Merger Negotiations Heating Up For Bank of Boston and Shawmut

Merger talks between Bank of Boston Corp. and Shawmut National Corp. have intensified to a "white heat" phase, sources in Boston said.

But dicey issues - over how to handle the combined problem loan portfolios of the New England companies - may be slowing progress on the deal.

A Shawmut source said that his company became queasy when it took a close look at Bank of Boston's $21 billion loan portfolio. About $1.7 billion, or 7.9% of the Boston bank's loans plus foreclosed real estate are nonperforming.

Shawmut, according to a second source, claims that Bank of Boston has failed to classify some of its poorer assets as nonperforming. Shawmut executives are believed to be consulting with the Office of the Comptroller of the Currency on this issue.

Lookout from the Bridge

Shawmut, with dual headquarters in Hartford and Boston, has an even leakier ship. About 10.8% of its $14 billion in total loans plus foreclosed real estate have been classified as nonperforming.

Both companies declined to comment.

Shawmut shares fell by more than $1 last week, then ended the week with a slight rebound. The stock was trading Friday afternoon at $9.25 a share, up 12.5 cents from its Thursday close. Bank of Boston shares were unchanged at $11.25 on Friday.

Bets Are On

"There may be speculators who were expecting a deal sooner rather than later," said James McDermott, president of Keefe, Bruyette & Woods Inc. the New York brokerage firm. "They're selling off when the deal doesn't materialize."

But Mr. McDermott and several other analysts are betting that a deal between the two will eventually be cinched.

For one thing, many of the prickly social issues appear to be solved.

Chair Ready for Stepanian

Sources said that Ira Stepanian, Bank of Boston's 55-year-old chairman, will remain at the head of a merged company. Joel B. Alvord, his strong-willed Shawmut counterpart, has apparently been persuaded to step down.

Mr. Alvord, 52, has been under fire from regulators to improve the asset quality of his company.

Another roadblock has apparently been removed in the crucial slot below Mr. Stepanian.

Other Decks Being Cleared

Well-placed bank sources said that Bank of Boston president Charles Gifford, 49, will stay at the bank, but they would not elaborate on whether he would remain in his current post.

An investor close to Bank of Boston said that Mr. Gifford will likely step aside to make room for Gunnar Overstrom, 49, the president of Shawmut.

Separately, other decks are being cleared. Shawmut's chief financial officer, James E. Adams, quietly announced his departure last week to become chief financial officer at Dominion Bancshares in Roanoke, Va. His position at Shawmut has not been filled.

Sleuths on Red Alert

The Boston talks, meanwhile, have taken on the character of a public show. Amateur sleuths, not to mention professional short sellers, are camping out in the lobby of Boston's downtown Meridien Hotel - where the two banks have taken a suite for negotiations - hoping to read meaning into the expressions of passing negotiators.

There remains a wild card in the potential merger. BankAmerica Corp. has combed through Shawmut's books twice this year.

However, the California giant's ability to move fast probably has been curbed by the planned megamerger with Security Pacific Corp. that it announced last month.

With BankAmerica off the prowl, a defensive merger between Bank of Boston and Shawmut is viewed by many investors and analyst as a necessity. If the New England economy goes into a second tailspin, the argument goes, then neither bank can survive independently.

Nonperformers Crucial

The issue of combining two weak loan portfolios, however, has not been overcome. A combined Shawmut and Bank of Boston would have $3.3 billion in nonperforming assets. Questions remain about pre- or post-merger chargeoffs, creation of bad-bank structures, and other strategies.

In any deal, Bank of Boston would probably be in the driver's seat because of its access to capital. The companies will need at least $500 million in capital to grease the merger wheels, estimated Carole Berger of C.J. Lawrence Morgan Grenfell.

When Bank of Boston sought to buy Bank of New England Corp. last April, it was quickly able to amass $500 million in capital and commitments. Its investor lineup included Warren Buffett through his Berkshire Hathaway Co. and General Cinema Corp.

Thomas Lee, another member of the group, said recently that he would be glad to back a Bank of Boston bid, but that he had not been asked to fork over yet.

Some Cloudier Perspectives

Bank of Boston chief financial officer Peter Manning hinted earlier this summer that the investor group would be on tap again for a big deal.

But some analysts are not buoyed by any of these reports.

Charles Peabody, a bearish analyst at Kidder Peabody, said the two companies would need to raise at least $700 million to absorb the chargeoffs and reserves related to their combined bad-loan portfolios.

If the two companies combine, he implied, two big problems would combine into a major chronic headache.

PHOTO : Ira Stepanian, Likely to remain in charge

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