A Losing Quarter in New England

By most accounts, second-quarter results at New England banks will be a grim tale of losses and depleted capital.

Shawmut National Corp., Bank of Boston Corp., and BayBanks Inc. are all expected to fall into the losers column.

Among the major players, only Fleet/Norstar Financial Group Inc. is expected to earn money, buoyed by its nonbank business and its Norstar unit in New York. Analysts estimate Fleet's profits at $25 million, essentially flat with the first quarter and less than half the year-earlier total.

Still, a handful of analysts are growing bullish for the long term, suspecting that some of the big regional banks turned the corner in loan problems in the second period.

"Second quarter will be meaningfully better," predicts Thomas Brown, a Donaldson, Lufkin, & Jenrette analyst who has placed "buy" ratings on Bank of Boston and Shawmut. "Credit quality will improve in a way that is eye-opening."

This prognosis was echoed by Richard Syron, president of the Federal Reserve Bank of Boston. "We're generally perceiving an early trend of improvement," he said. "Nonperforming loans at many institutions are leveling off."

Shawmut and Bank of Boston will score modest victories in the nonperforming loan category, Mr. Brown and some other analysts said.

Optimism on Shawmut

Despite an estimated loss of up to $80 million, Shawmut could post a decline in nonperforming loans and foreclosed real estate for the first time in several quarters, the optimists said. Nonperformers may decline by as much as 10%, after leveling off in the first quarter, Mr. Brown predicted.

Executives of Shawmut, which has dual headquarters in Boston and Hartford, spent much of the last quarter on the road, trying to woo analysts. On the strength of their statements, Carole Berger of C.J. Lawrence, Morgan Grenfell Inc. and James Moynihan of Advest Inc. joined Mr. Brown in upgrading the company's outlook.

"They're on the record now saying that nonperforming assets have stabilized," Mr. Moynihan said, "and they've indicated that there might even be an improvement."

Chairman Joel Alvord has said that the worst quarters are behind Shawmut. In the first quarter, the company posted a $117 million loss.

Shawmut's biggest plus is an expected $70 million in operating earnings defined as earnings before loan loss provisions and credit expenses are deducted.

Bank of Boston Blues

In contrast, Bank of Boston had no operating earnings in the first quarter, a distressing fact that has made some analysts regard it as the sicker institution.

Mr. Brown predicted that Bank of Boston would post some operating earnings for the second quarter. But overall losses are expected to approach $60 million or $70 million, down from $89 million in the previous period. No increase is expected in nonperforming loans.

The company recently announced it will cut its dividend for the quarter. Many analysts suggest the payout cut was a stipulation for the Bank of Boston to acquire First Mutual Bank for Savings in Boston from regulators in June. Chief financial officer Peter Manning has said the company intends to pursue other small acquisitions, perhaps among the troubled New Hampshire banks.

Sources close to Shawmut and Bank of Boston say talk of a merger has not progressed beyond initial discussions, which took place in June. But if Bank of Boston continues to lose money, it may be forced to look more closely at the merger idea.

"Until Bank of Boston, is able to restore core earnings, it has a tough row to hoe, and its independence is in question," said Charles Peabody, an analyst for Kidder, Peabody & Co. in New York.

Worries About BayBanks

BayBanks is expected to show a loss of $5 million to $10 million for the quarter, and some analysts suspect that the company may eventually have to take a larger hit. The Boston-based company earned $1 million in the first quarter.

"BayBanks has the largest capacity for a negative surprise," said Gerard Cassidy, an analyst in Portland, Maine, for Tucker, Anthony & Co.

BayBanks, with $10 billion in assets, has been criticized by analysts for avoiding heavy charge-offs and loan-loss provisions that would address its mounting loan problems. Two of its bank units are very troubled, with bad loans exceeding 100% of equity plus reserves.

Fleet is not expected to feel the impact of severance and consolidation costs related to its acquisition of the failed Bank of New England units until that deal closes, in the present quarter. In addition, nonperforming loans at its Rhode Island units should go no higher in the second quarter than in the first.

Given the expected losses, most analysts remain bearish on New England banks. "Loan demand and loan growth are virtually nonexistent," Mr. Cassidy said. "Banks' abilities to grow out of asset quality problems will be hindered by the lack of loan demand."

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