Banks continue on successful tack of slow expansion

Vermont Business Magazine, Mar 01, 1997 by Kelley, Kevin J

The stolid image shared by most Vermont banks masks the turbulence sweeping the industry at a time of rapid technological change, large-scale mergers and out-of-state expansion, and intensifying competition with aggressive financial institutions outside the traditional banking realm.

Through it all, banking in Vermont remains a highly profitable endeavor.

State-charted and national banks in Vermont had combined earnings of $1 15 million in 1996, according to tentative figures released by the Sate Banking Division. That's a substantial gain over the $83 million reported for 1995. Deputy Banking Commissioner Thomas Candon cautions, however, that the latest numbers have been inflated somewhat by the one-time earnings accruing to Green Mountain Bank of Rutland as a result of the selloff of its banking and trust divisions.

"The banking industry is very healthy in Vermont," declares Timothy Hayward, president of the Vermont Bankers Association. The state's economic recovery has spurred activity in the banking sector. he notes.

Vermont's rate of growth remains slower than that of many states, however, which results in "loan demand that's still pretty weak in most areas," according to Hayward. At the same time, he observes, an economy that's expanding at modest pace offers a close-to-ideal environment for the banking sector.

The future appears a bit cloudier for Vermont banks.

Challenges posed by other types of financial institutions continue to affect banks in two fundamental ways. Deposits remain static, due in large measure to the attractiveness of mutual funds during a period in which the stock market seems only to advance. And lending--the main way banks make their money--has become a highly competitive field, with Vermont now home to more than 250 "licensed lenders." Many of these businesses post low mortgage rates. and they operate under less stringent regulatory requirements than do banks themselves.

"I actually think loan demand in Vermont is pretty good," says Merchants Bank President Joseph Boutin. "It's just that there are so many lenders out there now that banks aren't getting the share they once did."

Boutin cautions consumers not to switch loyalties solely on the basis of small pricing advantages. Think twice, he urges, because "you need a good banker when times get tough."

Vermont banks are responding to the changed conditions by seeking to become more competitive. That involves a variety of strategies.

One is to cut costs. The combination of mergers and technological innovation has produced a steady drop in the number of people working at depository institutions in Vermont. According to the Department of Employment and Training, the annual average employment total for this sector stood at 5,550 in 1990; it had fallen to 4,800 by 1995, and it drooped further to 4,650 last year,

Banks have also lobbied the State Legislature and regulatory agencies for approval to expand their range of services.

Guidelines will soon be issued, Candon says, to permit banks to sell home, automobile and life insurance. That move will probably prompt a number of Vermont banks to "marry up" with insurance agencies, Candon predicts.

As a result of a law passed last year, bank holding companies in Vermont are now able to consolidate their trust functions in ways designed to enhance their competitiveness. The aim is to become as appealing an investment instrument as mutual funds.

The Legislature also permitted Vermont's three state-chartered savings banks--Northfield, Passumpsic and Wells River--to set up mutual holding companies. That will enable them to raise capital to finance possible expansion into other states.

On a national level, banks are raking legal action to restrict the range of one set of competitors. Vermont's six federally charted credit unions--but not the 41 with state charters--are included in a suit brought by banks with the aim of blocking expansion of credit unions' memberships.

"It's an ongoing battle for the banking industry in terms of nonbank financial services," says Hayward. "They don't have the same regulatory constraints as we do, and that's something we've been trying to address."

Takeovers are another way of enhancing efficiency.

Vermont's banking landscape changed forever in the early 1990s when Bank of Boston acquired Bank of Vermont. That venerable state institution was subsequently acquired by Cleveland-based Key Bank.

The biggest bank acquisition in state history took place a few months ago when Vermont National Bank bought Vermont Federal Bank in an estimated $89 million deal. That deal should be consummated by shareholders of both institutions' shareholders this spring and the banks are expected to merge into the single Vermont National this summer. Vermont National also acquired the trust division of Green Mountain Bank, which simultaneously sold part of its banking operations to Albank Financial Corp of New York. Green Mountain branches in eastern Vermont were sold to Mascoma Savings Bank of New Hamphsire.