🔒CT bank profitability surges as pandemic recovery continues

After a year of turbulence and uncertainty, Connecticut banks are seeing a boom in profits as the economy continues to rebound. But they’re also reporting a noticeable decline in their loan portfolios.

The numbers seem to be at odds with each other. After all, banks make the majority of their money on the interest they charge customers for everything from mortgages to small business loans.

But local lenders say the numbers aren’t all that surprising in the aftermath of a once-in-a-century pandemic that saw demand for traditional bank loans decline as many struggling businesses chased free or cheap money from the federal government’s Paycheck Protection Program (PPP).

“The reason most banks’ [loan portfolios] are down is because of all the PPP loans that were forgiven,” said George Hermann, president and CEO of Windsor Federal Savings.

After three rounds of the PPP program, more than 119,000 loans were approved in Connecticut totaling $9.9 billion, according to the U.S. Small Business Administration. Banks processed and approved those loans and kept them on their books while they were active. However, many businesses during the first half of this year began to apply for and were granted loan forgiveness.

After that, banks removed the loans from their books and were also able to fully collect fees paid for by the federal government, helping boost profitability.

“When we booked the PPP loans, we could not take any of the fees,” said Stephen Lewis, president and CEO of Thomaston Savings Bank. “It has to be amortized over the life of the loan. But when the loan is forgiven, any leftover fee income will be recognized.”

The numbers

Connecticut’s 32 federally-insured banks have nearly doubled their profits through the first six months of 2021, reporting $736 million in net income. That represented an 89% increase over the $389 million in profits the banks reported during the first half of 2020 and puts them close to pre-pandemic earning levels, according to data from the Federal Deposit Insurance Corp.

In addition to PPP loan activity, other factors are helping improve bank profitability. For example, the rebound in the economy has allowed banks to reduce the amount of money they set aside for loans that may go bad in the future. That directly boosts the bottom line.

Thomaston Savings saw its net income through the first half of the year more than double to $7.1 million, according to the FDIC.

“We’ve had record residential activity, including refinances, new purchases and construction loans,” Lewis said. “That activity helps on the income side so that’s been very positive for us.”

Windsor Federal’s net income increased 13.2% during the first half of 2021 to $1.91 million, FDIC data show. Hermann said Windsor Federal’s growth influenced its profitability.

“We’re 25% larger than a year ago so you hope that continues,” he said.

Middletown-based Liberty Bank’s profits more than tripled through the first six months of the year jumping to $38.3 million, FDIC data show.

Liberty Bank Senior Executive Vice President and CFO Paul Young said the mutual lender’s strategy included focusing more on commercial and industrial lending and reducing its deposit costs.

Nationwide, the increase in bank profits was even larger.

According to the FDIC, the 4,951 commercial banks and savings institutions it insures reported an aggregate net income of $70.4 billion in the second quarter, a 281% increase from one year ago.

“The banking industry reported strong earnings in the second quarter 2021, supported by continued economic growth and further improvements in credit quality,” FDIC Chairman Jelena McWilliams said.

In addition to rising profits, bank deposits have also skyrocketed as many people were able to boost their savings during the pandemic through a combination of less spending and government stimulus checks.

Connecticut-based banks held $112.5 billion in deposits at the end of the second quarter, up 8.4% from a year ago and 18.3% from the second quarter of 2019, FDIC data show.

Lending trends

While profitability was up, the value of local banks’ collective loan portfolios at the end of the second quarter was down 5.9% from a year ago, FDIC data show.

Banks’ net loans and leases fell from $92 billion on June 30, 2020, to $86.8 billion on June 30, 2021.

Both Windsor Federal and Thomaston Savings — smaller community banks, with $707 million and $1.5 billion in assets, respectively — saw only a 2% drop in their loan portfolios over the past year compared to the nearly 6% statewide average, and both banks report that commercial lending has recently picked up.

“Right now demand is good for us,” said Hermann of Windsor Federal, which saw its loan portfolio drop slightly from $472.6 million at the end of the second quarter of 2020 to $464 million at the end of June 2021, FDIC data show.

The bank is currently doing more commercial loans with manufacturing and construction businesses than with the retail or service sectors, he said.

Lewis said Thomaston Savings’ commercial loan pipeline looks strong until the end of the year. Its portfolio held $901.8 million in loans and leases at the end of the second quarter, down 1.6% from a year ago.

Its lending is focused on construction and manufacturing, including fixed-asset purchases.

“I’m also seeing business acquisition, some smaller businesses buying each other out, so that’s been a positive,” Lewis said.

Meantime, Liberty Bank, the third-largest bank in Connecticut with $7.3 billion in assets, saw its loan portfolio shrink 9.5% over the past year to $4.1 billion as it has adjusted its lending strategy.

Young said he expects loan activity will quickly turn around, thanks in part to the bank’s greater focus on commercial and industrial lending along the Interstate 91 corridor.

Liberty opened loan production offices in New Haven, Hartford and East Longmeadow, Mass., and staffed them with experienced lenders hired from some of the larger banks that have merged.

“Our plan is to build out lending in the I-91 corridor,” he said. “We’ve taken advantage of disruption in the market. We’ve been able to get a lot of top talent.”

Liberty did less than $40 million in lending in the I-91 corridor last year but has done $200 million so far this year, Young said.

Some uncertainty

While the bank executives are optimistic about the immediate future, the pandemic continues to cast doubt on the long term, as do workforce shortages and clogged supply chains.

“Right now business conditions are very good,” Hermann said. “The biggest challenge our commercial customers are seeing is the ability to get qualified help.”

“A lot of companies could be doing more if they had staff — that’s the manufacturing side, the restaurant side, and across the board in most industries,” Lewis said, adding that the alternative for many businesses will be automation.

Young said Liberty Bank is not expecting a return to normal until the second quarter of 2022.

“And if you’re in the hospitality and service industries, it will take longer to recover…, ” Young said. “We expect inflation and price increases, and supply chain disruption is still a problem.”