The management succession picture at Keycorp grew murkier on Monday when the Albany, N.Y.-based company announced that James Waterston, a group executive vice president and chief banking officer, had resigned.

Mr. Waterston, 52, joined Keycorp 18 months ago from Comerica Inc. with responsibility for coordinating the company's sprawling network of nine subsidiary banks in eight states.

He was perceived as a front-runner to succeed Keycorp's longtime chairman and chief executive, Victor Riley, who will turn 62 in August.

|Uncomfortable' with System

Keycorp said it was replacing Mr. Waterston with Gary R. Allen, 44, who has been president and chief executive officer of its largest subsidiary, the $13 billion-asset Key Bank of New York.

It had become increasingly clear that Mr. Waterston's "experience in a highly structured organization made him uncomfortable with Keycorp's more flexible management system," Mr. Riley said in a statement released after the board of the $30 billion-asset company met Monday.

Mr. Waterston, who could not be reached for comment, said in the statement that his "career goal is to become the chief executive officer of a major banking organization. Since that seems no longer possible at Keycorp, I decided to pursue that goal elsewhere."

Senior Keycorp officials said Mr. Waterston had an autocratic, hierarchical style that conflicted with the bank's looser managerial culture.

"He expected as chief banking officer that you would have to clear decisions with him first, and our organization has never worked that way," said Lee Irving, the company's treasurer and senior vice president.

"To implement loan policy changes, it's not necessary for the person in charge of loan review to clear all changes with the chief banking officer," Mr. Irving said.

William Dougherty, 62, the holding company's chief financial officer, said the parting was "very amicable but reflected different styles."

He conceded that the succession question remains open, but added that elevating Mr. Allen to chief banking officer and James P. Menzies to Mr. Allen's post as president of Key Bank of New York gives them a chanceto prove themselves. Both are 44.

Smooth Transition

Mr. Riley, who was traveling to Keycorp banks in the West on Monday afternoon, could not be reached for comment. He has openly discussed the need for an orderly line of succession to reassure investors that Keycorp will not falter upon his retirement, expected around 1996.

But he is perceived by some to be unwilling to give up the reins of the profitable company. Gregory C. Dillett, who joined the company from CoreStates Financial Corp. as chief administrative officer around the same time as Mr. Waterston, left after five months, apparently convinced that he would not be the heir apparent.

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