Banks throughout the nation – some of them in Connecticut – saw more bad loans added to their books during the first half of 2009 as the deep recession lingered and the weakened real estate market continued to take its toll.

According to a study by the Investigative Reporting Workshop (IRW) at American University in Washington, D.C., total troubled assets – the sum of loans more than 90 days past due and the value of foreclosed property on banks’ books – increased to $285 billion nationally at the end of March, up from $237 billion at the end of 2008. The first quarter results were the latest available for the study.

But some Connecticut banks that saw troubled assets jump significantly in the first quarter, compared with the same quarter a year ago, either saw an increase in that category for the second quarter – or said they expect to.

“We expect our problem assets will rise probably through the end of the year,” said Charles (Charlie) F. Howell, president of Stamford-based Patriot National Bank. Patriot’s troubled assets jumped from $3.9 million in the first quarter of 2008 to $85.6 million for the same period this year.

“We’re expecting the economy to begin recovery in the first quarter next year, and after that, going into 2010, we anticipate our nonperforming assets to decrease,” said Howell and Angelo De Caro, chairman of Patriot, during a conference call with The Commercial Record.

Capital Infusion

The boost in troubled assets at Patriot, thanks primarily to the severe downturn in the real estate market, has led the bank to seek $30 million in new capital from existing, but mostly new, investors, said Howell and De Caro.

It also has led to a sanction by regulators.

“We have a formal agreement, not a cease and desist order, with regulators who basically want us to do a couple of things,” said Howell. “One is to reduce the credit concentration on real estate, particularly commercial real estate loans and construction loans,” said Howell. “They would like to see a better-balanced portfolio, like C&I loans, small business loans, those types of things,” he said.

Howell said the reason the bank hadn’t been doing that was that in 2001 when a new management committee came on board, the market was such locally that C&I loans and small business loans appeared risky.

“Everybody wanted to get into Fairfield County, and people with good credit were getting very low rates from some big banks,” said Howell. “And they were paying those people high rates on their deposits, so the spread made no sense to a relatively young bank like ours.”

Howell said Patriot elected “to stay close to home and in real estate with very low loans-to-values. Who knew that real estate was going to get stepped on?” He said he’s confident Patriot will work through its problems.

“We have a team that has worked through problem loans during other recessions dating back to the mid-1970s, a team that worked out problem loans in the worst real estate downturn in the early ’90s. We expect to see an improvement in the first half of next year.”

Confidence In Its Recovery

De Caro noted that Patriot Bank was “well-capitalized as of March 31. If we bring in any capital, we will continue to be well-capitalized for the indefinite future. If we do not manage to bring in additional capital, based on our projections, we would be adequately capitalized,” he said. “We’ll come out of this in reasonably good shape.”

Howell noted that last year, Patriot saw $110 million in construction loans paid off, “and there were no charge-offs, no losses, and last year was not a good year for the real estate market or the economy.”

Howell said one of the reasons Patriot Bank was negatively impacted is that “this particular part of the state is dependent on the financial services industry for purchases of new homes whose executives purchase many of the homes in lower Fairfield County. But last year was a particularly bad year for them; many firms didn’t pay their normal bonuses, and there were layoffs at some of the major banks in New York City, which made for a weak real estate market.”

Add to that, said De Caro, “was that in August and September of 2008 is when the credit crisis hit and the Wall Street firms and the large banks began to have a credit freeze and credit markets worldwide froze.”

He said when that happened, “it had a very dramatic impact on the financial sector, clearly. That’s when everybody started to panic. Many of our homes are probably very expensive by national standards, certainly above average. Fairfield County is a wealthy county.

“So the credit markets froze, and the government talked capping salaries, and the people who would normally buy new homes and second homes in Fairfield County from our builders didn’t,” said De Caro. The volume fell off a cliff; until that credit crisis hit, our portfolio was doing well.

Dimished Impact

For Bridgeport-based People’s United Bank, there was a more positive result, even though its nonperforming assets jumped to $182 million in the second quarter from $86.4 million in the second quarter a year ago.

Despite that increase, People’s huge capital number and the low nonperforming assets ratio to total loans diminished the impact, according to Jared Shaw, senior vice president.

“While nonperforming assets more than doubled, the ratio is what’s important,” he said. “The ratio of the $182 million in nonperforming assets to total loans is 1.25 percent, which is much lower than the national median.”

He noted that the ratio for the $86.4 million in nonperforming assets for the second quarter a year ago was 0.60 percent, and 0.46 percent for the $67 million in nonperforming assets reported in the first quarter of 2008.

“If you’re a small bank with $200 million in assets, and $182 million are nonperforming, that would be bad,” said Shaw. “If you’re Citibank and you only had $182 million of nonperforming assets, that would be nothing. So it’s what percentage of your loans are bad? And 1.25 percent is a low number.”

Shaw said most of the nonperforming loans are in commercial real estate and residential mortgages, “which are the two biggest; then we have commercial business C&I loans, equipment financing, and consumer loans. The growth that we’ve seen in nonperforming loans is due to economic weakness, but our strong underwriting is why our dollar numbers are as low as they are compared to the rest of the bank group.”

Thinking Ahead

As for capital, People’s has more than $2.5 billion in excess capital and is “beyond well-capitalized; well over the regulatory definition of well-capitalized,” said Shaw.

Brent DiGiorgio, director of communications, said because the company is so well-capitalized, it’s looking to add to its 300-branch banks and roughly 4,700 employees through acquisitions in the Maine to Washington, D.C., corridor.

Asked if People’s sees improvements in nonperforming assets in the next few quarters, DiGiorgio said that depends on how the economy goes.

“That’s what drives all these numbers,” he said. “If the economy improves, the numbers will likely improve. When compared to other peer banks, we didn’t do badly at all in the second quarter.”

Webster Bank was also hit with a huge increase in troubled assets this year. The Waterbury-based company recorded $343 million in that category for the first quarter, compared with $148.89 million for the same quarter a year ago.

The bank also recorded in its second quarter ended June 30 earnings report that total nonperforming loans were $350.4 million, or 3.02 percent of total loans, compared with $316.2 million, or 2.61 percent in the first quarter, due mostly to a combined increase of $24.0 million in performing non accrual residential mortgages and consumer loans, and an increase of $19.6 million in non accrual equipment financing loans.

Webster recorded $85.0 million in provisions for loan losses, and net loan charge-offs totaled $50 million. The allowance for credit losses increased to 2.72 percent of total loans. Non performing assets increased by 10 percent or $36 million during the quarter, of which $24 million were restructured loans.

Withstanding The Impact

But Edward (Ed) P. Steadham, vice president of public affairs, said the bank can meet the challenges of the economic downturn.

“Webster Financial has solid capital ratios and significant reserves to withstand the impact of adverse economic conditions,” he asserted.

“As of June 30, Webster’s estimated Tier 1 risk-based equity was 11.7 percent, or nearly double the 6 percent ratio required to be well-capitalized,” he said. “Webster’s allowances for credit loses increased to 2.72 percent of loans as of June 30, compared with 1.52 percent a year ago.”

Steadham said Webster got $400 million under the Treasury’s Capital Purchase Program (CPP) in November, and said this month the company intends to file a capital plan with regulators in the third quarter “in anticipation of beginning repayment of the Treasury’s CPP investment.”

He said the bank is using the CPP funds to “support the borrowing needs of the communities it serves. Through June 30, Webster has funded $1.3 billion in new, modified, or renewed loans, including nearly $600 million in the second quarter alone.”