Bank of Boston Flexes Muscle with Acquisition

Proving it is a player on the New England merger scene, Bank of Boston Corp. on Friday took over the $1.2 billion-asset First Mutual Bank for Savings in a federal assisted transaction.

In recent weeks, Bank of Boston has been boasting of its ability to raise capital for acquisitions in background talks with investors and analysts. While speculation has centered on the possibility of a merger with Shawmut National Corp., the latest move indicates it will fill out its retail franchise through smaller deals.

A broader deposit base would help Bank of Boston compete with Fleet/Norstar Financial Group Inc., which outbid it for the Bank of New England franchise earlier this year.

"The BNE acquisition would have permitted them to fill franchise gaps in one fell swoop," said Gerard Cassidy, an analyst with Tucker, Anthony in Portland, Maine. "Now they're going to fill the gaps by laboriously buying smaller companies."

A $10 Million Premium

In an announcement late Friday, Bank of Boston said it would pay a premium of $10 million to buy the 17 branches of Boston-based First Mutual and its $1.1 billion in deposits.

Under terms of the deal, Bank of Boston will purchase $250 million in assets, including cash equivalents and investments securities, and $426 million of residential mortgages and consumer loans within 60 days.

The Federal Deposit Insurance Corp. will advance Bank of Boston $800 million and will retain assets with a book value of about $875 million, including all business loans and commercial real estate loans. In addition, the FDIC will repay $100 million in secured borrowings as receiver for the failed savings bank.

"This is a prime example of how we intend to stay a major player in this region," said Constance Hubbell, a spokeswoman for Bank of Boston.

Hefty Loss last Year

First Mutual was the largest mutual savings bank in Massachusetts. It posted a $83.8 million loss last year, prompted by distressed real estate and commercial lending.

"It looks like a good deal," said Carole Berger, an analyst for C.J. Lawrence Morgan Greenfell Inc. in New York. "It has gotten them low-cost deposits, which they desperately need."

The company hinted of things to come last Thursday when it announced it would omit its 10 cent-a-share dividend in the second quarter. The $30 million a year in extra capital will help the company take advantage of acquisition opportunities in New England, chairman Ira Stepanian said in a prepared statement.

"I'm sure the dividend cut was the quid pro quo from regulators for okaying the acquisition," Ms. Berger added.

While the company is adequately capitalized now, it will need additional funds if it is to make further acquisitions.

Shareholders' equity equaled 5.01% of assets as of March 31. The $30 million from the dividend cut will boost that ratio only slightly, to 5.23%.

More Losses Expected

The company faces continued capital erosion through losses. It is projecting a second-quarter loss of less than $89 million posted in the fourth quarter. Analysts anticipate a $50 million loss for the period.

Bank of Boston would not comment on capital-raising efforts. But an official at the bank said in an interview last week he was confident investors who helped the bank make a bid for Bank of New England could be tapped again if needed.

He also noted the bank would be interested in acquiring banks in New Hampshire "if the price is right." Meanwhile, sources close to the bank said its interest in a bid for Shawmut National has cooled.

Amid rumors of funding problems, money-center banks took a drubbing on Friday.

Chase's 10% subordinated notes due in 1999 were trading 305 basis points over comparable Treasuries late in the day, up 50 basis points on the day. Yields rose also on Citicorp's 9.75% subordinated capital notes due in 1999, which were trading 240 basis points over comparable Treasuries Friday, up from a 185-basis-point spread two weeks earlier.

"It feels like panic selling," said one capital markets specialist. Nobody wants to be the last to stick around and find out if [the rumors are] true."

A Chase spokesman insisted that the bank is highly liquid and that funding activity is proceeding normally.

Some market specialist concurred. "We believe any rumors about funding problems to be unfounded," said Richard Schwartz, a director at First Boston Corp.

PHOTO : Acquisition at a Glance

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