Processing Your Payment

Please do not leave this page until complete. This can take a few moments.

Updated: June 15, 2020

Despite plummeting profits, CT banks aren’t sending distress signals

Photo | Contributed Michael Rauh, CEO of Chelsea Groton Bank, talks to employees at his Groton branch before the COVID-19 pandemic struck Connecticut.
By Matt Pilon

After enjoying record earnings last year, Connecticut banks started 2020 on a gloomier note, seeing their combined profits cut in half during the first quarter.

The COVID-19 pandemic, which struck Connecticut in the final weeks of March, is to blame, as it spurred record poor stock-market performance, forcing banks to write down their investment portfolios, which reduced overall profits, according to recently published Federal Deposit Insurance Corp. data analyzed by the Hartford Business Journal.

“[To say] that the stock market had a very poor first quarter would be the understatement of the decade,” said Michael Rauh, CEO of eastern Connecticut’s Chelsea Groton Bank, which lost $3 million during the January-to-March period, compared to a $6-million profit in the first quarter of 2019.

The decline, Rauh said, was almost entirely because of stock volatility.

The 35 state-based banks analyzed by HBJ saw their collective profits fall 49% in the first quarter to $161 million vs. $317.3 million in net income a year earlier.

All but a handful of lenders saw their bottom lines shrink, and about one-third of banks booked a loss, FDIC data shows.

The good news for banks is their stock portfolios have largely rebounded since March, which will be a positive for their second-quarter performance. And the sector still managed to remain profitable as the pandemic set in, maintaining strong loan fee and interest income even as the state’s economy tanked and jobless rate soared.

Collyn Gilbert, Analyst and Managing Director, Keefe, Bruyette & Woods

Indeed, the pandemic so far is shaping up to be something far short of apocalyptic for lenders in Connecticut and the Northeast — institutions that tend to carry particularly large capital cushions and that saw lower levels of problem loans in the first quarter compared to banks across the country, said Collyn Gilbert, an analyst and managing director at investment banking firm Keefe, Bruyette & Woods, who covers Waterbury-based Webster Bank and People’s United Bank in Bridgeport.

“Nearly all of them sit in a fine position,” Gilbert said. “This is not going to be a crisis where they have to raise capital.”

Chelsea Groton’s Rauh is quick to agree with that.

“This is not a mortal event for us in any way,” he said of his $1-billion asset bank. “We have lots of capital, lots of liquidity, a great market and a strong reputation.”

At Liberty Bank in Middletown, which has $6 billion in total assets, CFO Paul S. Young says the pandemic’s impact has been manageable. The mutual bank’s loan portfolio is diversified, with limited exposure to harder-hit commercial real estate, such as restaurants and retail.

“Most of the real estate [in our portfolio] is essential businesses and they are performing well,” Young said, adding that the mix includes grocery stores.

He was initially worried about Liberty’s approximately $700-million resort finance portfolio, which writes loans for the timeshare industry, but those concerns have largely subsided.

“People are paying their loans,” he said. “Customers are prioritizing vacation.”

Set-asides and interest headwinds

While banks held their own in the first quarter, it doesn’t mean things aren’t going to get worse before they get better.

Lenders — including Chelsea Groton — are expected to set aside larger amounts of income in the quarters ahead for expected pandemic-related loan losses, which will put downward pressure on profits, Rauh said.

“There are businesses that are simply not going to open up again,” he said. “All banks are looking at losses, just like they did in every other cycle before this.”

Depending on how borrowers fare financially, those loan losses could impact banks over the next three quarters or so, Gilbert said.

Low interest rates will also burden performance in the quarters ahead, Rauh said, because it means lenders are earning less on loans.

The Fed cut its benchmark rate to between 0% and 0.25% in mid-March, which is where rates were during the last economic crisis.

“Generally speaking, down rates are bad for banks over time,” he said. ”You’ll start to see it play out in the next year or two.”

The pressures could lead to further consolidation in the industry, said Gilbert. She also predicts the pandemic, which has moved even more banking transactions online, will embolden executives to further shrink their brick-and-mortar branch networks.

Forecasting is as hard as it’s ever been, given COVID-19’s unprecedented, lightning-quick economic impact. Many economists believe it’s a certainty that the country has entered a recession, though it won’t be made official for months.

“It’s difficult to predict what’s going to happen in the future,” Rauh said. “This is not a typical down cycle that’s caused by an asset bubble. This is a healthcare crisis that has an economic tail to it.”

Still, for now there are few signs of prolonged negative impacts on banks as a result of suddenly unemployed borrowers defaulting on loan payments. That’s partly because many banks have allowed 90-day payment deferrals. Connecticut banks and credit unions recently extended their mortgage forbearance pact with the state by two months. Federal stimulus money could also be keeping borrowers on schedule.

All of that may be disguising potential problems ahead, but loan forbearance has not yet been a major issue for some local banks. Only 12% of loans held by publicly traded banks in the Northeast are in forbearance, according to Gilbert. A similar metric is not available for non-public banks.

In addition, the CARES Act encourages banks to be flexible, permitting them not to count deferred payments as troubled debt, which could otherwise impact their capital levels.

How those borrowers who asked for relief fare in the months ahead will be an important metric to watch, Gilbert said.

Sign up for Enews

Most Recent

Most Recent

0 Comments

Order a PDF