New England Turns Corner?

For the first time in more than a year, New England banks edged into profitability during the third quarter as credit quality improved throughout the region.

Ten large banks in the region followed by Keefe, Bruyette & Woods Inc. reported a collective profit of $50 million, a number that looks impressive only in comparison with a combined loss of $206 million loss in the year-earlier quarter. The 1990 figure excludes an $123 million loss at Bank of New England Corp.

Part of the improvement, but by no means all, was due to the disappearance of some $5.5 billion in bad assets that belonged to the defunct Bank of New England Corp.

Confidence Reviving

In another sign of confidence in the region, Fleet/Norstar Financial Corp., the principal buyer of the failed bank's assets, announced last week that it would repurchase up to $500 million of bad Bank of New England loans from the government.

The rebound in asset quality at New England banks reflects more than a year of heavy provisioning, writeoffs, and reclassification of assets.

Modest profits were reported at many of the largest New England banks. At ten representative banks followed by Keefe, Bruyette, and Woods, return on assets averaged 0.13% in the third quarter, compared with negative returns of 0.28% in the second quarter, and 0.70% in last year's third quarter. "New England commercial banks have edged into the black at last," said David Berry, an analyst at Keefe Bruyette.

Nonperforming assets dropped by 8% at Shawmut National Corp. during the third quarter; by 7% at State Street Boston Corp.; by 2% at Bank of Boston Corp.; and by 1% at Bay-banks Inc.

They rose by 5% at Fleet/Norstar, largely because of $48 million in Bank of New England loans that were too small to be transferred to the government's bad-asset pool.

The decline in nonperformers is, of course, a doubled-edged indicator. While it's good news to think that a bottom has been reached, the falloff reflects the fact that banks have given up on a lot of borrowers by simply writing off their loans.

More Aggressive Writeoffs

"Managements have been writing off loans more agressively," Morgan Stanley analyst Dennis Shea wrote in a recent report. He said the chargeoffs were occurring on average at "more than twice the rate experienced during the mid-1970s downturn and about triple the level during the twin recessions in the early 1980s."

Bankers, he added, cannot take credit for this discipline since regulators forced it on them. Nevertheless, the quarter added a hint of welcome stability to the New England banking scene.

One exception was UST Corp. The Boston-based company, with $2.5 billion in assets, lost $6.3 million in the quarter largely because of a $16.4 million provision to its reserve. Nonperforming assets at UST, the parent of UST Bank, rose 9% from second-quarter levels to $141.7 million.

Clear Directions from FDIC

The company was one of the last Boston banks to have been examined by the Federal Deposit Insurance Corp., and the third-quarter results are believed to reflect moves strongly recommended by the regulators.

The quarter generally revealed that the days of the "New England premium" - the extra-rich rates that banks had to pay for deposits - may finally be over. Average rates on six-month certificates of deposit for banks in the Boston area stood at 5.29% on Sept., 25, down from 5.74% on July 3, according to Bank Rate Monitor.

The highest rates in the nation at the end of the third quarter were being paid by banks in the Washington area and Chicago.

Average net interest margin for the regions' banks was virtually flat with the second quarter - 3.69% compared with 3.70%, according to Keefe.

Margins would have been slightly higher - reflecting a decline in the Fed Funds rate during the quarter - if not for a $193 million one-time charge at Fleet to reflect its absorption of $14 billion of assets from Bank of New England, according to Keefe's Mr. Berry.

Despite the upbeat news, some New England bankers remain pessimistic.

"We're not seeing any loan growth," said Kevin Gage, president of Bank of Darien, a Connecticut company with $100 million of assets. "And we won't see loan growth until the economy turns around."

Joblessness Persists

The economic forecasts, meanwhile, remain gloomy.

Unemployment in the region is running at 8% in Massachusetts and 10% in Connecticut in October, according to Nicholas Perna, the chief economist at Shawmut.

In southeastern Connecticut, where General Dynamics builds high-tech military hardware, new rounds of job cuts are expected as defense contracts decline, he added.

"The stanching of negatives is underway," said Gary Ciminero, chief economist of Fleet/ Norstar. "As for the big positives - we're still waiting."

Banks are both cause and victim of the area's recession. By yearend, banks alone will have reduced their workforces by at least 10,000 people over the past two years in Massachusetts, Connecticut, Maine, and New Hampshire.

Table : Third-Quarter Earnings at New England Banks Asset figures are in billions; income is in millions 10/31 3Q '91 Versus NPA(*) Tier 1 assets income 3Q '90 ratio ratio(**)Fleet/Norstar $46.0 $62.4 NM 5.53% 9.35%Bank of Boston 32.4 18.0 NM 7.06 4.80Shawmut National 22.0 2.3 NM 10.3 5.48State Street Boston 13.3 27.3 9.0% 3.06 12.10BayBanks 9.4 1.1 NM 7.86 6.90UST 2.5 -6.3 -400.0 8.22 7.65BankNorth 1.6 -3.0 NM 4.60 10.40BancWorcester 1.2 2.4 60.0 6.48 8.61

(*) Loans in default, reworked loans, and foreclosed properties as a percentage of

total loans and foreclosed properties. (**)Risk-adjusted Tier 1 capital as a percentage of total assets. NM: Not meaningful

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