In search of fee income and a new way to fight off big competitors, community bankers are reaching into the baronial world of trust.

During the last 18 months, industry analysts have seen more interest among small banks in starting or expanding trust operations.

"The community banks are as aware as their larger brethren that fee income is going to be increasingly important to the bottom line in coming years," said Jeffrey Cohn, bank analyst at Buckingham Research Group in New York.

"I felt for a long time that trust departments probably were the sleeping giant," said Cal Myers, president and chief executive of Merchants Bancorp, Aurora, Ill. "Most community banks were not taking advantage of all of the potential that was really there."

A push into the trust business can mean a substantial increase in capitalization and takeover potential, analysts say. In some instances, trust assets are actually hauling in higher premiums than banks to generally, because of a "general feeling that those business lines will grow faster than just garden-variety commercial banking," said James M. Schutz, bank analyst at Chicago Corp.

That feeling enabled Putnam Trust Co., which has $1 billion in assets under management, to fetch a premium of 2.4 times its book value when it sold to Bank of New York Co. That's well above the current norm for bank acquisitions.

And the $220 million in assets under management in Vermont by upstate New York's Arrow Financial Corp., Glens Falls, has "attracted a lot of attention" from several potential buyers who are not interested in the Vermont bank subsidiary that actually manages the money, said an analyst.

Although commercial banks have long had trust powers as part of their charters, many community banks neglected that line of business until three years ago, focusing instead on deposit service charges to rake in fee income.

Now, with asset quality no longer an overriding issue and competition tightening among banks and between them and nonbanks, community bankers are turning to trust to boost market share and fill voids left by consolidation.

"It's becoming more of an issue because of what has happened with the nonbank holding companies taking more and more of the share away from the banks," said Kevin Timmons, bank analyst at First Albany Corp.

Last year, for example, People's Savings Bank in New Britain, Conn., purchased the trust assets from the failed Meriden Trust Co., and arranged to service trust assets from Glastonbury Bank and Trust. People's brought in about $200 million in assets under management virtually overnight.

"We thought there was an awful big void in the trust area," said Richard S. Mansfield, president and chief executive. "If you had a trust account with the banks in Connecticut, you were basically being served out-of- state. You were calling Boston or Providence."

Speaking of Boston, eight-year-old Boston Private Bank and Trust Co. has also leaped headfirst into the trust arena recently. The $225 million-asset company has taken its assets under management from almost zero three years ago to almost $450 million now. The jump followed the hiring of several money managers from John Hancock and the purchase in June of a Burlington, Mass., money-management firm with $315 million in assets under management.

And $550 million-asset Merchants revamped its trust staff during the past four years as officials sought to reach out to untouched markets.

"As the community banker realizes his bread-and-butter business is slowly but steadily disappearing to the large producers, he needs to recognize that he has to reposition his business if he's going to thrive in the 21st century," said Gerard Cassidy, bank analyst at Tucker Anthony's Hancock Institutional Equity Services.

The trust business has also benefited from a change in attitude by bankers and consumers.

Instead of viewing trust operations as linked with estate management for the wealthy, customers and bankers are starting to use them for money management, to respond to rising education costs, and retirement planning. In particular, banks are targeting younger clients to keep them from simply pulling their money out of banks and putting it into investment firms.

"It's a recognition that the trust business is no longer viewed as the exclusive domain of the superwealthy, but is a domain where the community banks feel they can participate," said John Carusone, president of the Bank Analysis Center in Hartford, Conn. "There's been kind of a demystification of the trust business. It's no longer the starched-shirt-and-bowtie crowd."

But although observers are seeing a pickup in trust business among community institutions, it's not the sort of lemming-like push they made to construction lending in the 1980s, Mr. Cassidy said.

"Every Tom-Dick-and-Harry community banker was making construction loans the proverbial brass ring," he said. "With the turn toward trust business I don't see the same type of rush."

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