🔒CT banks are enjoying a record run of profits, but some lenders question if it will last

The state’s job recovery and economic growth rate since the Great Recession have lagged the nation, but Connecticut banks are collectively doing better than ever.

In fact, the 35 banks headquartered in the state booked record profits of $1.33 billion in 2019, up more than 11% from a year earlier, according to Federal Deposit Insurance Corp. (FDIC) data.

That bucked the industry’s performance nationally, as U.S. banks collectively saw their profitability decline 1.5% in 2019, FDIC data shows.

However, not all Connecticut banks enjoyed higher profits last year and larger institutions were more likely to end 2019 in the black than smaller ones, according to a Hartford Business Journal analysis of FDIC data.

Bridgeport’s People’s United Financial and Waterbury’s Webster Financial Corp. accounted for nearly three-quarters of the profits, raking in about $543.5 million and $404.9 million, respectively, FDIC figures show.

The Connecticut industry’s bottom line has now grown six consecutive years, with an average annual growth rate of nearly 17%. Connecticut-based bank profits in 2019 were nearly double what they were in the 2005 pre-recession peak, and are up sharply from their 2008 recessionary trough, a year in which the industry barely broke even, FDIC data shows.

Don Klepper-Smith, an economist and adviser to Middletown-based Liberty Bank, said while Connecticut’s job recovery has been slow, there has still been plenty of economic activity here, creating opportunities for banks to sell loans and other products and services.

State Gross Domestic Product numbers through the third quarter of 2019, he said, “were some of the best in the last five years.”

As a result, banks have increased loan revenues while borrower credit quality has improved, reducing the need to set aside money for loan losses.

Those factors, along with record stock market returns (prior to the recent coronavirus outbreak), higher fee income and better expense controls, have many local banks swimming in profits.

“This is not a surprise,” Klepper-Smith said of the record earnings. “Bankers have been busy, so that’s a good thing for Connecticut.”

Winners and losers

While Connecticut banks collectively reported record profits in 2019, not all of them improved their bottom lines.

Of the 35 banks HBJ analyzed, 16 actually saw their profitability decline in 2019. Only one bank — Stamford-based Patriot Bank — lost money last year.

And bank size did have some influence over performance. By and large, smaller banks had a harder time boosting profits than larger ones. In fact, banks whose profitability declined last year had median assets of $487 million vs. $838 million in median assets for banks whose profits increased.

“The smaller you are, the harder it is,” said Richard Cantele, immediate past president of the Connecticut Community Bankers Association and president and CEO of Salisbury Bank, based in the Lakeville section of Salisbury.

The need to invest in ever-evolving technology and keep up with regulatory demands, among other issues, has made it harder for smaller banks to compete, which has fueled a decades-long mergers-and-acquisitions wave.

In just the last two years People’s United Bank and Liberty Bank have picked off Farmington and United banks, and Simsbury Bank, respectively.

Over the longer term, the number of Connecticut-based banks in the state has shrunk dramatically from 106 in 1994 to 58 in 2008 and 35 today, FDIC data shows.

But size doesn’t tell the whole story, warned Cantele, whose $1.1 billion bank posted a 24% profit increase last year, to $11.9 million, on higher interest income and lower expenses.

First, there are one-off scenarios that can change a bank’s fortunes in any given year.

For example, Darien-based DR Bank, which has $370 million in assets, saw the largest 2019 profit gain of any bank, growing from a loss of about $12 million to a gain of nearly $116 million, as it sold its Laurel Road digital lending business to KeyBank.

Meanwhile, Stafford Savings Bank, with $304 million in assets, grew its bottom line from $2.4 million to $19.1 million in 2019, almost entirely because of gains on securities.

Second, regardless of scale, varying customer bases can also impact results.

Some banks skew more heavily toward manufacturers, while others, like Cantele’s Salisbury Bank in the state’s northwest corner, are less concerned with that sector.

“There are little mini economies, even in a small state like Connecticut,” Cantele said. “What happens in New York City probably impacts us to a larger degree than what happens in Hartford.”

Klepper-Smith concurs there are no definitive characteristics that determine profitability.

“Some parts of Connecticut have grown faster than others simply because of the sectors of the economy that have grown faster than others,” he said. “Bank profits will often be based on geography and scale.”

Good times coming to an end?

While banks are on a record run of late, the question for most is: How long can it last?

“I hate to say this, but 2019 might be the peak for all of us from an earnings perspective,” said Cynthia Merkle, chair of the Connecticut Bankers Association and CEO of Union Savings Bank in Danbury.

She is concerned that the Federal Reserve has continued to lower interest rates. While banks can still earn a spread on the interest they charge on loans, it’s become harder to do so in a low-rate environment.

“We’re in uncharted waters,” Merkle said.

Continuing to post record profits, absent rate hikes from the Fed, is going to be “very difficult” for banks, she added.

Interest rates aren’t the only concern.

Like most economists, Klepper-Smith has been thinking about what might drive the next national recession. The coronavirus, which has been spreading and caused a recent stock market tumble, is a candidate, he said.

Different banks could be exposed to different levels of impact, depending on how their customers are affected.

Besides those economic and human worries, Klepper-Smith said bank performance this year will come down to a few things.

“2020 will be an interesting story in terms of where we go on consumer fundamentals, interest rates and the stock market,” he said.