Regulators Still Wary Of Bank of Boston Deal

WASHINGTON - Federal regulators are still withholding their blessings from a proposal to merge Bank of Boston Corp. and Shawmut National Corp., setting the two companies on a possible collision course with the government.

The two New England banking companies had been expected to announce a deal within a few days, but it is unclear whether they will do so without getting a nod from regulators.

Meeting on Terms

Executives of the companies met with regulators Monday to outline terms of the proposed merger, including plans to raise $625 million in common and preferred stock. But the supervisors expressed reservations, saying more capital was needed for the deal to fly, according to sources in the capital.

Senior regulators flatly denied a report published Thursday that they had given the deal a tentative green light.

"Have we given approval - tentative preliminary, or final - to Bank of Boston and Shawmut merging? The answer is no," William Taylor, the Fed's top bank regulator, said in an interview.

Frank Maguire, No. 2 official in the Office of the Comptroller of the Currency, said: "I don't know how anybody sitting in [Monday's] meeting could have gotten the idea the merger was approved."

A Game of Chicken?

Comments on deals in progress from regulators are rare. The remarks implied the regulators thought the story was leaked to advance the merger. The Wall Street Journal, which reported that regulators had tentatively approved the deal, did not cite a source for the report.

One regulator who requested anonymity suggested that someone close to the banks told Wall Street and reporters that approval had been given in order to pressure bank supervisors.

"I think they are playing a game of chicken with us," the regulator said. "I think they think if they announce [the deal], we won't have the guts to reject it."

But he added that regulatory agencies intended to scrutinize any formal merger application.

Judging Regulatory Nuances

Officials of Bank of Boston and Shawmut, which is based in Hartford, Conn., said they had not disclosed any details of the meeting with regulators.

A source close to Bank of Boston said the company would not proceed with a merger if regulators gave a definite "no," but said it might announce a deal if regulators felt there was a small degree of risk or showed no enthusiasm.

Analysts said it is unlikely that investors would pump equity into a merger in the face of strong regulatory objections.

Both Mr. Taylor and Mr. Maguire refused to detail what requirements they have set for approval, although both said the merged company must have a strong capital-to-assets ratio.

$1 Billion in New Capital?

Sources near the companies and in Washington said that regulators are pressing for the partners to raise enough capital to write off a substantial portion of the $3.6 billion in nonperforming assets carried by the two banks.

On a pro forma basis, the bad assets would equal 9.86% of total loans plus foreclosed real estate in the merged company. That is about twice the average ratio at big banking companies and is considered dangerously high.

Analysts estimated that the companies may be forced to raise as much as $375 million more in equity than they have proposed. "Really, they need to have a billion dollars lined up," said James Moynihan, an analyst in Boston for the Advest Group Inc. "That's the only way regulators would let this fly."

Congressional Pressure

There are questions whether the companies could raise such an amount, which would severely dilute the stake of existing shareholders.

The tug of war going on between the companies and regulators reflects the heavy pressure from Congress for scrutiny of bank mergers. The House Banking Committee held two days of hearings this week on "bank merger policy."

"There is a large group in the Congress that feels mergers are bad," said L. William Seidman, chairman of the Federal Deposit Insurance Corp. "There is a new, hard look at mergers."

While there is still a general sense that the merger will eventually be approved, a number of regulators said privately this week that the two companies will have to meet strict requirements.

Other Regulatory Concerns

"The things being asked [of the banks] are not easy to accomplish," one high-ranking regulator said. "There are concerns here, concerns that go beyond capital."

Other areas that regulators are looking at include the strength of management at the prospective merged company and whether it could obtain projected cost savings.

Although bank supervisors generally encourage in-market mergers as a way to trim overlapping expenses, they insisted in interviews this week that they will not create a bigger problem bank just to get cost savings.

They repeatedly cited the ill-fated merger of two weak Texas banks in 1987 that created First RepublicBank Corp. Just 13 months after the deal got approval, the company failed, requiring a $3.4 billion bailout.

Meanwhile, investors have become cautious about the prospects of a Bank of Boston deal. The companies' stock fell this week on reports about the amount of capital that might have to be raised. Bank of Boston shares were down 25 cents Thursday afternoon, at $9.875. Shawmut's shares were down 12.5 cents, to $8.25.

Investors in bonds of both companies have been "alarmingly quiet," according to Mr. Moynihan of Advest. "The fixed-income investor feels he had better sit on the sidelines."

A merger of Bank of Boston, which has $32 billion in assets, with Shawmut, which has $23 billion in assets, would create one of the nation's 10 largest banking companies.

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