BayBanks Searches for a Strategy As Exams Sting, Mergens Loom

The day of reckoning has come for BayBanks Inc.

The venerable Boston company is in danger of being left in the cold as its biggest competitors talk about merging themselves into positions of strength. Equally threatening to the $9.9 billion-asset company is a display of regulatory clout that has its normally composed executives sputtering.

"These regulators are really just gonzo in terms of their ability to understand what's happening," said William C. Crozier Jr., the bank's chairman and chief executive, in a recent interview. "They're the most confused of all."

Mr. Crozier, 58, is usually a picture of the proper Bostonian. He has a reputation for keeping a close eye on bank operations and is not wont to spread family secrets.

His veneer of unflappability, however, has been punctured by a rapid series of regulatory actions and by a competitive home front that is changing as rapidly as the Soviet government.

For 18 months, banking regulators have cut a swath across Boston, probing the city's most powerful banks and forcing them to recognize huge loan losses while imposing supervisory agreements on their officers.

Bolstering Its Market Share

BayBanks, however, an institution catering primarily to the city's middle and working classes, had appeared to stay out of the regulators' path. While its rivals were forced to cut back, the bank plowed steadily ahead, building its retail deposit base and taking market share from the dying Bank of New England Corp. as well as Bank of Boston Corp. and Shawmut National Corp.

This year, though, time and the examiners caught up with BayBanks.

Its Massachusetts unit was slapped with a memo of understanding from the Office of the Comptroller of the Currency, requiring tighter lending controls. Its Connecticut bank, meanwhile, suffered an even more severe sanction -- a letter of agreement citing violations of banking rules and requiring improved management controls and Comptroller approval before paying dividends to the parent company.

Plans of Rivals

BayBanks, without admitting or denying the unspecified charges, signed the agreement.

The Federal Reserve Bank of Boston, which oversees the holding company, said it intends to impose a similar agreement.

Meanwhile, Fleet/Norstar Financial Group Inc., a hungry giant based in Providence, R.I., absorbed the stricken Bank of New England and quickly adopted plans to tap its buried reservoir of retail strength. And now, Bank of Boston and Shawmut are deep in negotiations to resurrect their troubled fortunes by combining into a powerhouse that could become New England's biggest banking company.

Mr. Crozier, who joined what was then known as BayStates Corp. 28 years ago and became chairman in 1974, shows little concern about the competition.

If Bank of Boston and Shawmut tie the knot, he said, their energies will be occupied for many months in resolving merger issues and conflicting cultures. That only presents further opportunity to steal customers.

Fleet's Imminent Threat

Fleet/Norstar, to be sure, presents a more immediate challenge, Mr. Crozier admitted. It is starting afresh in the Massachusetts market with the former Bank of New England franchise wiped clean by the government of bad loans. The company last month hung its shingle on Bank of New England's headquarters building and is about to launch a massive advertising campaign.

"They'll be tough, sure," Mr. Crozier said, "but that means we'll have to play the game a little sharper."

What gets him riled, however, is the regulators. Their moves, he said, are standing between the bank and its freedom to pursue its strategy.

"With something like [the failure of] Bank of New England," he said, "the regulators throw nets over everybody. They go cuckoo. We all sort of pay the price."

Angry at Regulators

While Mr. Crozier blamed Congress for pressuring the regulators, the brunt of his ire is reserved for examiners who succumb to the politicians. Examiners' "brutal" enforcement actions, he said, are forcing bankers to sever their lending arms.

"There is something a little Pavlovian in it," Mr. Crozier said. "You set the rat up to jump for the cheese and hit him with a brick every time he starts jumping; after a while, he stops jumping for the cheese."

The cheese, of course, is credit, the fuel for business expansion. The brick wielders, in Mr. Crozier's view, are the regulators, primarily from the Office of the Comptroller of the Currency. The afflicted rats, alas, are bankers.

Mr. Crozier, meanwhile, is struggling to keep the healthy portion of his bank growing as he buys time to heal its real estate-related problems.

Robust Deposit Base

BayBanks, with 214 branches and 977 automated teller machines in Massachusetts, has banking relationships with 30% of the state's households. While other New England banks battled deposit outflows this year, BayBanks was welcoming depositors in. Savings and money-market deposits rose by $200 million in the second quarter, to $4.4 billion.

That strategy, however, has been halted. BayBanks is being forced to improve its capital ratios, Mr. Crozier complained, by reducing its assets to about $9 billion. That means that liabilities, too, must fall.

"BayBanks has very little but core deposits," he lamented. "There are in New England now deposits equal to all the banks that have failed so far -- over $20 billion in busto banks. And we have to turn them away."

The company's real estate problems, like those of its competitors, have mounted steadily since 1989. BayBanks' nonperforming assets have soared from 24% of tangible common equity plus loan-loss reserves at year-end 1989 to 78% a thte beginning of this year. Due to writeoffs, nonperfomers have fallen slightly this year.

Those gloomy statistics pale next to data at Bank of Boston, where nonperforming assets totaled 109% of tangible common equity plus loan-loss reserves at June 30. And BayBanks also looks better than Shawmut, where nonperformers stood at 88% of tangible common equity plus reserves at June 30.

Mr. Crozier has a twofold approach to dealing with his company's problems -- exploiting the electronic and consumer banking savvy that have kept BayBanks' core earnings stable and working around the regulatory morass that he blames for his problems.

The company's seven subsidiary banks are divided between national and state charters. The former are regulated by more martinet-like overseers from the Comptroller's Office; the latter, by the state and Federal Deposit Insurance Corp. examiners.

Early next year, BayBanks is converting one of its three national banks to a state charter, a move that some analysts said is a direct attempt to escape the Comptroller's strictures.

Getting Out from Under

"Our eventual goal is to have a single, state-chartered BayBanks," said chief financial officer William Sandalls, shortly after the consolidation was announced this year.

Meanwhile, Mr. Crozier -- to a degree unusual in a bank chief executive -- is straining against barriers on the marketing front. His aim, he said, continues to be widespread branching. He wants the BayBanks green-and-white logo to be as well-known in New England as McDonald's restaurants' golden arches are on Main Street U.S.A.

"When you drive into a town, you don't ask the address of a McDonald's," he said. "What you do is start driving. That's terrific recognition."

Mr. Crozier has put such a high premium on the idea that he sends employees -- mixing his 'burger metaphors -- to learn marketing techniques at Burger King's Burger University in Florida.

Merger Likelihood

Analysts, however, are not sure that BayBanks can cruise along independently.

"It has held its own in core earnings," said David Berry of Keefe, Bruyette & Woods Inc. But he added that the company will suffer from "dead-in-the-water stability" until it addresses its loan problems with higher reserves and restructuring.

Others believe that Mr. Crozier has no choice but to look for a merger partner, an idea that the executive dismisses.

"We don't hang around in bus terminals" courting an acquisition, he said.

But has he been in conversation with Bank of Boston in an attempt to sabotage a Shawmut deal?

"We've had no talks," he said.

What about BankAmerica Corp., which bid on Bank of New England and is mentioned as a logical partner for BayBanks, given that both companies are driven by savvy marketers? The West Coast bank company has a full-time crew scouting acquisition opportunities. The effort is being led by Luke Helms, chief executive of Seafirst Corp., BankAmerica's Seattle subsidiary.

According to several sources, the West Coast giant has also looked at Shawmut and Connecticut's CityTrust Bancorp.

"We've had no talks," Mr. Crozier says again. But he pauses and adds curiously: "If [BankAmerica chairman Richard] Rosenberg doesn't know anything about BayBanks, it's only because he doesn't know about Luke Helms. If you don't think he has a playbook on BayBanks, you're wrong."

A spokesman for BankAmerica, which is working to consummate its announced merger with Security Pacific Corp., would not comment.

PHOTO : CHAIRMAN CROZIER is struggling to keep the healthy portion of his bank growing.

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