More Connecticut banks are seeing profit growth — up 55 percent in the second quarter over the year ago period — but their loan portfolios can’t seem to shake the recession, data shows.
More than half of Connecticut’s 54 federally insured banks have seen an increase in loans that were delinquent by 90 or more days during the first half of this year.
Those noncurrent loans totaled $1.3 billion at the end of June, a 20 percent increase from a year ago, a Hartford Business Journal analysis of Federal Deposit Insurance Corp. data has found.
In June 2008, just before the peak of the financial crisis, the state’s banks had $496 million in delinquent loans.
The escalating numbers indicate that despite the Great Recession ending in June 2009, as determined by The National Bureau of Economic Research last week, its fallout continues to be felt, especially in the banking industry.
Although profitability and overall loan quality remain relatively strong for most Connecticut banks compared to those in other parts of the country, continued high unemployment is still hurting asset quality.
“It’s clear that credit quality has continued to deteriorate due to the anemic economic recovery,” said John Carusone, president of the Bank Analysis Center, a consulting firm in Hartford.
Among banks that have seen the largest increase in noncurrent loans is Middletown-based Liberty Bank. Its loans 90 days past due have gone from $1.3 million at the end of June 2009, to $35.3 million at the end of June 2010, FDIC data shows.
Bridgeport-based People’s United Bank also saw a sizable increase in noncurrent loans from $186 million at the end of the second quarter of 2009, to $289 million through the end of June 2010.
Farmington Bank, Unions Savings Bank and NewAlliance Bank also saw increases this year in their noncurrent loans of at least 20 percent.
Edward Deak, a professor of economics at Fairfield University, said all types of loans are vulnerable to delinquency right now, but commercial and residential mortgages are among the most likely culprits.
There’s concern about continued stress in the housing market, especially with high unemployment. As people lose jobs, their ability to pay a mortgage is put in jeopardy.
At the same time, more borrowers are beginning to realize that their homes are underwater, meaning they owe more on the mortgage than their home is worth.
“When people start to think they are throwing good money at bad, they’ll stop paying their mortgage,” Deak said.
Meanwhile, commercial property owners are facing intense pressure with high vacancy rates within office and retail market.
In Greater Hartford, retail vacancies have reached 13.1 percent, while the office space vacancy rate has been hovering around 20 percent.
“All of those vacancies hurt the cash flow in the buildings, which could make it more difficult to pay the loan,” Deak said.
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.
“Banks have either raised capital or shrunk their balance sheets anticipating a continuation of a difficult economic environment,” Carusone said.
It also means bankers are being cautious about booking new loans.
But there is a silver lining.
Despite the rise in noncurrent loans, Connecticut banks are still making money. In fact, overall profitability and capital adequacy of the banking system in the state is on the upswing.
Only 13 of Connecticut’s 54 banks and savings institutions were unprofitable during the second quarter, down from 16 banks last year, according to FDIC data. Collectively the banks had a net income of $146 million, a 55 percent increase from the second quarter of 2009.
And, about 20 Connecticut banks have actually seen their delinquent loan totals decline recently.
Among them is Waterbury-based Webster Bank, which has seen its noncurrent loan portfolio shrink about 10 percent to $319 million.
John R. Ciulla, the executive vice president and chief credit risk officer at Webster, said the key to reducing problem loans has been to work with borrowers who may be in trouble.
“We’ve had a laser like focus over the last six quarters on getting those nonperforming loans off the balance sheets,” Ciulla said.
