Hartford Business Journal

www.HartfordBusiness.com • June 15, 2020 • Hartford Business Journal 17 Earnings Volatility Despite plummeting profits, CT banks aren't sending distress signals By Matt Pilon mpilon@hartfordbusiness.com A fter enjoying record earnings last year, Connecticut banks started 2020 on a gloomier note, seeing their combined profits cut in half during the first quarter. The COVID-19 pandemic, which struck Connecti- cut in the final weeks of March, is to blame, as it spurred record poor stock-mar- ket performance, forcing banks to write down their investment portfolios, which reduced overall profits, according to recently pub- lished Federal Deposit Insur- ance Corp. data analyzed by the Hartford Busi- ness Journal. "[To say] that the stock market had a very poor first quarter would be the understatement of the decade," said Michael Rauh, CEO of eastern Connecticut's Chelsea Groton Bank, which lost $3 million during the January-to-March period, compared to a $6-million profit in the first quarter of 2019. The decline, Rauh said, was almost entirely because of stock volatility. The 35 state-based banks analyzed by HBJ saw their collective profits fall 49% in the first quarter to $161 million vs. $317.3 million in net in- come a year earlier. All but a handful of lenders saw their bottom lines shrink, and about one-third of banks booked a loss, FDIC data shows. The good news for banks is their stock portfolios have largely rebound- ed since March, which will be a positive for their second-quarter performance. And the sector still managed to remain profitable as the pandemic set in, maintaining strong loan fee and inter- est income even as the state's economy tanked and jobless rate soared. Indeed, the pandemic so far is shap- ing up to be something far short of apocalyptic for lenders in Connecticut and the Northeast — institutions that tend to carry particularly large capital cushions and that saw lower levels of problem loans in the first quarter com- pared to banks across the country, said Collyn Gilbert, an analyst and manag- ing director at investment banking firm Keefe, Bruyette & Woods, who cov- ers Waterbury- based Webster Bank and People's United Bank in Bridgeport. "Nearly all of them sit in a fine position," Gilbert said. "This is not going to be a cri- sis where they have to raise capital." Chelsea Gro- ton's Rauh is quick to agree with that. "This is not a mortal event for us in any way," he said of his $1-billion asset bank. "We have lots of capital, lots of liquidity, a great market and a strong reputation." At Liberty Bank in Middletown, which has $6 billion in total assets, CFO Paul S. Young says the pan- demic's impact has been manageable. The mutual bank's loan portfolio is diversified, with limited exposure to harder-hit commercial real estate, such as restaurants and retail. "Most of the real estate [in our portfolio] is essential businesses and they are performing well," Young said, adding that the mix includes grocery stores. He was initially worried about Liberty's approximately $700-million resort finance portfolio, which writes loans for the timeshare industry, but those concerns have largely subsided. "People are paying their loans," he said. "Customers are prioritizing vacation." Set-asides and interest headwinds While banks held their own in the first quarter, it doesn't mean things aren't going to get worse before they get better. Lenders — including Chelsea Gro- ton — are expected to set aside larg- er amounts of income in the quarters ahead for expected pandemic-related loan losses, which will put downward pressure on profits, Rauh said. "There are businesses that are simply not going to open up again," Seeing Red These Connecticut-based banks saw the most significant declines in first-quarter profits. (Dollar amounts in thousands) Bank Headquarters 1Q-2019 net income 1Q-2020 net income Profit change % Torrington Savings Bank Torrington $2,685 -$6,272 -333.6% Stafford Savings Bank Stafford Springs $9,314 -$17,330 -286.1% Northwest Community Bank Winsted $1,310 -$1,115 -185.1% Patriot Bank Stamford $886 -$668 -175.4% Ion Bank Naugatuck $2,965 -$1,823 -161.5% Guilford Savings Bank Guilford $1,956 -$1,134 -158.0% Jewett City Savings Bank Jewett City $646 -$350 -154.2% Liberty Bank Middletown $22,700 -$11,437 -150.4% Chelsea Groton Bank Norwich $6,030 -$2,953 -149.0% DR Bank Darien $2,380 -$337 -114.2% Source: Federal Financial Institutions Examination Council call reports for Jan. 1-Mar. 31, 2020. Collyn Gilbert, Analyst and Managing Director, Keefe, Bruyette & Woods Continued on page 18 >> Michael Rauh, CEO of Chelsea Groton Bank, talks to employees at his Groton branch before the COVID-19 pandemic struck Connecticut. PHOTO | CONTRIBUTED

• Cover