The chief financial officer of Middletown-based Liberty Bank says 2007 will be a very cautious, “wait-and-see” year for financial institutions in Connecticut and across New England.

Most of Connecticut’s banks have gone into 2007 with healthy levels of capital, but the continuing consolidation of the state’s banking market, compression of the yield curve and increasing possibilities of mortgage loan delinquencies are some of the subjects on bankers’ radars this year.

“There are some positive aspects and some negative aspects sitting out there,” said Tom Pastorello, chief financial officer of Middletown-based Liberty Bank.

This year will be a very cautious, “wait-and-see” year in Connecticut and across New England, he added.

Although they have not yet affected most banks, mortgage loan delinquencies are becoming more common, said John J. Patrick, president of TD Banknorth Connecticut. Those are affecting mostly companies that offer nontraditional mortgages, something most banks don’t do.

McCue Mortgage in New Britain services about 7,000, mostly traditional mortgages, and is not yet seeing increases in foreclosures, according to Kim Neilson, the company’s senior vice president. But it is seeing an increase in loss mitigation – when the company works out a plan to help borrowers who have fallen behind on payments catch up.

Neilson said McCue itself does not expect a decline in business in 2007, but many businesses in the industry may experience some problems.

“In the industry as a whole, I believe there will be some tightening up in 2007,” she noted.

Neilson added that the federal government is paying more attention to “no-doc” and “low-doc” loans, which are issued without proof of the borrower’s income.

“What I’m reading is that there’s going to be tightening up in those loans,” she said.

That could result in businesses offering those loans to downsize or close. Connecticut has more mortgage companies per capita that any other state, according to Patrick.

The New England Economic Partnership predicted that “the minimal gains in nominal home prices should mean that inflation-adjusted home prices will fall, while the effective price of new homes, including buyer concessions and free upgrades, should decline as well.”

That could create problems for homeowners with adjustable-rate mortgages, according to NEEP. The interest rates on those mortgages will reset at a higher rate this year.

“We are seeing the appreciation in housing prices decelerating,” Pastorello said. But most do not see that as a real problem unless home values fall in any great degree, he added.

Increased consolidation, along with compression of the yield curve – a curve that shows the relationship between yields and maturity dates for a set of similar bonds – are among bankers’ other concerns, Patrick said.

“Those are some of the things we need to be cautious of,” he said. “Going into next year, I think we’re still going to see pretty much a stagnant economic environment. From a financial perspective, it will be a challenging year for institutions to grow in a marketplace that is more and more competitive.”

‘Darn Good Shape’

According to NEEP, Connecticut’s economy in 2007 is a mixed picture. Unemployment rates are low and real income is higher, although the pace of job creation is low. The state saw one of the slowest recoveries in nonagricultural jobs in any state in the country. But compared to the rest of the country, job loss likely will not have as much of an impact on Connecticut.

“Looking ahead to 2007, national job declines in housing-related industries, along with manufacturing, should have a lesser negative impact on Connecticut,” said Edward Deak, a professor of economics at Fairfield University, in a prepared statement. “Conversely, anticipated strong national job growth in financial services and professional services should help the state where these jobs are relatively more important.”

New England’s economy as a whole will perform below the U.S. average until late 2007 or 2008, according to NEEP. Total employment and per capita income growth will be below the rest of the nation. Massachusetts and New Hampshire are expected to have the strongest economies in New England.

NEEP predicts employment across the region will grow at a rate below that of the nation until 2010, and expects employment to expand at an average rate of 0.8 percent per year. Nationally, job growth is supposed to increase 1.3 percent during the same time period.

This year also could bring a decline in earnings for banks caused by a more compressed net-interest margin, Pastorello said. Lots of banks, either at the end of last year or early in this one, were expected to leverage their balance sheets and get rid of some of the wholesale money that is costing more than local deposits. That will cause capital levels to get stronger by the end of 2007.

“But I also think we’ll continue to see that earnings decline, but it may be a modest earnings decline,” Pastorello said.

He added that he is confident that Connecticut banks, which tend to maintain strong levels of capital, will be able to face any issues they may face.

“In terms of being able to weather any potential issues, we’re all in excellent shape,” he said.

And although job growth is stagnant, the unemployment rate remains relatively low, which will mean fewer loan delinquencies.

“We’re in pretty darn good shape in the state,” Pastorello said.