Banking Vermont-style

ST. ALBANS, Vt. -- With five banks and eight branches -- not to mention two credit unions -- most people would think this old railroad town of 7,600 residents was pretty much set, bankwise. Merchants Bank of Burlington didn't.

Last month, Merchants officially became St. Albans's sixth bank, opening the city's ninth branch with promises of "free checking for life" and food baskets of cheddar cheese, maple syrup, and other Vermont specialties for new depositors. St. Albans now has one bank branch for every 850 residents, a people-to-branch ratio that is one-fourth the New England average and gives new meaning to the term "personal banking."

Tucked into the northwest corner of the state, 15 miles from Canada, St. Albans is an example of the different path banking has taken in Vermont. Largely ignored by big interstate banks hungry for acquisitions, Vermont's banking industry has consolidated at a slower pace, leaving intact solid regional players and feisty local banks that jealously guard their independence -- and markets.

Today, Vermont boasts more banks than Rhode Island, which has nearly twice the population, and averages just over 2,000 people per branch, compared with more than 4,000 in Boston. Vermont remains the only New England state in which none of the biggest three banks operating in the region, FleetBoston Financial Corp., Citizens Financial Group Inc., and Sovereign Bancorp Inc., has made an acquisition.

The result has not only been fierce competition, but also a broad choice of services that often bypasses rural areas. Here in St. Albans, bank managers say without a touch of hyperbole that every customer counts. Free checking is virtually a right -- a right without minimum balances, check-writing charges, or ATM transaction fees. So is personal attention.

At Peoples Trust Co. of St. Albans, for example, customers only have to walk into the lobby to find the bank president, Rick Manahan, sitting a few feet from the teller windows at a plain desk, an empty chair waiting for the next visitor. Shirley Babcock, manager of the St. Albans branch of Portland, Maine-based Banknorth Group Inc., carries a beeper and gives the number to all her business customers so they can reach her day, night, or weekends.

"The competition is very tough," said Babcock, "but it keeps us all on our toes."

Analysts say that banking has developed differently here for a simple reason: It's Vermont. Sparsely populated, with a slow-moving economy about one-third the size of neighboring New Hampshire's, Vermont hardly presents an attractive target to aggressive interstate banks seeking high growth potential.

Bank of Boston was the first to find out. In 1988, it became the first out-of-state bank to move into Vermont by acquiring a flagging local bank, but pulled out six years later to chase faster growth in metropolitan markets. Bank of Boston, which later merged into Fleet, which will soon be acquired by Bank of America Corp. of Charlotte, N.C., sold its Vermont branches to Cleveland-based KeyCorp, which still operates them.

"At the end of the day, big banks desire dense markets with strong growth prospects," said Paul Perrault, chairman of Chittenden Corp., Vermont's biggest bank. "Vermont is just not the kind of place that comes on the radar screen in big financial centers."

Not that Vermont has completely avoided bank consolidation. Chittenden, which has the biggest share of the Vermont market with 28 percent of deposits, has gobbled up banks in and out of state over the years. The state's second biggest bank, with about 18 percent of deposits, grew from the mergers of several Vermont institutions into the Banknorth group, which was bought in 2000 by People's Heritage Financial Group of Portland, Maine, which kept and now operates under the Banknorth name.

Together, Chittenden and Banknorth share about half the state's market, but nearly half their Vermont deposits are concentrated in the state's only metropolitan area, Burlington, according to the Federal Deposit Insurance Corp. Meanwhile, scattered throughout the state are much smaller markets, where local banks hold sizable, if not dominant, shares, and feel no pressure to sell.

In St. Albans, for example, locally based Peoples Trust Co. competes against all of the state's biggest banks -- Chittenden, Banknorth, KeyCorp, Merchants, and Cleveland-based Charter One -- but holds about 48 percent of deposits, according to the FDIC. Founded in 1886, Peoples Trust trades on its deep community roots, positioning itself as the bank where everybody knows your name.

Manahan, 44, is the third generation in his family to lead the bank, named president in 1989 after his father, Richard Sr., died. Tim Smith, a St. Albans native and now head of the local industrial development agency, recalled telephoning Manahan about 10 years ago for a $2,000 loan to finance his return home after living briefly in Arizona.

"Do you have a job lined up yet?" Smith remembered Manahan asking.

"Nope."

"Well, we know you're good for it," Manahan answered. Loan approved.

History, geography, and culture have all helped shape Vermont's different banking landscape, according to analysts. Communities grew up scattered and often isolated by the topography of this mountainous state, forced to rely on homegrown institutions, including banks, to which they remained fiercely loyal even as transportation improvements and technology dramatically reduced the isolation.

In towns like St. Albans, families have done business with the local banks for generations. Local bank stock, too, gets passed down through the generations. Joe Boutin, who has worked more than 30 years in Vermont banking, currently as president of Merchants Bank, said these shareholders typically see their stock not only as a financial investment, but also as one in their hometown.

"Owning $2,000 of your local community bank means a lot more than owning $2,000 in Bank of America stock, and they don't want to give that up," said Boutin, whose bank has branches in about 70 percent of Vermont. "We've asked almost every bank in the state if they want to merge, and they say no."

For Boutin and Merchants, this feisty independence has meant starting from scratch to expand into new markets, as they have done in St. Albans. Boutin estimates that the new branch needs to sign up about 1,200 households to break even, a goal that would seem pretty reasonable. Here, however, that represents as much as one-fifth of a market now divided by six.

Once a thriving railroad hub and today the center of a growing manufacturing region, St. Albans has long been ranked among Vermont's more attractive banking markets. So attractive, in fact, that in 1864, 22 Confederate raiders swept down from Canada, robbed three banks, and forced the tellers to swear allegiance to the Confederacy in what became the northernmost engagement of the Civil War.

Today, of course, the competition in St. Albans is not quite as cutthroat, but tough nonetheless. Peoples Trust has added market share in recent years, and in December opened another new branch, its third in the city. The bigger banks are trying to position themselves as offering the same type of personal attention as Peoples Trust, but with a broader array of services and the ability to make bigger loans.

Meanwhile, it's good to be a customer. Karl Zurn, president of MED Associates Inc., a growing medical device company, said hardly a week goes by when a bank doesn't call offering to lend him money at attractive rates. Denise Beliveau, who is opening a yoga studio next month, got turned down for a small business loan by one bank, but got approved by another. Suzi and James Lynch found the paperwork required to get a mortgage from a credit union onerous, and refinanced at Merchants by doing little more than submitting copies of their income tax returns.

"Everyone is going as hard as they can to get and hold market share," said Steven Bourgeois, a St. Albans business consultant and former bank executive. "The customer is definitely the winner."

Robert Gavin can be reached at rgavin@globe.com.