Bankers were in a fairly optimistic mood on the eve of their industry's biggest annual gathering, the American Bankers Association convention, being held this week in Boston. And, in fact, there appears to be reason for optimism.

The economy, though sluggish, seems to be in better condition than it has been for several years. More to the point, the nation's banks this year have been reporting hefty earnings increases.

In the first half, bank profits totaled $15.7 billion, up 54% from $10.2 billion in 1991's first half.

And the good fortune is widespread, with 94% of all commercial banks making money.

The positive feeling showed up in attendance figures for this year's ABA parley. With 4,000 bankers expected, it appears that the ABA has stemmed a three-year decline in attendance.

To be sure, bankers have not forgotten the ravages of the recession just past. For their institutions it often meant losses on everything from commercial real estate to credit card debt.

Those experience have tempered many bankers' optimism with a dash of caution. Typical is Molitor Ford, chairman of Commercial Bank and Trust, in Paris, Tenn., a town of about 10,000 people not too far from the Missouri border.

"Things are stable, things are looking up," he said. "The banking industry right now is stronger than it has been for the last number of years."

That upbeat sentiment was echoed time and again across the United States.

"I'm cautiously optimistic about the future," said Ernest J. McFarland, president of First State Bank in Winchester, Ohio, population about 1,000. "Six months ago, I would have said I wasn't so optimistic. We can deal with the future better than we could six months ago."

And here's a change from a few years ago when many bankers were eager to make loans outside their home regions: Nowadays the grass is greener in bankers' own bank yards.

"Things are good in Montana, it's a hot potato right now. the boom is on here. We're benefiting from the recession," boasted Richard Hart, president of Bank of Montana, Anaconda, a county seat with 12,000 population.

"Those California people - who are fed up with all of it - are buying property here," he said.

Business is even looking up in Colorado, one of the states that suffered the most during the oil downturn of the 1980s.

"We're a little different. We've overcome our negatives. We haven't felt the effects of a down economy as much as other places," said John Gregory Mullins, Ark Valley Independent Bank, LaJunta, Colo.

And elsewhere?

"Iowa's economy is probably faring a little better than the nation," opined Donald Snyder, president of Manufacturers Bank and Trust Co., Forest City.

Runaway Regulation

Added Anne Szostak, chairman of Fleet Bank of Maine, Portland, "Maine never had the boom, so it never quite had the bust."

Of course, bankers would be feeling a whole lot better if they didn't have to live with the Federal Deposit Insurance Corporation Improvement Act of 1991. The lion's share of the law's regulations kick in this year and next, with over 60 changes including a new system of deposit insurance premiums, business restrictions for all but the most highly capitalized banks, and tons of paperwork.

At Factory Point National Bank, in Manchester Center, Vt., president Gregory Kreis has formed a new department just to deal with new regulation. Mr. Kreis alone spends at least an hour a day trying to make sense of the new rules.

"There isn't a day that goes by that I don't have something on my desk. It just seems to make everything more difficult," Mr. Kreis said.

"The only problem we have with regulation is the amount of it," quipped Charles C. Brinley, chairman of Liberty National Bank, Fort Worth, Tex.

Lean Lending

And bankers blame the most recent round of bank-reform legislation for the so-called credit crunch.

"The regulation of the loan portfolio today definitely has had an effect on a banker making a loan," said Mr. Gregory. "Unless its gold plated, they're afraid to make a loan."

Mr. Ford of Commercial Bank and Trust is quick to offer specific examples of the impact regulation has had on lending.

"Just in the last week I have turned down three really good loans, which we needed," he said.

One of these loans was turned down out of fears for environmental liability, and the others were real estate related businesses, which the bank deemed just too risky.

Bankers find it ironic that the same legislators who burdened them with restrictive rules are blaming them for shrinking loan volume. Not a banking hearing passes in Congress, it seems, without legislators blasting bankers for not making enough loans.

To combat this notion, many banks have strengthened their outreach programs, hoping to stimulate loan demand. Fleet Bank of Maine, for example, has set up a new unit just to generate demand for small business lending. The program generates 250 requests a month for new loans. The catch is, the loans need to be safe enough not to raise the eyebrows of bank examiners.

Factory Point National Bank has conducted several seminars to educate small businesses about the types of loans available to them.

"Unlike the well publicized stories of the banks not lending, the real problem is no loan demand," Mr. Kreis said.

Reforms Wanted

While complaining that Congress has saddled them with unnecessary regulation, bankers are also calling for new laws that will level the playing field with other financial sectors.

"Higher-profit areas have been skimmed by nonregulated competitors," said Terrence Murray of Fleet Financial Group. "Interstate banking and expanded powers is very much needed."

Liberty National's Mr. Brinkley added: "Everybody in the financial industry has an unfair advantage over banks, because of the way banks are regulated. It's just broken up the banking business, and that will continue until the regulations are changed."

Silver Lining

Some banks have turned the shakeup in the banking industry to their own advantage, and in the process have become optimistic about banking's future. In Maine, Fleet Bank recently acquired two failing institutions to become the largest bank in the state. Assets have grown to $3.3 billion, and last year's $6 million loss in earnings has been turned into a $6 million gain through the second quarter.

Consolidation has been crucial to that success. By the end of the year, management will have cut the number of branches by a third, to just over 100, and the product line has been streamlined. Downsizing has cut annual expenses by $20 million, Ms. Szostak said.

"And that really gives us a good earnings potential down the road," she added.

In New Mexico, Michael R. Stanford has followed a similar strategy. His bank, First State Bank of Taos, took over another bank in 1988, and returned it to profitability in just a month. Buoyed by success, he took over an even weaker one in Albuquerque, and is working on picking up a third in Santa Fe.

The secret of his success? Basic banking.

He's stabilized the bank, upped expense monitoring, streamlined employee operations, integrated new technology, and reemphasized customer service.

"There will always be a place for personal service small banks," he said. "Some people go to superstores, but other people like to deal with the corner market."

Self-Examination

Other banks are looking inward instead of outward and trying to improve their services.

"A bank of our size, we really have to look at the particular niche we can provide," said Thomas Robinson, president and CEO of First National Bank of Moline, Ill., which has assets of $200 million. "We continue to see that as providing personalized services to both businesses and consumers."

His bank, like many other small banks, has gained many new customers who bailed out of other banks in the area when they were bought out by holding companies.

This return to basics among the smaller banks has many of them confident for the first time that they can survive amid a sea full of voracious banking giants.

"I think a well-run, small independent bank such as ours can survive and will provide a service that a large holding company cannot provide," said Mr. McFarland. "We know our customers."

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