Good times seen coming for New England.

Bank analyst Gerard Cassidy of Portland, Maine's Tucker Anthony brokerage firm says New England community banks are poised to take advantage of new growth opportunities as the market gradually recovers.

These community banks were among the hardest-hit during the recent recession. About 100 banks and S&Ls failed, and many others were swept up in mass consolidations that virtually wiped out the middle tier of medium-size banks in the region.

Now Mr. Cassidy, senior vice president in the firm's institutional research ann, Hancock Institutional Equity Service, believes their small size is an advantage. It allows the banks to offer more personal service, including the chance for customers to just drop in and see the president, he says.

With the likely onset of interstate branching in a growth environment, Mr. Cassidy sees a bright future these smaller community banks.

Q.: How would you characterize the community banking environment in New England today?

A.: The New England bank environment has rebounded significantly since the bottom of the economic cycle, which for the banking industry was the first quarter of 1991. Profitability has rebounded primarily due to the steep yield curve and the improvement in asset quality. Those two elements of the business were the primary engines in driving the banks' profitability to the levels where it is today. As a result of the higher profitability, the industry is significantly better capitalized than it was in the first quarter of 1991.

Today, most, if not all, of the capital ratios of banks and thrifts in New England exceed the federal minimums -- by a significant amount in some cases.

Q.: Is New England in recovery or recession?

A.: Right now the New England economy has started to expand. Job growth is probably the best indicator of that expansion. However, other sectors of the economy have not responded as quickly as the job creation engine, and therefore the recovery has been mild in comparison to recoveries in years past.

All is not well in New England as it was back in the boom times of 1984 through 1989. Real estate values in most areas for most property types -- residential or commercial -- although they're up considerably, they're nowhere near the peak levels attained in the 1980s.

The consumer confidence in the region has recovered but is still being held back. Some of our major employers in this region have reengineered their work forces, which has led to layoffs, in the tens of thousands. The big headlines are being made by the companies that are laying off thousands of people, so it reduces consumer confidence in the area.

Q.: How is that affecting community banks?

A.: With consumer confidence being low, the loan demand for community banks has been modest at best, and it's been difficult to achieve without price cutting.

Q.: How strong are the community banks in the region, and how will they fare against superregionals?

A.: The future for community banking is as bright as ever. I think what you'll find is an increasing polarization in banking around New England and the country over the next five years. The large regional, superregional, and nationwide bank franchises will continue to grow and offer a wide array of products at discounted prices.

To compete against that type of competitor, the small community banks will offer a product that is not as wide in the diversification as that of their large competitors. But they'll make it up in terms of service.

Customers want to be treated as individuals and not account numbers. The large regional banks tend to treat customers as account numbers rather than an individual. For the real estate broker, it's location, location, location. For the community banker, it's service, service, service.

And if they can offer a more personalized service than their competitors, they will have enough business to keep them profitable while the large banks have enough to keep them profitable.

As long as the community banks provide outstanding service, exceptional service, better than the big regionals, they're going to remain in business.

Q.: Community bankers have harangued over and over again about the danger of credit unions and the competitive advantagethese organizations have over the banks. How much of a reality is that competitive advantage?

A.: I think as the credit unions expand into more traditional banking territory, the credit unions do have a competitive advantage due to their tax-free status. They can offer to their customers higher deposit rates while at the same time offering lower loan rates. And because they're tax-exempt, non-profit, they have a major competitive advantage against the for-profits that are taxable.

Q.: Do you see community banks acquiring other community banks in the next couple of years?

A.: No. The large regional banks are able to pay much higher premiums to the selling banks. Once the large regional banks finish their acquisition strategies, which we believe will be in two to three years, then the remaining community banks that want to sell or merge will probably do so.

Q.: Who are the buyers and who are the sellers?

A.: The likely targets include Hometown Bancorp in Darien, Conn.; DS Bancorp in Derby, Corm.; Dime Financial Corp. of Wallingford, Conn.; Bank of New Hampshire, in Manchester, Eastern Bancorp of Williston, Vt.; Grove Bank of Boston; UST Corp. of Boston; and Cape Cod Bank and Trust Co. of Hyannis, Mass.

The community banks who will look to buy after the big banks are finished include Centerbank of Waterbury, Conn.; Webster Financial Corp. of Waterbury, Bonn.; People's Mutual Holdings of Bridgeport, conn.; Regional Bancorp of Medford, Mass.; Andover Bancorp of Andover, Mass.; Co-operative Bank of

Concord in Acton, Mass.; People's Heritage Bank of Portland; and Chittenden Corp. of Burlington, Vt.

Q.: What kind of effect will interstate branching have on community banks?

A.: I think it's a net positive effect on the community banks. I know many community banks are concerned about the large banks coming in and taking customers.

It gets back to the level of service the small community bank provides to its customers.

Additionally, there tends to be far more stability at a community bankmore stability at a community bank and therefore the relationship tends to last for years and years. At a supra-regional bank, the executive tends to move on to a different position after a certain time and therefore the business owner has to go through the whole process again reacquainting himself with the regional manager.

Cassidy's View of New England community Banks

* The New England banking industry is slowly rebounding, with capital well above minimum standards.

* Consumers, frightened by persisting accounts of job losses, may be reluctant to seek loans.

* A more personal level of service will allow community banks to compete against mega-banks.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER