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April 1, 2013

Profits up at CT community banks

Martin J. Geitz, president and CEO Simsbury Bank & Trust Co.
John J. Patrick Jr., president and CEO, Farmington Bank
By Greg Bordonaro

For Connecticut's community banks, making a buck these days isn't as easy as it used to be.

With the prolonged low-interest-rate environment eroding their primary revenue source, the state's smaller lenders are trying to find new ways to make money to pad their bottom lines.

Whether it's diversifying into new businesses, slashing interest rates on savings and checking accounts, selling long-term securities to make a quick yield, or even charging new fees like their big bank brethren, the state's community lenders are trying it all to remain in the black.

And their strategies appear to be working, at least for now.

The state's 49 community banks with less than $2 billion in assets saw their collective profits rise nearly 26 percent in 2012. The banks earned an additional $30 million in profits last year, despite seeing a 3.3 percent decline in interest income, an area that can make up as much as 85 percent of small bank earnings.

Still, the profitability of Connecticut banks lags behind the national average, experts say, creating long-term challenges for the industry and putting pressure on executives to find new strategies to remain viable.

“I think there is a lot of pressure on community banks right now,” said Howard Pitkin, commissioner of the Connecticut Banking Department. “The condition of the industry is still very good in Connecticut with a few exceptions. Banks continue to be well capitalized and asset quality is continuing to improve. But the main area of concern is earnings, which are only fair.”

Pitkin said the low-interest-rate environment and increased competition is driving lower profitability among Connecticut's smaller banks.

As much as 85 percent of a community bank's operating revenue typically comes from its net interest margin, which is the difference between the money a bank gains from interest on loans and the money it pays out as interest on deposits.

With interest rates being kept near all-time lows by the Federal Reserve, small banks are seeing their margins get squeezed, Pitkin said.

Net interest income for Connecticut banks fell 3.3 percent in 2012 to $990 million, down from about $1.1 billion a year earlier, according to data from the Federal Deposit Insurance Corp.

Martin J. Geitz, president and CEO of Simsbury Bank & Trust Co., said the interest margin squeeze impacts smaller lenders more than their big bank competitors, which tend to have more diversified revenue streams.

Geitz said his $375 million bank has responded by diversifying its business and also charging new fees.

Many community lenders, including Simsbury Bank, are becoming much more active in the residential mortgage business thanks to the major shakeout that the industry experienced following the 2008 financial crisis.

Many independent mortgage brokers who once dominated the market either went out of business or fled the industry, opening the way for community banks to reclaim that space.

Investors also have renewed appetites for mortgage debt right now so many community banks are underwriting mortgage loans and then selling them to the secondary market, where yields are attractive, bankers say.

“There is a lot of money chasing those bonds right now,” said John J. Patrick Jr., the president and CEO of Farmington Bank, which has $1.8 billion in assets.

Patrick said Farmington Bank has expanded its secondary market residential lending program significantly, which helped boost the bank's non-interest income 89 percent during the fourth quarter to $4.1 million. Profits from the bank's mortgage business alone grew by $1.3 million during the quarter, Patrick said. Overall, the bank's profits grew to $4.2 million last year, or 25 cents a share, reversing a year-earlier loss of $4 million.

Rockville Bank saw its mortgage volume double last year. In the fourth quarter alone, the company sold $49 million worth of residential mortgage loans, with an average spread of 2.73 percent, said William H.W. Crawford IV, the bank's president and CEO.

For all of 2012, Rockville Bank originated $294 million in residential loans.

Crawford said Rockville Bank sells off about 80 percent of its mortgage loans to the secondary market, but retains the servicing rights so they can still have a relationship with its customers.

Rockville Bank, with $1.9 billion in assets, also has expanded its commercial lending and financial advisory businesses with the recent hiring of four new money managers. The bank is lowering its cost of funds to reduce the expense side of its net interest margin, Crawford added.

The results have been good so far. In 2012, Rockville Bank reported record earnings of $15.8 million, or 56 cents a diluted share, compared to $7.1 million in profits in 2011.

To shrink expenses, Connecticut community banks are currently offering some of the stingiest interest rates in the country on savings and checking accounts.

The typical savings account offered by a Connecticut bank or credit union, for example, had an average percentage yield of 0.13 percent at the end of February. Only one other state had lenders that offered a smaller average interest rate, according to consumer website Go Banking Rates.

Other factors helping community banks remain profitable include the expansion of commercial lending and the selling of long-term securities.

And in some cases small banks are also adding new checking and savings account fees, something they've tried to avoid because of the harsh criticism large banks have endured for taking similar steps in recent years.

Geitz said Simsbury Bank, for example, recently added fees on some of its checking accounts and he suspects other small lenders have as well.

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