February 19, 2019

Federal tax cuts push Connecticut banks' earnings to record levels

PHOTO | iCreative3D, shutterstock.com
PHOTO | iCreative3D, shutterstock.com

Connecticut banks are rolling in dough, courtesy of Uncle Sam.

One year after President Donald Trump enacted the largest corporate tax cut in modern U.S. history, this state's 40 federally insured lenders during the first nine months of 2018 earned a collective $887 million after taxes — an apparent record, federal bank data show.

Once their fourth-quarter performances are tallied, Connecticut's banks and savings and loans likely could see their combined, full-year profits eclipse $1 billion for the first time. Connecticut insured banks netted just $659 million during the first three quarters of 2017, and $562 million in the same 2016 time period, according to Federal Deposit Insurance Corp. data.

Savings from lower tax bills, along with a relatively strong U.S. economy, has been a big part of the reason for the higher profits.

However, what on the surface seems like great news for the state's banks, which barely a decade ago were dealing with the onset of the Great Recession, isn't all rosy, experts say.

The improved earnings come with their own set of challenges. For one, sitting on piles of idle cash is anathema to bankers, who now have extra pressures to deploy that capital in ways that please shareholders and regulators.

There also are increasing signs of a U.S. recession, or at the very least an economic slowdown, which could make boosting loan output — one key way to deploy extra capital — much riskier, experts say.

"Sometimes bad things happen when banks have too much cash on their hands,'' said David D. Gibbons, a Chicago area financial-services consultant who is a former federal bank regulator.

New Haven economist Donald Klepper-Smith rates "50-50'' the chances of a national recession before the end of this year.

For that reason, Connecticut banks should be cautious with their capital because, said Klepper-Smith, invoking a football analogy, "this isn't the time to play offense. This is the time to play defense.''

Local bankers say they have found ways to safely and profitably deploy extra cash. Most publicly traded banks have returned a portion of the tax windfall to stockholders in the form of higher dividends, and increased their pools of lendable funds. Some, like Webster Bank, even shared the extra cash with their employees in the form of one-time bonus payments and a higher minimum wage.

Still others, including Hartford-based United Financial Bancorp, parent to United Bank, say they are investing some of the windfall into new and improved financial products and services and technology for the benefit of depositors.

Gibbons, who heads his eponymous consultancy in Lake Forest, Ill., said lenders may also find it convenient to use their extra cash to merge with or acquire competitors, rather than incur debt or trade stock. However, the risk there is that some banks may wind up overpaying to enter markets and still not be successful.

Connecticut has seen a number of bank mergers over the last 12 months, including the $544 million tie-up between People's United Bank and Farmington Bank, and Windham lender Savings Institute Bank & Trust Co.'s pending $180 million merger with Massachusetts' Berkshire Hills Bancorp Inc.

In December, Massachusetts community lender PeoplesBancorp MHC completed its $60 million cash buyout of Suffield's former First National Bank.

$21 billion in savings

Nationally, many U.S. banks had a good year in 2018, recording higher profits despite the still relatively low-interest rate environment.

Many lenders derived significant savings from Trump's Tax Cuts and Jobs Act of 2017, which slashed the corporate income tax rate among other business-friendly changes to the U.S. tax code. In fact, major U.S. banks trimmed about $21 billion from their tax bills in 2018, Bloomberg recently reported.

In the fourth quarter, several Connecticut banks, too, reported significant tax savings.

• Bridgeport-based People's United Financial Inc. recorded a fourth-quarter tax benefit of $9.2 million.

• Webster Financial Inc. paid a 2018 final-quarter tax bill of $20.7 million on pre-tax earnings of $102.4 million, down from $29.1 million in taxes paid on its $90.7 million earned pre-tax in 2017.

• United Financial Bancorp Inc. posted a 2018 full-year tax provision of $1.6 million vs. $12 million in 2017.

• Even small lenders like Simsbury Bank & Trust Co. reaped a tax windfall. Parent SBT Bancorp paid state and federal tax collectors $265,000 on fourth-quarter pre-tax income of $1.4 million. A year earlier, SBT remitted to tax collectors $485,000 of its $1.2 million in pre-tax earnings.

According to United Financial Bancorp Chief Financial Officer Eric Newell, United Bank has long aggressively managed its tax rate, accessing tax credits through its financing of customers' alternative-energy equipment purchases and the development of affordable housing.

United, too, has shared some of its income-tax savings with borrowers, Newell said, by reducing its earnings spread on loans.

"Banks are pretty much giving the tax-cut savings to customers, primarily in the form of a lower interest rate,'' he said.

Shareholders are also reaping the benefits. Total dividends paid out by Connecticut banks through the first three quarters of 2018 increased 58.4 percent from the previous year, FDIC data show.

The state's lenders paid out $495.4 million in dividends during that time period, compared to $312.8 million a year earlier, FDIC data show.

Meanwhile, the total loans and leases held by Connecticut banks grew at a much slower pace: only 2.53 percent during the first three quarters of 2018.

At Webster Bank, its net income after preferred dividends climbed 42 percent in 2018 from a year earlier, paced primarily by its strong operating performance, including consistent double-digit revenue growth throughout the year. Bank officials also acknowledge the contribution its lower tax rate made to earnings.

Webster says it plied several routes to sharing the tax-driven windfall to boost its competitiveness and community engagement throughout its East Coast banking network. First, most of its employees received a one-time $1,000 cash bonus, while its lowest-paid workers saw a pay hike with the adoption of a $15-per-hour minimum wage.

The bank also says it boosted overall loan volume last year by $900 million, or 5.4 percent, from 2017. It also invested in new technology to improve customer services and operating efficiency.

Webster stockholders received a 27 percent dividend hike, from 26 cents a share to 33 cents, beginning with its 2018 first-quarter payout.

In the community, Webster said it raised its philanthropic and community investments by $1 million. It also expanded its career-development initiatives for aspiring bankers, including its summer internship program and its two-year training program.

Webster said its extra capital also was a factor in the bank's decision to offer interest-free loans to any Connecticut resident employed by the federal government whose take-home pay was cut off during the recent federal shutdown.

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