Hartford Business Journal

12 Hartford Business Journal • September 21, 2015 www.HartfordBusiness.com Farmington Bank CEO John Patrick Jr. says his bank's profit recipe -- more loans, fewer troubled credits, tightened overhead -- hasn't dimmed his awareness of the threat posed from higher interest rates. Connecticut Banks' Improved Profitability Connecticut banks' balance sheets and profitability have strengthened noticeably since the Great Recession that began in late 2007 and troughed in early 2010, according to the Federal Deposit Insurance Corp.'s performance scorecard. Despite fewer state banks and tighter net interest margins, a greater percentage have witnessed their profits' upward march through the first half of this year as a result of fewer charge-offs of problem loans and foreclosed assets. n CT Bank's Collective Financial Performance 30 June Year 2015 2014 2013 2012 2011 2010 2009 2008 2007 Net Income (in millions) $338 $297 $271 $318 $251 $144 $94 $203 $283 Net Interest Margin (%) 3.1 3.25 3.31 3.63 3.77 3.53 3.2 3.58 3.41 Banks 43 45 48 52 53 54 56 57 57 Net charge-offs to loans & leases 0.1 0.16 0.28 0.37 0.55 0.69 0.5 0.23 0.08 Nonperforming assets to assets 0.81 0.99 1.36 1.66 1.95 1.82 1.55 0.73 0.3 % of unprofitable banks 4.7 8.9 16.7 15.4 18.9 24.1 28.6 14 10.5 % of banks with profit gains 74.4 53.3 54.2 55.8 54.7 63 26.8 59.7 28.1 S O U R C E : F E D E R A L D E P O S I T I N S U R A N C E C O R P. The secret: More loans, lower overhead from page 1 Connecticut banks netted $283 million in combined earnings. The uptrend in banks' profitability is proof, Connecticut bankers and regulators say, that the local and state economies are benefitting from mounting confidence and spending from consumers and businesses. Banks' balance sheets also have brightened with the decline in loan defaults and foreclosures. "In general, banks in Connecticut, they're doing well,'' said state Banking Com- missioner Jorge Perez. However, Perez, a former New Haven banker tapped last July to take the reins as the state's top bank overseer, cautions that those slim interest margins — the profit- generating difference between what lenders pay for deposits and collect in loan interest — are his concern for their continued profit- ability. A rise in rates, which could trigger a mismatch in bank's long- and short-term source of funds vs. loan maturities, poses just such a threat, Perez and bankers say. "The numbers indicate we're making good loans. But at the same time, net inter- est margins continue to shrink, which is a concern," Perez said. Nonetheless, Bankers say growing demand for home mortgages has generated extra loan-origination and servicing fees and income. On top of that, more banks are charging fees for the first time, or rais- ing them, on certain products and services such as deposit overdrafts, late payment fees, among others. Also, some bankers say they are simply finding ways to do more with less staff, plus fewer and smaller bank branches, which cuts down on payroll and other operating over- head that directly impacts their bottom lines. Recent financial performances for two of the state's biggest and most profitable lenders — Farmington Bank and Webster Bank — are illustrative of how they and their peers are coping. John J. Patrick Jr., chairman, president and CEO of First Connecticut Bancorp. and its flagship Farmington Bank, says his bank's rising profitability (it posted $3.5 million in net income in the second quarter vs. $2.2 million a year earlier) is in lock-step with its climb in assets, to $2.1 billion today vs. $900 million in 2007. Farmington Bank, like most lenders, Pat- rick said, has built up its earning assets through stepped up lending of mortgage, home-equity, auto and commercial loans. Banks profit from these kinds of assets by maximizing their inter- est-rate spreads, or margins. Past-due and unpaid loans can be a big drag on bank earnings. However, Farm- ington Bank, its CEO said, has suffered fewer troubled loans, which typically trig- gers banks to put aside, or reserve, a slice of their profits to cover the problem debt in case the borrower never recovers. Patrick said he and his managers, too, are aware of the potential threat from misaligned sources of deposits vs. income from loans and other assets, and runaway expenses, and monitors each closely. Webster Bank, with $23.6 billion in assets, originated $1.5 billion worth of new loans in the second quarter, the most the Waterbury regional giant has ever written in a quarter, said Robert Guenther, the bank's senior vice president and chief spokesman. Webster, too, has been disciplined with its pricing on loans and deposits, Guenther said. Additionally, its acquisition last Janu- ary of JPMorganChase Bank's health sav- ings account business provides Webster with a stable, relatively low-price source of deposits — money it can convert into loans. Finally, Webster's focus on reining in expenses also is paying off, Guenther said. The bank has posted nine consecutive quar- ters with an efficiency ratio of 60 percent or better. Its goal, he said, is to expend 60 cents or less for every $1 of revenue col- lected from loans and other services. For all Connecticut banks, loan-loss reserves, payroll, the light and gas bills, the cost of regulatory compliance, all are funded directly from their interest-margin pools. According to FDIC data, the collec- tive interest-rate spread for Connecticut's banks in the first half of this year was 3.1 percentage points. A year earlier, the spread was 3.25 per- centage points. In the first half of 2007, just before the recession began, the margin gap was 3.41 percentage points. At its widest, the spread was 3.77 per- centage points in the first half of 2011, when 53 Connecticut banks' netted $251 million, the data show. If the Federal Reserve were to raise interest rates, banks would have to raise the interest paid on deposits and charged on loans accordingly. n P H O T O | H B J F I L E

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