Connecticut banks and savings institutions shed 361 jobs in the fourth quarter and reported a 94 percent drop in net income for all of 2008, showing signs that a deepening recession is impacting the industry.
Net income at Connecticut’s 58 federally insured financial institutions dropped to $30 million in 2008 from $527 million a year earlier, according to the Federal Deposit Insurance Corp.
Nationally, earnings at federally insured banks and savings institutions plunged 84 percent to $16.1 billion from $100 billion in 2007, the lowest annual earning total since 1990.
Although statistically it appears that Connecticut’s banks underperformed the national average, some struggling financial institutions in Connecticut pulled down the state’s average significantly, including Waterbury-based Webster Bank which reported a net loss of $322 million in 2008.
In general, most financial institutions in the Northeast generally performed better than banks in other parts of the country.
Regardless, earnings and credit quality deteriorated virtually across the board, thanks to rising loan-loss provisions and one-time investment losses in shares of Fannie Mae and Freddie Mac.
“Looking at the industry as a whole, banks are operating in an extremely difficult environment,” said state Banking Commissioner Howard Pitkin. “We are seeing that banks are putting more money in loan loss reserves, which is negatively impacting their incomes. That indicates that they have some questions about loans in the future.”
Struggling Industry
Pitkin said his main concern is whether Connecticut banks have adequate capital and reserves to absorb more losses going forward in 2009. He said that he is “comfortable with what Connecticut banks have” so far.
Pitkin, whose office regulates state-chartered banks, said the future performance of Connecticut banks will depend largely on how the broader national economy performs.
“Banks and other financial institutions reflect the economy they are operating in,” he said. “Right now, they are experiencing the ramifications from the recession. They will be impacted by the economy continuing through 2009 and possibly into 2010.”
Damon DelMonte, a banking analyst at Keefe, Bruyette & Woods Inc. in Hartford, said Connecticut banks’ struggles are a reflection of higher credit costs and the broader economic problems plaguing the rest of the country.
“We are starting to see the effects of rising unemployment rates,” DelMonte said. “People are tightening their budgets, which means that small businesses are making less money. That leads to a rise in delinquency in commercial and industrial loans.”
DelMonte expects future banking results will continue to come under pressure, resulting in lower earnings across the board.
In a note to investors last week, Friedman, Billings, Ramsey & Co. analyst James Abbott said that Northeast banks have held up relatively well compared with other regions, but that he expects more pressure to be put on them in the coming months.
The Northeast is in the earlier stages of economic deterioration compared to other regions, which means the downside risk to earnings and stock prices could be meaningful, especially with unemployment expected to rise, Abbott explained. He also expects the rate of loan defaults and the severity of those defaults to increase.
“We expect Northeast valuations will come under significant pressure, narrowing the gap between banks in the Northeast versus those in the West,” Abbott wrote.
“Banks are mostly in defensive mode,” DelMonte added. “They are predominantly taking measures to preserve capital by taking money from TARP [Troubled Asset Relief Program] or slashing dividends.”
Federal Assistance
So far, only three Connecticut banks have taken funds from TARP, the federal program that aims to encourage lending by boosting banks’ capital levels. State banks participating in the program are: Waterbury-based Webster Bank ($400 million); First Litchfield Financial Corp. ($10 million); and The Connecticut Bank and Trust Company in Hartford ($5.4 million).
However, more are expected to participate in the program. Shareholders of Simsbury Bank & Trust Co. recently approved the issuance of preferred stock, which will allow it to receive $4 million from TARP.
Along with income losses, jobs were also cut. In the fourth quarter, most of the job losses occurred at non-state chartered institutions, which cut 356 positions. State-chartered banks shed five positions during the period.
Nationally, banks and savings institutions shed 17,969 jobs in the quarter.
Although 25 insured institutions failed nationwide, none were from Connecticut.
Of concern is the FDIC’s “Problem List,” which grew during the quarter from 171 to 252 institutions, the largest number since the middle of 1995.
Investment losses of Fannie Mae and Freddie Mac hit banks across the country, and Connecticut institutions were not spared. The shares, which historically had paid high dividends and had been considered safe investments, plunged in value when the quasi-government entities that finance most of the nation’s mortgages were bailed out by federal regulators in September.
The bailout was structured to protect Fannie and Freddie debt, but it nearly wiped out the value of their common and preferred shares.
But while their profitability suffered from those losses, Connecticut banks reported slight gains in deposits and total assets in the fourth quarter.
