Hartford Business Journal

www.HartfordBusiness.com December 19, 2016 • Hartford Business Journal 3 Flush CT lenders cautiously await higher interest rates By Gregory Seay gseay@HartfordBusiness.com C onnecticut banks are on pace for their most profitable and biggest lending year since at least the Great Recession, a sign that business and consumer borrowers have a healthy appetite for credit even as the state's economic recovery remains tepid. But a recent interest-rate hike, and the threat of more next year, could erode some banks' earnings and dampen borrowers' appetites, leaving some uncertainty about 2017, lenders say. The 42 banks insured by the Federal Deposit Insurance Corp. (FDIC) posted a col- lective $562 million in profits through the first nine months of 2016 vs. $520 million netted by 43 lenders the same period in 2015, FDIC data shows. Only two Connecticut lenders failed to turn a profit in the period. Those same lenders also had loans and leases on their books totaling $75.1 billion as of Sept. 30 vs. $69.8 billion on the books of 43 institutions a year earlier, according to FDIC data. At their lowest point in the recession, only half the 58 FDIC-insured Connecticut lenders were profitable in the third quarter of 2008, netting $217 million with $52.4 billion in loans and leases on their books. Charlotte-based Bank of America, the nation's second largest by assets and Con- necticut's biggest lender by deposits, has wit- nessed a rise in revolving-credit usage among its regional commercial customers who are using the borrowed capital to buy equipment, real estate, or for acquisitions, said Kevin Cunningham, Hartford-based president of Bank of America Connecticut. "[Loan] demand is a function of how con- fident clients feel,'' said Cunningham, whose turf covers all of New England, New York, New Jersey, Pennsylvania and Canada. In Con- necticut, B of A employs some 3,000 workers, including ones in its national home-mortgage processing center in Farmington. Glastonbury's United Bank, a $6.5 billion- asset community lender, too, has watched its stock recently eclipse all-time highs in the wake of record third-quarter earnings amid strong consumer- and commercial-borrower demand, said CEO William H.W. "Bill'' Crawford IV. The bank netted $14.2 million in the third quarter of 2016, compared to $9.1 million in the year-ago period, while it saw an uptick in home equity and commercial real estate lending. "We've had a good year in '16,'' Crawford said. But Crawford, Cunningham and other Connecticut and U.S. bankers are bracing for followups to last week's 0.25 percent hike in the base interest rate, to 0.50 percent. If the U.S. economy continues its expan- sion, experts say another hike is expected sometime around the first half of 2017, likely to set off more increases going into 2018. "We're encouraged because the rates were so low for so long … because of the financial crisis," Crawford said. "I think it's a healthy sign that we're looking for an increase.'' Higher borrowing costs, however, could undermine Connecticut's lagging economic recovery by stifling businesses' demand for borrowed capital, experts say. "Once stronger growth and inflation become evident, we think the pace of the hiking cycle will accelerate in 2018 — possibly three hikes total,'' Cunningham said. "Generally, we believe 2017 will start slow, but then we will see accel- erated [economic] growth in the second half as tax cuts kick in," Cunningham said. Although small, a rate hike poses a dou- ble-edged sword for lenders. One is that a rate hike allows banks to charge more for loans, with part of the extra interest income ear- marked to cover the collection and overhead costs on bad loans and foreclosed real estate. Higher rates are also good news for savers, who likely will earn more on their passbook savings and certificates of deposit. But higher rates also pressure banks' prof- itability, experts say, by eating into their mar- gins between revenue and expenses, because lenders must pay more for deposits while cov- ering fixed costs such as leased office space, utilities and salaries. Higher interest rates also could crimp demand among borrowers. "If, as we believe, interest hikes are initially on the smaller side, we won't see a big effect on our business or for our clients, in terms of cash flow, as we build interest rate sensitivity into many of our loans,'' Cunningham said. 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