Although last year started out comely and turned ugly, this year’s duckling could transform into, if not a swan, at least something better, if banking industry analysts’ predictions are correct.

Recent indicators suggest the economy has already bottomed out but, depending on the analyst, whether the recession lasts through the first half of 2002 or longer is debatable.

This particular recession, or slowdown, being capital-induced, did not have as serious an effect on consumers and on the banking system, said Carl R. Persson, vice president and investment officer at First Financial Trust in Framingham. The banking system actually was and continues to be quite strong. That’s a major positive for the economy as a whole and it’s a major strength as contrasted with the last recession, he said.

The Sept. 11 terrorist attacks are viewed as an economic watershed event that caused an already weak, recessionary economy to nosedive, with economists immediately adjusting downward their estimates for growth. But the recent rebound to pre-Sept. 11 market levels was due, in part, by the leadership evidenced by government at all levels restoring consumer confidence, said Persson.

We are firming up on the prospects for the coming year. The consensus had been we were going to emerge from recession mid-year [in 2002]. Now it’s more like the second quarter, he said.

Retailers had a weak season but, considering the recession, didn’t fare that badly. Additionally, airlines have reported improved traffic.

The net of all of this is that the worst appears to be over. We have some difficult months ahead of us with probably some additional layoffs and additional poor earnings announcements. But on balance, the year 2002 looks like it’s going to be a rebounding year and quite good, he said.

That is good news for the banking system, which, although showing some negative effects, proved to be quite resilient during this recession, said Persson. Although there have been modest rises in mortgage delinquencies and non-performing loans, it’s important to put these negative factors in perspective, he said.

The extent of this negative impact is nowhere near what it was in the last recession. It’s just a consequence of the downward cycle in the economy, he said. Looking forward, these problems should moderate during the course of the year and should be improving by year-end 2002.

One reason for banks faring better is that regulators, having learned from the tumultuous ride during the last recession, instituted more requirements on the banks in terms of capital adequacy. As the economy recovers, banks have capital to lend and a higher quality of loans in their portfolios.

The economy will continue to dominate the New Year for Massachusetts banks, said Stanley J. Lukowski, chairman and chief executive officer at $3.5 billion-asset, Boston-based Eastern Bank. Banks are truly a reflection of the economy, he said.

Even if the economy recovers slowly, if the situation does not worsen the coming year holds promise for the banking industry.

If we are truly bouncing along the bottom here, it’s not going to be as difficult a period of time for the banking industry. Most of the regional banks in Massachusetts and New England should fare very well, Lukowski said.

I think banks will need to be vigilant on loan-loss reserves, watching delinquencies, which have still, been very, very, low, said Daniel J. Forte, president of the Massachusetts Bankers Association.

More Mergers
In keeping with the slowdown in the economy, Forte said merger-and-acquisition activity for the coming year would not be as hot as in the recent examples of FleetBoston Financial, Citizens Bank and Banknorth Group’s more substantial foray into the Bay State.

Kevin J. Handly, an attorney with Goulston & Storrs in Boston, focuses on mergers and acquisitions. He expects more of the same, meaning further consolidation of community banks and regional banks, like Citizens, continuing on an acquisition path.

Although FleetBoston Financial had taken time off from its acquisition path and focused more in the later half of the year on customer retention, he expects the company to return to acquisition activity, depending on what happens in economically troubled Argentina, where Fleet is heavily involved through its BankBoston brand.

Portland-based Banknorth Group also may continue acquiring banks in Massachusetts, said Handly, a fact that Brian Arsenault, senior vice president of corporate communications for Banknorth, acknowledged. Although the bank will seek acquisitions in all of its markets, Massachusetts is the prime target, he said. Arsenault wouldn’t predict how quickly acquisition announcements might occur, but said it is looking at banks between $500 million and $2.5 billion in asset size.

Additionally, Handly predicts the state will see a number of smaller banks combine to fill the middle-market void left by the large regional players. There isn’t much of a middle tier left in New England. It’s becoming stratified between large and small, he said.

You’ll probably see more small bank charters. That’s a natural byproduct of the level of consolidation that we’ve seen. There are still communities out there that aren’t served by a locally owned and managed community bank, he said. So I would expect to see groups organizing small banks to fill that void.

Legislatively, a decision should be forthcoming regarding a Massachusetts preemption request that would unlock the shackles currently placed on banks that want to sell insurance in the state, said Forte. Current regulations prohibit tellers from suggesting insurance products without prompting from customers.

Insurance is just one facet of growth for banks that Handly sees.

Gradually, GLB [Gramm-Leach-Bliley Act] is going to take better hold. I think there’ll be more cross-industry associations as people become more comfortable with the idea of combining banking and securities and insurance firms, said Handly.

But as the ingredients making up the financial services industry melt into each other, some bitterness may bubble up. Although Forte said he hopes that regulators will eventually see the problem that some large credit unions pose to small community banks, Handly said he sees the possibility of these entities switching charters.

We’ve seen it in the Midwest and in the Atlantic Seaboard to the south. We haven’t seen it in New England, but I wouldn’t be surprised to see a couple of those [charter changes] this year, he said. The motivation for credit unions to become banks would be the relief of activity limitations placed on them by federal and local regulators. For very small community banks in competition with tax-free credit unions, seeking that status themselves may be an option, he said.

Federal issues like deposit insurance reform and bankruptcy may see some activity but will more than likely take a back seat to post-Sept. 11 issues that need to play out in the first quarter in Washington, D.C., said Forte.

Lukowski said he expects the idea of interest-bearing checking accounts will become a reality and, subsequently, there will be legislation regarding them. In addition, he expects federal regulators to eventually issue new guidelines with regard to bank capital requirements. But overall, Lukowski said he’s looking forward to a reasonably good year in the Massachusetts banking industry.