Although 15 of Connecticut’s 55 federally insured banks were unprofitable in 2009, earnings for the industry soared last year overall compared to a dismal 2008.
Still, problem loans remain a drag on Connecticut banks balance sheets, and 2009 earnings remained far below profits from two years ago.
Net income at Connecticut’s 55 federally insured financial institutions rose to $199 million in 2009 from $18 million a year earlier, according to the Federal Deposit Insurance Corp. That’s an impressive comeback considering those same lenders earned $527 million in 2007.
Nationally, earnings at federally insured banks and savings institutions increased to $12.5 billion — up from $4.5 billion in 2008.
“It’s a less bad situation than it was last year, but it certainly isn’t a normal, healthy banking environment,” said John Carusone, president of the Bank Analysis Center, a consulting firm in Hartford. “There were signs of profit recovery overall, but the industry is still recovering from deteriorating loan portfolios and putting additional reserves against future loan losses.”
Carusone said Connecticut banks are strong compared to others nationally, but it’s going to take year or two, or more for the industry to regain prerecession health in terms of profitability, non-performing loans and capital ratios.
The profitability increase was aided in part by the recovery of the stock market and overall improved investment income.
The effects of the recession, however, continue to add to the number of problem loans on bank’s balance sheets.
Nonperforming loans as a percentage of total loans at Connecticut banks in 2009 rose to 1.67 percent from 1 percent in the year ago period. Those bad bets compromise a bank’s profitability, Carusone said, because it forces them to set aside money in reserves to hedge against those future losses.
“Problem loans translate into lower capital ratios, and a riskier balance sheet,” Carusone said.
Of a bigger concern to the overall economy, however, is that fact that U.S. bank’s loan balances declined for the sixth consecutive quarter.
Total loans and leases shrunk by $128.8 billion or 1.7 percent during the fourth quarter of 2009. Loans to commercial and industrial borrowers declined by $54.5 billion and real estate construction and development loans declined by $41.5 billion.
In Connecticut, total loans and leases for all of 2009 fell by about $1.3 billion, or 3 percent, to $51.1 billion.
Carusone said bankers continue to be cautious because of uncertainty still plaguing the economy, while many borrowers remain skittish about taking on new debt.
“It’s hard to take on more risk, when the environment is riskier than it has been,” he said.
FDIC Chairman Sheila Bair said more stringent lending standards and lower real estate values also helped spur the declines in lending and that “resolving these credit market dislocations will take time.”
Despite the mixed results, Connecticut banks reported gains in deposits and total assets in 2009, growing to $58.5 billion and $77.6 billion respectively. The state’s lending institutions also collectively added a net 38 jobs during the year, boosting its fulltime workforce to 13,924.
Investors Give Nod to Merger
Shareholders at First Litchfield Financial Corp. have approved the company’s merger with Danbury-based Union Savings Bank.
The $35 million deal was announced in October and is expected the close in the second quarter, the companies said.
Under terms of the agreement, each First Litchfield shareholder will receive $15 per share in cash.
First Litchfield Financial Corp. runs The First National Bank of Litchfield, which has $520 million in assets and nine branches in Litchfield and Hartford counties.
Union Savings is a state-chartered mutual, meaning it is owned by depositors, with $2 billion in assets. When the proposed merger is completed, Union Savings will have approximately $2.5 billion in assets, $1.7 billion in deposits and 28 branches statewide.
Union Saving CEO John Kline said the merger will significantly expand its market share in Litchfield County as well as a greater presence in Hartford County. “This acquisition will further our vision of becoming the bank of choice in western Connecticut,” Kline said.
Greg Bordonaro is a Hartford Business Journal staff writer.
