Connecticut's bankers are still languishing with a struggling economy, even as their New England neighbors celebrate record earnings and strong growth.

Connecticut Banking at a Glance Tler 1 Return Nonperforming capital ratio on equity asset ratioState average 7.19% 9.40% 1.64%National average 7.72 14.84 1.22Worst Tier 1 capitalratioFairfield First Bank andTrust 2.43 109.3 14.07Connecticut Bank ofCommerce 2.62 NA 19.63Founders Bank 3.90 -91.12 10.68Liberty National Bank 4.33 -3.59 2.44

All data as of June 30.

Source: Sheshunoff Information Services

"The Connecticut economy is not responding and has not responded to the progress that other New England states have," said John Carusone,president of the Bank Analysis Center in Hartford. "That has repercussions to the Connecticut banking industry in terms of the viability of the remaining impaired institutions, and it places added emphasis on the drive towards consolidation of the industry within the state as impaired institutions seek to marry up with a stronger partner."

He added that while the problems plaguing the banking industry in Connecticut have hit bottom, several community banks still face the prospect of failure if they don't raise new capital soon.

Connecticut's banks suffered heavily during the real estate crisis of the early 1990s, as nonperforming assets soared and profits plummeted. Thirty-five institutions have failed since 1990, almost 25% of the state's banking industry. Only 108 institutions remain, compared with more than 150 in 1989.

But while its New England neighbors have pulled out of the doldrums of the past few years, Connecticut has been unable to stimulate a full economic recovery.

Although the state's unemployment rate stands at only 5%, below the regional and national averages, the state has produced only 10,400 new jobs since October 1993, after losing 160,000 from 1989 to 1992. Much of the losses came from the defense and insurance industries, which dominate the state's economy.

"The Connecticut economy is gently chugging along in recovery," said Joseph Cohen, spokesman for the state's Department of Economic Development. "There is limited job creation, and there seems to be limited enthusiasm."

Bankers agreed.

"Connecticut's economy is lagging the New England economy in general, but has been showing recent signs of strengthening," said James C. Smith, president and chief executive of $2.8 billion-asset Webster Financial Corp., in Waterbury. "The economic environment is improving, rather than stagnating or declining. We would expect continued improvement into 1995, but it's hard to tell beyond that."

The state's community banks have suffered the most. More than half of its nine money-losing banks in 1994 have less than $100 million in assets. The state's smaller banks also show a much lower return on assets and had three times as large a percentage of assets in the nonperforming category, statistics revealed.

And competition for mortgage loans is tight in the state, which despite some consolidation remains the most heavily banked state in the country.

"There are a lot of liabilities chasing a limited number of high-quality assets," Mr. Smith said.

As a result, despite steady improvements in asset quality and earnings, the state still lags behind the banking industry as a whole in basic performance indicators, such as capital, profits, and nonperforming assets, statistics show.

"Things just haven't bounced back," said Peter Sposito, a former Shawmut National Corp. executive who is starting a banker's bank in Glastonbury to help community banks compete. "It's just a tough, tough market here."

But overall, Mr. Carusone said, "the real bleeding in the Connecticut banking industry has stopped."

"There's some leakage in a few institutions, but it would be wrong to characterize the Connecticut banking industry as being on the critical list the way it was two years ago," Mr. Carusone said. "The balance of these institutions on an industry wide basis are stronger than they ever have been."

In fact, regulators have been pleased with progress in New England as shown by bank failures.

Failures in the region have dropped from a high of 46 in 1991, including 17 in Connecticut, to just four this year, two of them in Connecticut.

But two institutions still remain focal points for regulatory concern.

Connecticut Bank of Commerce in Woodbridge and $67 million-asset Fairfield First Bank and Trust Co. in Fairfield are battling high levels of nonperforming assets, while barely maintaining their capital.

As of June 30, 1994, $104 million-asset Connecticut Bank of Commerce reported a Tier 1 capital ratio of 2.7%, while Fairfield lagged behind with 2.4%. Connecticut Bank of Commerce also had nonperforming loans that amounted to almost 500% of capital, while Fairfield's bad loans were 343% of capital.

Both institutions are under regulatory orders to raise capital, including a new order imposed on Connecticut Bank of Commerce by the Federal Reserve Bank a few weeks ago that also targeted insider transactions and excessive dominance of the board by company insiders.

Until November, $168 million-asset Branford Savings Bank in Branford was also in trouble, with a Tier 1 ratio of 2.2% and bad loans that were 214% of capital. But the thrift held a rights offering in November that netted $11 million, raising its capital ratio to 8.29%.

Under the 1991 FDIC Improvement Act, regulators are required to take further restrictive action against an institution, including a possible takeover, when its Tier 1 ratio falls below 2%.

That leaves officials at Connecticut Bank of Commerce and Fairfield scrambling to find solutions, even while FDIC examiners look over Fairfield's books for the second time this year.

"The clock is ticking for both banks, and both banks know the clock is ticking," Mr. Carusone said. "They're going to need an infusion of capital, if the present trends continue, in the next 90 days."

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