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Updated: September 7, 2020

CT banks remain profitable through COVID-19’s peak

Photo | Contributed Torrington Savings Bank CEO Lesa Vanotti, with predecessor John Janco Sr.
By Matt Pilon

Connecticut’s banking sector remained in the black during what was one of the industry’s most unusual and challenging fiscal quarters ever.

The 34 banks headquartered in the state booked nearly $229 million in combined profits during the second quarter, according to new data from the Federal Deposit Insurance Corp. (FDIC)

Just two banks lost money, and 14 reported higher earnings than they did a year ago, which was long before the novel coronavirus was first detected in China. Meanwhile, banks here continue to have healthy capital cushions.

That performance came despite a chaotic and strange set of circumstances.

To recap, during the three-month period ended June 30, COVID-19 hit its presumed peak in Connecticut, resulting in an estimated 4,000 deaths and nearly 100,000 people filing for unemployment as the economy fell off a cliff.

Meanwhile, the federal government enlisted banks big and small to distribute billions in stimulus loans to more than 50,000 Connecticut employers — the single biggest ramp-up in volume most lenders had ever experienced.

Cynthia Merkle, CEO, Union Savings Bank

That nearly every bank managed to produce a profit is notable, given the many challenges they were facing, some of which still linger, said Cynthia Merkle, chair of the Connecticut Bankers Association and CEO of Danbury’s Union Savings Bank.

Her bank, whose western Connecticut-focused branch network also includes a Canton outpost, was among the 18 local lenders that were profitable during the recent quarter, but didn’t make quite as much money as they did a year ago. Union Savings reported a $4.9-million profit in the second quarter, down about 18% from a year earlier.

“We’re doing better than I thought we would be, considering [loan payments] we’ve had to waive,” said Merkle, referring to temporary forbearance Union Savings and other banks have granted to business and consumer borrowers during the pandemic.

She admits she’s even been a bit perplexed at times that things seem to be going so well, given the deep uncertainty over how badly the coronavirus will ultimately impact the economy, and for how long.

“It can feel like such a disconnect,” she said.

Merkle reports no signs of new or accelerating stress levels in Union Savings’ loan portfolio. Meanwhile, the bank’s mortgage lending arm is having a banner year, as the housing market has performed unexpectedly well, and commercial banking has been healthy too, she said.

All that despite the fact that there’s no definitive end in sight for the virus in the U.S., and thus far, no vaccine. Plus, Connecticut’s unemployment rate stands at about 15%, stimulus money employers have used to cover payroll expenses is now spent or running out, and some loan forbearance deals struck back in April are also expiring.

Hit from all sides

Though Connecticut’s banking sector remained profitable during the second quarter, it wasn’t unscathed.

Earnings for the 34 banks analyzed by the Hartford Business Journal were down about 46% from $424 million a year ago, which Merkle attributes to profit margins being squeezed from multiple directions.

“Some could say it was almost a perfect storm for us all,” she said.

One of the most significant impacts stems from the Federal Reserve lowering interest rates to near zero back in March, which in the recent quarter eroded the amount of revenue banks generated from interest on loans to a record low nationwide, according to the FDIC.

The Fed cut interest rates sharply as the country fell into recession in 2007 and 2008, where they remained for about six years before beginning to rise again in 2016. Four years later, Torrington Savings Bank President Lesa Vanotti says she’s feeling deja vu.

“It feels like we barely came out of the last period of historic lows and here we are again,” said Vanotti, who will succeed John Janco Sr. as TSB’s CEO later this year.

TSB, which has a Hartford County branch in Burlington and $864 million in total assets, managed to keep its second quarter earnings level from a year ago, at $1.7 million. However, the bank remains in the red so far in 2020, thanks to a first-quarter loss caused by the stock market crash earlier this year, which fueled red ink at a dozen Connecticut banks during the January-to-March period.

Vanotti shares some of Merkle’s worries about the path the virus will take, but also says she has reasons to be confident.

“Torrington Savings Bank is well-capitalized and has a highly liquid balance sheet,” she said. “That will allow us to weather this storm.”

Another driver producing downward pressure was that banks, for the second quarter in a row, put more money than usual into reserve to prepare for the possibility that an increasing number of borrowers stop paying their loans down the road.

Those set-asides, which lower a bank’s profits, totaled $155 million in the second quarter, up from about $129 million last quarter, and just $29 million a year ago.

“Banks are not waiting, they’re putting as much as they can into their loan loss reserves,” Merkle said. “We don’t know what’s going to happen, if it’s going to happen or when it’s going to happen, but we want to be ready.”

Connecticut bank deposits also spiked, reaching nearly $104 billion, up from $92 billion a year ago.

That may sound like a good thing, but it can present a challenge for banks in a low-interest rate environment, Merkle said.

Banks must produce enough income — by making loans, charging fees, etc. — to cover the costs of holding deposits, which pay an interest to the account holder.

“It’s hard to deploy that money,” she said. “There’s really nowhere for us to invest that cash for a good return.”

Another headwind for Connecticut banks during the recent quarter was plummeting consumer spending, as restaurants and some stores closed and many people stayed in their homes. For area banks, that meant fewer fees from credit and debit card transactions, and as a result, they saw their so-called non-interest income drop by nearly $41 million in total, down 17% from a year ago.

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