Commercial bank loans fall in CT

Total lending by Connecticut’s 55 federally insured banks fell by nearly $1 billion over the past year, and the state’s largest, regional lenders are mostly responsible for the significant drop in loans, according to a Hartford Business Journal analysis of Federal Deposit Insurance Corp. data.

Loans and leases held by the state’s three regional lenders — Webster Bank, People’s United Bank and NewAlliance Bank — fell 5.3 percent or $1.7 billion during the one-year period.

Webster Bank, which received $400 million in federal bailout money, accounted for $1.5 billion of that decline.

The $1.7 billion drop in lending by the state’s larger banks was offset by an increase in loans made by Connecticut’s community banks, which boosted lending by over $800 million over the past year.

The increase in lending by smaller institutions is notable because the Great Recession has led to deteriorating credit quality among borrowers and a drop in loan demand.

“Large institutions are not doing enough,” said Howard Pitkin, the state’s banking commissioner. “The community banks are the one’s keeping credit flowing to the market.”

Total loans held by Connecticut’s banks at the end of September was $51.6 billion, down $816 million, or 2 percent from the year ago period, according to FDIC data.

Virtually all major lending categories, except commercial real estate loans, saw a decline over the past year.

The drop in lending does not include loan totals from national banks that operate in Connecticut, some of which received a public scolding last week from President Barack Obama, who criticized those institutions for not making enough funds available to small businesses.

Credit Shortage

The new data illustrates that access to credit remains tight for many Connecticut companies, preventing them from adding or retaining staff or investing in other growth opportunities.

Of the 346 companies surveyed by the Connecticut Business & Industry Association at the end of the third quarter, for example, 31 percent said credit availability is a problem for their business — the highest reading since the survey began five years ago.

In 2005, only 10 percent of respondents said credit availability was a problem.

Despite the overall drop in loan volume, however, Pitkin said he is not totally discouraged by the numbers, mainly because most community banks are continuing to lend.

Pitkin noted that the only way banks can survive a recession is to tighten lending standards and stay away from risky loans, things that Connecticut banks have done over the past year.

Even so, high unemployment is making it difficult for lenders to identify “safe-and-sound” loans and lower revenues are hurting companies’ credit quality, making it harder for them to qualify for loans.

Connecticut banks have experienced an increase with problem loans throughout the year, although most have adequate capital, Pitkin said.

“I think they have to tread very carefully,” Pitkin said. “Until the economy firms up here in Connecticut, you are going to see a credit market that is tight.”

Bob Guenther, senior vice president of public affairs at Webster Bank, said the company’s loan volume declined over the past year mainly because the bank reduced its lending outside of the Northeast.

In the past, Webster did a fair share of out-of-market lending, but lower credit quality among some of those borrowers made the bank rethink that strategy, Guenther said. It was also difficult for the bank to work closely with companies outside of its main branch network in New England, he added.

“We are a relationship lender, and it’s obviously hard to have a relationship with someone in Nevada,” Guenther said.

Webster’s loan and lease portfolio in Connecticut, however, also experienced a decline, going from $7.9 billion in 2008, to $7.4 billion in 2009.

Guenther said loan demand among commercial borrowers has declined, and the bank has also decided to sell more of its mortgages into the secondary market, which contributed to the decline locally.

In the coming year, however, Guenther said Webster is planning a significant expansion in lending activity, and the bank is currently hiring small business and commercial bankers to prepare for that growth.

“We see a pickup in economic activity in 2010,” Guenther said.

At the other end of the lending spectrum is Farmington Bank, which had nearly $1 billion in total loans and leases on its books at the end of September, a 22 percent increase over the prior year period.

John Patrick, chairman, president and CEO of Farmington Bank, said most community banks in the state have been able to continue lending because they avoided writing subprime loans. That’s allowed smaller institutions to steal market share from some larger competitors, which have been hurt by the bad bets they took on borrowers with shaky credit histories.

Next year, Patrick said his bank will likely add another $150 million to its loan portfolio as it concentrates on growing its commercial, consumer, and mortgage businesses.

But even as community banks keep credit flowing, many businesses are still having trouble borrowing the amount they need.

Building Woes

One industry that has felt the brunt of that pain is home builders, according to Bill Ethier, the CEO of the Home Builders Association of Connecticut.

“It’s a big problem,” Ethier said. “It’s one of our most pressing issues.”

Ethier said with the low-interest rate environment, there are a lot more interested home buyers now than there were a year ago.

But Ethier said builders are struggling to find lending sources for acquisition, development and construction loans, and many bankers have been reluctant to fund any projects, even viable projects by borrowers with good credit.

Construction and land development loans fell 16 percent in the state at the end of September, to $3.3 billion, according to FDIC data, while commercial and industrial loans fell 5 percent to $8.9 billion.

“Builders have spoke of long-standing banking relationships that have been strained and even severed over the lack of credit — even for approved projects that were selling well,” said Ethier. “It’s perplexing.”

In addition to a lack of credit, the overall slowdown in the real estate market has caused the construction industry to lose tens of thousands of jobs in Connecticut. Ethier said the number of new building permits issued in 2009 will be about 3,000, compared to an average year of 8,000 to 9,000.

Home Builders Association of Connecticut membership has shrunk from 1,500 to 1,100.

As some businesses struggle to find credit, state and federal lawmakers are trying to come up with answers on how to ease the problem.

U.S. Sen. Christopher Dodd, for example, suggested earlier this month that Congress should establish a temporary small business-lending facility, using as much as $125 billion in unused and repaid federal bailout money.

Dodd said the low-interest loans would go to healthy small businesses with good credit, but that are struggling to find a loan.

Meanwhile, state lawmakers on the banks and commerce committees also are looking for solutions. They held a forum on the credit crisis earlier this month and asked regulators and lenders for ways to improve the flow of credit in the state.