🔒Guarded Outlook: CT banks see positive economic signs, but keep wary eye on potential downturn

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Inflation continues to rise at rates not seen in decades and gross domestic product is shrinking, but Connecticut bankers say they see no need yet for dramatic defensive actions.

Heads of several community lenders say that ominous signs nationally aren’t mirrored locally. New loan demand remains robust and historically low unemployment has bank presidents confident of continued strength from existing borrowers.

“We are still seeing a lot of job openings,” said Stephen Lewis, president and CEO of Thomaston Savings Bank. “We have job openings at the bank. Just about every other bank I know, every company I know, is still looking for people. So, I think we are going to have this odd situation where we are going into this recession, but people aren’t going to be losing jobs.”

To Lewis, that means any recession will likely be shallow and short — there are no signs of significant increases in foreclosures, delinquencies or bankruptcies.

“We are still seeing a lot of demand for loan products and credit quality still looks very strong and our delinquencies are still at all-time lows,” Lewis said. “I think that all comes back to people still have jobs.”

Lewis said his bank, with $1.6 billion in assets, will be tightening its lending standards, wary of customers susceptible to failure in a downturn.

“On the speculative lending side, we are going to be much more cautious,” Lewis said. “We will be looking at who the developer is and who the builder is, really looking at their strength and ability to carry a project on their own for a longer period of time.

He added: “If we are going to do anything on the residential side, it’s going to be with someone who has lots of industry experience, who has lots of wherewithal. When you look at residential, when it stops, it really stops. You don’t want to be with the new guy in the field who’s never done this before.”

Lewis said he isn’t beefing up loan loss reserves because the metrics currently don’t call for it.

Dime Bank President Nick Caplanson said he is comforted by historically low unemployment but acknowledged inflation will likely remain persistent.

“The interest rates are going up on consumer and business debt,” Caplanson said. “That’s not great, being a community bank. The good thing is we are in touch with our customer base.”

Caplanson said preparing for shocks to the economy means ramping up communication with and oversight of customers, reaching out to potentially struggling borrowers to offer alternatives that will keep them from failure.

It won’t mean changing the bank’s already conservative credit approval criteria, Caplanson said.

Given the low unemployment rate, Caplanson said he doesn’t anticipate a severe recession.

“Because let’s face it, if you have a job, you can usually pay your bills or most of your bills,” Caplanson said. “I don’t see this being your classic, typical recession of years ago, where there were lots of layoffs and contractions in the labor force. It’s just not there right now. It’s a very unusual time.”

Caplanson said Dime Bank, with $1.1 billion in assets, is also making no changes to its loan loss reserves for now. With real estate values rising in recent years and clients having secure employment, the bank’s loan portfolio has become less risky.

Dime Bank’s outlook is so positive, Caplanson said, the bank plans to open a new branch in Vernon by the close of this year in a recently-purchased former Farmington Bank office.

Naugatuck-based Ion Bank is seeking a big expansion of its loan portfolio, trying to keep pace with growing deposits and rising interest payments to depositors.

“We are looking for more sources to increase our lending production,” said Ion President and CEO David J. Rotatori. “On the interest rate side, if we can’t reinvest deposits we have, we can’t pay deposit rates high enough to keep those deposits.”

Ion closed a $7.5 million purchase of Lincoln Park Bancorp on July 1, giving the bank two branches in northern New Jersey. The purchase added 20 staff to Ion, for a total of 284.

Ion, with $1.8 billion in assets, is also finalizing its purchase of Cheshire-based auto lender BCI Financial, which has 20 years of experience and a network of dealerships and buyers that the bank couldn’t easily replicate, Rotatori said.

Rotatori said the purchases are part of a plan to “significantly increase” loan volume, which is already at record levels.

Before the COVID-19 pandemic, the bank averaged about $200 million in new loans yearly, Rotatori said. Ion has already hit that mark this year and will probably authorize $300 million in loans before the end of 2022. Deposits are up $100 million this year, he said.

“Right now, it doesn’t seem to be slowing,” Rotatori said of the economy. “We are thinking the same thing — should we be expecting some slowdown? We are not seeing any of that yet.”

Windsor Federal Savings President George Hermann said he is leery of an economic downturn, but his bank is “extremely well prepared.”

“For right now, so many things are in the best shape they’ve ever been in,” said Hermann, whose bank has $745 million in assets. “Delinquency is at an all-time low. There is no delinquency in the commercial portfolio.”

Hermann said he doesn’t expect this downturn to be “anything like” previous recessions. Savings levels are at an all-time high, he noted. A lot of Windsor Federal’s commercial customers work for defense industries, which are stable, he added.

Like other bankers, Hermann stressed Windsor Federal will keep close contacts with customers who might face struggles.

“We are not publicly traded,” Hermann said. “If customers run into issues when there is a little bit of a downturn, we are here to help them, not abandon them.”

Hermann also doesn’t expect people to walk away from home loans as easily as they might have in the wake of the 2008 housing crash. Rents are so high right now it doesn’t make sense to leave a house, even if the mortgage is underwater, he said.

Hermann also said consumers have been a lot smarter about not buying above their means.

“You don’t have that mentality of back when people were overleveraging themselves and buying the biggest and the best,” Hermann said. “Deposit balances are up. Balances have grown more than 30% during the pandemic. Where there were huge influxes of cash, money went into savings accounts. So there is a lot more insulation for individuals and businesses right now.”