With no signs of a dramatic economic turnaround, no change to low interest rates, and an expected flood of new regulations still coming down the pike, banks in Western New York are focusing on the basics in what they expect to be another tough year of competition.
Local bank executives say the combination of a dysfunctional federal government, a sluggish economic recovery, worried business executives, record low rates, increased regulations and heightened industry competition are making it difficult to grow. Business demand is slack and margins are thin, so it’s hard to add revenues, they say. And expenses keep increasing.
That’s especially true in a market like Western New York, where the pie isn’t getting any larger. So the area’s banks are fighting to take business from each other.
“The competition is fiercer than it’s ever been for those deals,” said David Nasca, chief executive officer of Hamburg-based Evans Bancorp, parent of Evans Bank.
Banks have been dealing with these conditions, while still posting good results. But bankers don’t have high hopes that this year will be much different from last.
“Barring the real upturn in the economy, we think that largely what happened in the banking industry in 2012 will happen in 2013,” said Mark Czarnecki, president of Buffalo-based M&T Bank Corp., the region’s No. 1 lender and a top-20 U.S.-based bank. “Those macro events that have been driving the industry, like regulation, low rates and slow growth in the economy, they were there in 2012 and they’ll continue to be there in 2013. There’s no reason to think they’ll change at all.”
The biggest local news last year was the sale of HSBC Bank USA’s entire upstate banking business, with 195 branches, to First Niagara Financial Group, and the latter’s subsequent sale of 64 branches to three other banks: KeyBank, Community Bank and Five Star Bank.
“This is the fourth acquisition integration in my career, and it was actually the easiest and smoothest of all of them,” said Melissa Whitbeck, branch manager for Key’s East Amherst branch on Transit Road, formerly part of HSBC. “Customers have been very loyal. They’ve been very supportive.”
And M&T, which previously bought Wilmington Trust Corp. in Delaware, is in the process of buying Hudson City Bancorp in New Jersey for $3.7 billion, adding 97 branches in the Garden State. That means six area banks were involved in sizable deals that either they are still integrating or preparing to do so.
For those acquirers, it looks like time to absorb and adjust.
“There was considerable movement across a lot of banks, and it’s an opportunity now for us to sort of settle down the client base, and capitalize on the opportunities we thought we’d have when we made the acquisition,” said Gary Quenneville, Western New York district president for Cleveland-based Key.
So given all of the external and internal factors, bank executives are more likely to turn their attention inward, focusing on their banking operations, rather than adding branches, buying businesses or making major, flashy moves.
“Most banks will be hunkering down,” said William Wagner, CEO of Warren, Pa.-based Northwest Bancshares. “People are going to be very cautious.”
Banks have been battling such macroeconomic issues for some time, as the nation struggles to come out of its worst financial crisis and recession in more than 70 years. The industry itself now is better capitalized, costs are down, bad debts and losses are largely under control, and unprofitable businesses or risky operations have generally been shed. So banks overall believe they’re poised for growth when business activity picks up again.
“While there’s some improved clarity, there’s nothing to really get excited about,” said John R. Koelmel, president and CEO of Buffalo’s First Niagara, also one of the nation’s biggest banks and No. 2 in Western New York after HSBC. “As a guy who’s an optimist, I wish my glass was a little more than half full.”
Investors and businesses are frustrated by the bitter infighting in Washington between the Republicans and Democrats.
Frequent deadlocks and political brinkmanship on such issues as the “fiscal cliff” and federal debt ceiling have eroded confidence in the federal government to a degree that Wall Street shies away from taking too many risks and company executives hesitate to make major business moves. That includes acquisitions, expansions, hiring binges or other investments often requiring a bank loan.
First Niagara’s annual business confidence survey this month showed business leaders are more pessimistic than a year ago.
“To the extent the politicians, the regulators, are forever making it harder to do what we do, that’s somewhere between unfortunate and frustrating,” Koelmel said. “And when you’re dealing with a perpetually frustrating environment, it’s challenging for any business to consistently stay on the high road.”
The Federal Reserve plans to keep interest rates artificially low for as long as necessary to spur economic growth, but certainly through this year and into 2014.
Banks don’t do as well with such low interest rates, when they earn less on loans and investments while paying so little on deposits that it’s tough to retain the funding they need.
“The competition is pretty fierce,” said Brian Donahue, chief banking officer for Community Bank, which has 34 branches, a money management firm, and an insurance agency, as well as a major operations center in Olean. “There’s not much you can do when we’re paying the current rates and it appears that rates will be down for an extended period of time.”
At the same time, costs are going up for complying with the increasing regulatory load in the wake of the recession. The actions and failures of the nation’s largest banks and Wall Street firms were largely blamed for causing much of the mortgage fiasco and financial crisis, spurring Congress and regulators to crack down on the industry with new restrictions.
Banks are still adjusting to new limits on debit card interchange fees, overdraft fees and other activities. And more than two-thirds of the rules are still to be written from the Dodd-Frank reform legislation.
So bankers are focusing internally, and working harder than ever for the same revenue dollars. “I’ve never seen the environment this difficult, even when you’re doing well. It’s a bruising environment to operate in,” said Nasca, a 30-year banking veteran. “It’s going to be a year where people are really going to have to be diligent about really strong execution.”
For M&T, completing and melding the Hudson City purchase will be a major focus this year, Czarnecki said. M&T even plans to add at least 200 jobs in Buffalo to handle the growth. “The whole bank is growing when you’re adding something like Hudson City,” he said.
It’s also working to reap benefits from its Wilmington Trust purchase, particularly the corporate financial services and wealth management businesses. The bank will also continue pushing small-business lending, and may add mortgage jobs.
“We continue to put our time into Wilmington Trust, because we’ve seen a lot of benefit,” Czarnecki said. “There’s a good opportunity in mortgages and mortgage servicing, so that should help, in addition to the integration of Wilmington.”
M&T saw “a lot of really good, solid, fundamental” growth in upstate, in “almost every line of business,” as it positioned itself as a place of stability during rocky times, he said. “We had a quite busy year working on acquisitions and we had a nice year in terms of core customer growth, and we think those trends will continue into 2013.”
Half of M&T’s loan growth last year came from upstate New York, in what Czarnecki called “a once-in-a-lifetime opportunity,” with HSBC leaving the upstate retail market. “I don’t think you can count on that happening again. It’d be hard to rival last year.”
For First Niagara, HSBC was the fourth in a rapid-fire series of deals that more than quadrupled the bank’s size in a short time, to $38 billion in assets and 430 branches in four states. Koelmel said the integration has been completed for months. But bank executives have heard some criticism and skepticism because of their rapid expansion, so they’re taking that to heart, making sure they’re running what they have.
“Everybody’s collectively focused for the first time in my tenure and years beyond on running the business that we’ve built and playing the hand that we’ve been dealt,” Koelmel said. “We’re full-steam ahead, just blocking and tackling. We won’t be throwing any Hail Mary passes or running the two-minute offense or anything fancy.”
Key is also still adjusting to its acquisition of 26 former HSBC branches and over 200 employees, on top of a local branch-building spree over the past few years. “I can’t think of a market that we’re not well represented in. We’re pretty much where we want to be,” Quenneville said. “So we have to figure out how to put them to work and make some money with them.”
It has more than $3.3 billion in deposits to deploy, and he cited both retail and small-business customers as opportunities, with a chance to cross-sell products and expand customer relationships.
Among small banks, the focus remains on customer service, cost-savings and new business. Evans is investing in mobile and Web banking, but is “being very diligent about where we spend our investment dollar,” Nasca said. “The environment isn’t real forgiving with mistakes.”
Similarly, Community Bank is investing in new mortgage technology, a new teller system, expanded mobile banking, and a cleaner-looking website, with online calculators, including versions for kids and Spanish-speaking customers. In a rare example of brick-and-mortar spending, it’s paying $200,000 to buy a 36,000-square-foot former elementary school in Olean, which it will convert into a loan operations and training center.
And the bank is focusing on making sure the 19 branches it picked up from HSBC and First Niagara are performing up to expectations, and beyond.
“Customer retention is going to be important,” Donahue said. “With the current interest rate environment, it really comes down to customer service. People are going to make the difference.”