is already making a dent when it comes to market share. “Branches are very expensive, and they’re always going to be a critical part of a bank’s distribution network, but you don’t build branches today haphazardly. Jamie Dimon hasn’t called me to let me know what he’s doing, but he puts a lot of science behind it.”
And this heightened competition from Chase and elsewhere comes as banks face the many challenges detailed above — at a time when they need to continuing growing in the wake of the many rising costs they’re facing and the need for economies of scale.
In this environment, the community banks that dominate this region need to focus on blocking and tackling, said those we spoke with, meaning an emphasis on what they do right, specifically a generally higher brand of personalized service.
“Organic growth is becoming tougher and tougher,” said Dan Moriarty, president and CEO of Monson Savings Bank. “But as the bigger banks get bigger, we feel we can provide services and faster response times for small to mid-size companies. That’s our niche, and that’s what we’ll continue to focus on, but it’s getting tougher.
“We’re trying to go against the super bigs and sell our services and our reputation,” he went on, adding that Monson Savings picked up some market share when a Citizens Bank branch closed.
Garrity concurred. He noted that, while mergers and acquisitions will continue — and perhaps pick up as the skies clear — the cleaner path is organic growth, and that comes through customer service, new branches when and where they are appropriate, and keeping pace with the larger institutions on technology.
Sullivan agreed, noting the sizable investments New Valley is making both in cybersecurity and new online banking products.
“We have to stay relevant with the big players, we’ve got to have the same sort of offerings that they have, and, in some cases, we have to be even better,” he said, adding that keeping up is a big part of doing business in this environment.
Technically Speaking
As he talked about technology, Sosik spoke for all those we interviewed when he said customer expectations are high — as in sky-high.
“When customers use technology, they want it to work. When you turned on your laptop this morning and the wheels spun a little bit or it took longer to load your email, you said, ‘what’s going on here?’” he told BusinessWest. “So the expectations are really high, and the margin for error is really thin; you have to have near-perfect execution.”
Couple high expectations with the equally high cost of technology, security, and compliance, and banks and credit unions are under enormous pressure to get it right.
“Twenty years ago, it was basically bad loans that could kill a bank,” Glidden said. They would kill a bank over time, and you could kind of see it coming. Today, with technology, a privacy breach, a cyberattack, ransomware … those things can change the fate or status of a bank in seconds.
“That’s why I call that side of technology ‘table stakes,’” he went on. “You have to invest, and invest heavily.”
By that he meant investments in new technology aimed at improving customer service, in training and drills like simulated cyberattacks, and in AI, which amounts to a new frontier for financial-services institutions, and another area where they need to get it right.
Welch said Freedom has recently deployed AI in its call center, a strategy with many goals.
“We’re rolling it out slowly, and we rolled out the first part over the past few weeks; it’s answering the phone and transferring people to where they want to go,” he explained. “Shortly, customers will be able to get balances and do transactions like transferring money between accounts.
“The whole idea is to free up the call-center people to deal with more complicated financial issues that customers have when they call in, rather than ‘what’s my balance?’ and ‘transfer $1,000 to this account,’” he went on, adding that maybe 25% to 40% of the calls to the center can be handled by AI.
Other area institutions are in similar early-stage rollout phases, but most are still doing research and deciding how to best implement the emerging technology.
Moriarty, like others we spoke with, said his bank is looking at AI not to replace face-to-face interactions and decision making, but instead to help make decisions faster.
And like other institutions we spoke with, Monson will measure twice and cut once when it comes to all aspects of AI, especially when it comes to security.
“Confidentiality is a critical component of a bank’s reputation,” he told BusinessWest. “If banks start using this too quickly, they could run into a situation where information might be out in the open or in the cloud somewhere. So we’re going to be very prudent about when and how we use AI to give information.”
Garrity agreed. “We want to integrate AI in our business, but it’s going to be a longer process overall to make sure that we understand what the risk components are,” he said. “We want to look at how we can use those tools to make our team members more efficient in serving our customer. It’s a tool to use, and a not a replacement of that team member.”
And it’s just one more challenge — and opportunity — banks face as they turn the corner from a tough 2024 into an uncertain 2025.
Financial services is a broad and robust sector in Western Mass., running the gamut from banking and lending to insurance and accounting to wealth management.
