Rheo Brouillard, chairman of the Connecticut Bankers Association, gives the opening remarks at the CBA’s 2003 Directors and Senior Officers Symposium held Tuesday at the Aqua Turf Club in Plantsville.

I don’t want to spoil the afternoon, but the current banking environment just plain old stinks.”

That’s how Matthew Pieniazek, president of Darling Consulting Group in Newburyport, Mass., opened his speech at the Connecticut Bankers Association’s 2003 Directors and Senior Officers Symposium on Tuesday.

Rheo Brouillard, chairman of the CBA, who is also president and chief executive officer of the Savings Institute in Willimantic, hosted the event. In his opening remarks he referenced the topics of last year’s symposium, saying, “Here we are a year later and we’re still talking about the same topics.”

Brouillard said the current trends in the banking industry of low interest rates and regulatory reform seem to be sticking around as perennial issues. However, he was quick to note that 2003 will most likely “leave its own legacy when it closes.”

Remarking that Connecticut has seen its highest residential mortgage volumes in years, Brouillard segued into Pieniazek’s segment of the afternoon.

Pieniazek’s speech dealt with the current level of low interest rates and what banks can do to stay afloat in these turbulent times. Walking through the crowd with a wireless microphone and occasionally pausing to change slides, Pieniazek dealt some frank blows to the attending bankers.

“It’s not my intention to ruin your dinner, but the longer we’re in this mess, the harder it’s going to become,” he said to the large crowd of bank executives at the Aqua Turf Club in Plantsville. “I try to be absolutely brutally honest, look myself in the mirror and see what my choices are. Right now when banks looking in the mirror you’re choosing amongst the lesser of evils.”

One the main problems, he said, is that often bank administrators “think they’re economists.” Pieniazek recommended that bank heads spend less time forecasting the future and more time making real-world decisions.

“Instead of your bank following someone’s opinion of the world economy, you should evaluate what the embedded risk is and ask yourself, ‘can I live with it?,” he said. However, part of the root of the problem is inexperience with the current environment.

Two Extremes

Noting that today’s interest rates are the lowest they’ve been since the 1960s, and in some cases the 1950s, Pieniazek said that most bank employees have no experience in dealing with rates that low. While that isn’t necessarily their fault, he said, it is their challenge to do something about it.

“I can guess that your bank is getting droves of cash flow and doesn’t know what to do with it,” he said. Pieniazek added, “Be careful, because the things you’re doing today to protect what you have are going to look ugly in the future.”

He offered two extremes of how financial institutions are currently dealing with the increased cash flow. The first was “pigs get fat, hogs get slaughtered” scenario. In this example, a bank will take all its cash flow and put it toward an investment with the greatest possible yield. Pieniazek said that in the long run the “greedy pig” will end up as the hog and get “slaughtered” once the market changes.

The other end of the spectrum is the “deer in the headlights gets run over” scenario. Pieniazek said that if a bank sits on all its cash, it will never be able to recoup opportunity costs it incurred while waiting for rates to go up.

“Either extreme is problematic, and it’s up to you to find where your bank fits on the spectrum,” he said.

For most institutions, some element of growth will be needed to endure the current environment and the changes up ahead. One way to typically do that is through increased loans, but there is currently intense competition for loans, Pieniazek said.Pieniazek referenced a million-dollar bank that couldn’t sustain growth even with a 5 percent increase in loan volume each year. He said that it would require at least 10 percent loan growth in order to sustain current levels. Banks must then look for alternative forms of profit improvement, such as fee income and tax management.

“What kind of growth does your bank need? Is that acceptable? These are the things you need to be asking yourself,” he said.

Currently the banking industry is experiencing strong deposit growth, but it most likely won’t last for long. Pieniazek’s chart revealed that deposit growth increased by 5.6 percent in 2000, 7.8 percent in 2001 and 4.7 percent in 2002.

However, the 10-year average for 1989 to 1999 was 2.2 percent.

“When this thing turns, we all know what’s going to happen,” he said, remarking that the deposit growth isn’t likely to continue. “Banks keep building this larger and larger pool of money with a thicker and thicker question mark attached to it.”

Pieniazek added, “The worst thing you can do right now is a knee-jerk reaction to protect everyone in your organization.” He stressed that one thing a bank can do is make sure it has the capacity to grow. In order to do that, a bank must raise capital. If a bank has a low number of assets it will be harder hit when federal interest rates are raised 25 basis points – something that Pieniazek predicts is coming shortly.

In the meantime, he said, “Everyone and their brother has been flocking to mortgage banking,” noting that there has been an increased aggressive focus in the mortgage arena as a “surrogate for investment.”

The trick, Pieniazek said, is to maximize current income without incurring long-term pain.

“This isn’t going to be easy. Doing nothing is a decision. Being greedy is a decision. Both are problematic,” he said.