It has been a disappointing season for New England bankers.

While most continued to make progress during the second quarter in reducing bad loans, profits were generally down. The median return on assets for the top 10 banks in the region was 0.22%, down from 0.40% in the first quarter, according to SNL Securities.

And in another ominous sign, the region's economic recovery stalled as job losses continued and consumer confidence eroded.

"I don't see any major change [in the economic picture] until the first or second quarter of next year," said James V. Sidell, chief executive of the $2.3 billion-asset UST Corp., Boston. UST earned $519,000 in the second quarter, up from $508,000 in the first quarter and a $5.2 million loss in the second quarter 1991.

Even in Vermont, where tourism insulated the state from the recession's full force, the outlook is glum. "I don't see signs of a quick recovery," said Thomas J. Pruitt, chief financial officer of Banknorth Group Inc., a Burlington-based banking company with $1.6 billion in assets.

Banknorth earned $651,000 in the second quarter, compared with $12 1,000 in the 1991 quarter, but is still struggling with $56.1 million in nonperforming assets.

To be sure, no one predicts a return to conditions of two years ago, when the region's economy was in a free-fall. But all across the region, bankers and other businessmen who were bullish about the economy earlier in the year now say their optimism was premature.

Workouts Are Extended

"It was so bad that when people saw a little light at the end o the tunnel," they saw more than what was there, Mr. Sidell said.

For banks, the economic slowdown means a longer-than-expected workout of problem assets, particularly for exclusively regional lenders like Shawmut National Corp.

What's more important, it means that additional earnings through loan growth will be tougher to come by than the banks had expected.

Bankers and analysts say they doubt banks will resort to price wars to steal customers, but competition on other terms, such as the duration of a loan, is likely to be fierce.

Even then, according to Robert M. Mahoney, head of New England lending for Bank of Boston, those efforts aren't likely to be enough to spur significant earnings growth.

He said banks will have to diversify into other regions and into other products such as mutual funds if they are going to keep earnings growth at double-digit levels.

"Credit income from New England ... by itself won't create 10% to 12% earnings growth," he said. "On a good day, you're only going to be seeing 5% to 7%."

Impact of the Economy

Hartford-based Shawmut, with $22.3 billion in assets, and Northeast Bancorp in Stamford with $3.1 billion in assets, reported results that fell short of expectations and in both cases the stagnant economy was partly to blame.

Shawmut reported earnings of $8.6 million, short of its first-quarter number and below estimates. Northeast reported a loss of $39.8 million, its largest since the recession began.

For those banks already near failure, the slower-than-expected economy has sped up what was already a foregone conclusion in many minds.

New Haven, Conn.-based First Constitution Financial Corp., with $1.6 billion in assets, acknowledged that it would need government assistance in order to recover from its problems. It reported a loss of $20.6 million, its 10th straight quarterly loss.

"People continue to renegotiate leases at lower rates, and that lowers the values of properties," said John J. Crawford, First Constitution's chief executive who came on two years ago to turn the bank around.

Some banks were able to buck the gloomy trend in the second quarter.

Less Impact at Citizens

Citizens Financial Corp., the Providence, R.I.-based subsidiary of Royal Bank of Scotland, earned $6.2 million on $4.5 billion in assets. It is one of the few banks in New England that was not significantly affected by the recession. Nonperforming assets are less than 2% of loans and foreclosed real estate.

Bank of Boston Corp. made substantial progress reducing its nonperforming assets during the second quarter and reported better than expected earnings of $62.4 million. Still, its nonperforming assets remain a relatively high 6% of loans and foreclosed real estate.

Fleet Financial Group in Providence earned $70.5 million and logged its first substantial drop in bad assets.

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