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January 8, 2024 Industry Outlook | BANKING & FINANCE

Managing higher interest rates, deposit growth key focus areas for banks in 2024

HBJ FILE PHOTO David Glidden is the president and CEO of Middletown-based Liberty Bank.

Connecticut banks have faced several challenges over the past year, but the high-interest rate environment tops the list.

The Federal Reserve has raised interest rates 11 times since March 2022, in an effort to tame inflation that occurred in the wake of the pandemic.

That pushed the federal funds rate up from 0.25% to 0.5% in early 2022, to 5.25% to 5.5% today, significantly increasing borrowing costs for businesses and consumers.

Demand for new loans has slowed, while credit availability has tightened, bankers say.

Even still, Connecticut banks have held up relatively well financially.

Through the first three quarters of 2023, 25 of the 29 banks headquartered in the state recorded a profit, although the majority of lenders (16) saw their net incomes decrease from the year-ago period, according to Federal Deposit Insurance Corp. (FDIC) data.

HBJ recently talked to three bank CEOs about the industry’s 2024 outlook. They included:

  • David W. Glidden, president and CEO of Middletown-based Liberty Bank, with $7.4 billion in assets.
  • Joe Gianni, the Greater Hartford president of Bank of America, the state’s largest bank by deposits.
  • Nick Caplanson, president and CEO of Norwich-based Dime Bank, a community lender with $1.1 billion in assets.

Here are some banking trends to watch in the year ahead.

Interest rate pressure

Higher interest rates are causing borrowers to proceed cautiously with expansion and financing capital expenditures, Gianni said. Companies are also focusing on managing costs overall.

Joe Gianni

“CFOs in Connecticut are scrutinizing capital expenditures to ensure the projected return on any capital investment still makes sense given the higher cost of borrowing,” Gianni said. “Fortunately, after pausing to evaluate each decision, we are seeing many of our clients in Connecticut continue to proceed with equipment purchases. In the M&A market, the level of activity is slower than it was when borrowers had access to very low interest rates for acquisition financing.”

Glidden said Liberty Bank experienced a net growth in lending in 2023 — both on the commercial and retail lending side. But the bank is also witnessing lower overall demand.

It’s more expensive for most businesses to operate right now, he said. There’s less demand for their goods and services, they’re facing higher monthly payments and cash flows are being impacted.

“They’re also less likely to hire, expand or invest in capital equipment right now, all of which is weakening their appetite to borrow in this rate environment,” Glidden said.

On the flip side, Glidden said, banks are protecting their capital and increasing their lending standards to minimize borrowing risk.

Commercial borrowers are also less likely to switch banks in a high-rate environment, he said.

“Therefore, this lower loan demand is intensifying competition in the industry, impacting pricing discipline and compelling banks to grow existing customer relationships to increase their loan portfolios and look for other ways to grow capital,” Glidden said. “High interest rates are just one reason why loan demand is down. The economy is the other.”

Nick Caplanson

Caplanson said the impact of higher interest rates varies depending on the type of business customer.

“We have seen smaller businesses be more conservative and hold back on requesting more credit, in the hope that rates will begin to come down,” he said. “For midsize to larger companies, we expect to see consistent lending demand since they are in a better financial position, from a cash flow perspective, to lock-in rates now.”

In a volatile interest rate environment, efficiency and scale are key to a bank’s success, Caplanson said. As a result, he predicts the banking industry nationwide will experience an increase in merger activity in 2024.

In 2023, Connecticut saw one major M&A deal.

In August, the parent company of New York-based NBT Bank closed its $204 million acquisition of Lakeville-based Salisbury Bancorp.

There could be a bright spot on the horizon: Gianni said Bank of America’s research team believes the rate “hiking cycle is over.”

The Fed last increased rates in July.

Attracting depositors

Maintaining and increasing deposits is another major focus area for banks in the year ahead, the CEOs said.

Deposit outflows accelerated from community banks to larger money-center banks after the Silicon Valley Bank and other bank failures in 2023, Glidden said.

This trend, combined with record Federal Reserve rate increases, created a “deposit war,” increasing funding costs across the industry, Glidden said.

On a year-over-year basis, third quarter bank deposits nationwide were down 4.2%, while funding costs increased 115 basis points, FDIC data shows.

Connecticut headquartered banks held $91.7 billion in deposits at the end of the third quarter of 2023, up nearly 7% from a year earlier, FDIC data shows.

However, that increase was largely driven by Connectiut’s largest in-state bank, Stamford-based Webster Financial, which grew its deposit base by $6.4 billion over that one-year period.

The majority of Connecticut-based banks (17 out of 29) lost deposits from Sept. 30, 2022 to Sept. 30, 2023, FDIC data shows. Those 17 banks shed a combined $1.3 billion in deposits, a decline of 5.7%.

Caplanson said banks will continue to see more aggressive rate shopping from consumers as they try to take advantage of premium rate offerings, including from non-traditional, online lenders.

“Easier online accessibility to their money will facilitate faster movement of funds in and out of institutions and will be more difficult to predict,” Caplanson said.

Glidden said banks have had to remain focused on managing rate risk.

“In anticipation of the Fed beginning to raise rates, we conservatively invested our excess liquidity in overnight funds and locked in a significant portion of long-term debt via forward-advance hedges at very low rates,” Glidden said. “As a result of these proactive asset/liability management strategies, Liberty’s funding costs are significantly below our peers, despite the cost increases across the industry.”

Liberty Bank, through the first three quarters of 2023, reported the largest profit increase of any Connecticut-based bank.

It recorded $78.2 million in net income during the first nine months of 2023, compared to a $2.8 million profit in the year-ago period, FDIC data shows.


Many consumers and businesses have shifted their banking online, but for those who haven’t, a key barrier to entry is trusting that their information is protected and secure, Gianni said.

As a result, banks will continue to invest in cybersecurity measures to ensure their digital banking operations are protected.

Bank of America, for example, in 2021 launched a new service, which includes a security meter that allows customers to quickly visualize their account security level and recommends additional steps to help further protect accounts and information.

“And we will continue making investments to improve security,” Gianni said.

Glidden said Liberty Bank, like other lenders, is proactively implementing cybersecurity measures to combat phishing emails and texts; malware and ransomware; the ability of generative artificial intelligence to create deep fakes in facial and voice biometrics; and more.

Artificial intelligence

Artificial intelligence garnered significant attention in 2023, and will continue to do so in the year ahead across all industries, Glidden said.

Liberty Bank is taking proactive steps to analyze AI and create an internal policy as to when and how to use it in business practices, Glidden said.

“It’s critical to remember, with great power comes even greater responsibility,” Glidden said. “Banks need to tread cautiously and only use AI in a way that benefits the customers’ banking experience and enables teammates to work more efficiently while using the proper controls.”

Tempered growth plans

Don’t expect to see a lot of new branch activity in 2024, bankers said.

The current economic environment will most likely lead to some modifications in banks’ growth strategies, including a slowdown in new branch openings, Caplanson said.

In 2023, banks in Connecticut reported more branch closures than openings.

The 52 in- and out-of-state banks operating in Connecticut closed a net 36 branches from June 30, 2022, to June 30, 2023, a 3.6% decrease, according to FDIC data.

Check out the rest of HBJ's 2024 economic forecast issue

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