It was an unlikely scene: As a photographer snapped away, Bank of Boston Corp. President Charles K. Gifford stood in the rain outside a LeeJay Bed & Bath retail store in Boston holding bags of bath accessories and an umbrella. The bank had lost out in a competition with two rivals to make a loan to LeeJay. Undaunted, Gifford sent one of the photos to LeeJay president Howard Israel with a note saying: "Our interest can't be dampened by rain or rejection." Says Israel: "I was blown away. Five years ago, they were so arrogant, even patronizing, they never would have even bid. They have totally changed."
Meet the new Bank of Boston. Once the epitome of stuffiness, the bank was abruptly brought down to earth three years ago by a serious brush with insolvency. "We were smug--damn sure of ourselves," says Gifford. "You won't see that kind of complacency around here any more." Now, instead of having their noses in the air, Bank of Boston loan officers are out trying to shake hands with anyone who's interested and doing whatever it takes to close deals. The shift in attitude isn't yet reflected in profits, and controlling expenses remains a challenge. But the change does show that even the most hidebound financial institution is capable of changing its ways.
"COUNTRY CLUB." Most striking is the 209-year-old Bank of Boston's cultural remake, engineered by Chairman and Chief Executive Ira Stepanian, 56, a 30-year Bank of Boston veteran with a low-key style who made a name for himself making big, complex corporate loans. The son of an Armenian immigrant and raised in a middle-class Boston suburb, Stepanian symbolizes the bank's attempt to move beyond its ingrained WASPiness. "We made some big mistakes," he says, but "people's views of themselves and the bank have changed." He has ended a long-standing star system, in which favored Ivy League Yankees were promoted from within and given top jobs, and hired four outsiders for his top management team. He initiated a "casual day" each month to allow headquarters employees to dress down. Numerous status symbols have been banished, such as the company helicopter, private dining rooms for senior officers, and formal, antique-filled executive suites. Corner offices are being turned into meeting rooms, symbolizing the push for more group problem-solving. Also gone: management's annual golf retreat, replaced by a day rebuilding a rural summer camp for inner-city youth. Stepanian is chipping away at the bank's insular business image, beefing up lending in Boston's poorer neighborhoods. "This was a country club, disconnected from reality," says Michael Simmons, executive vice-president for technology and operations.
All of this is in sharp contrast to an earlier culture that was so calcified that men were expected to wear jackets just to walk from floor to floor. The "First," as longtime Bostonians still call the bank, catered to the region's wealthiest blue-blood clans. In corporate banking, its specialty was big national accounts. Small-business lending and retail banking for the hoi polloi were left to its rivals, chiefly Bank of New England, Shawmut, and BayBanks.
Bank of Boston's conservatism unfortunately did not stop it from getting caught up in the lending euphoria ofthe 1980s. With a slew of loans to companies from Hollywood to Australia, its assets grew from $19 billion in 1983to $37 billion in 1989. The company also made heavy investments in commercial real estate, and it strove to becomea major player in the market for loansto below-investment-grade companies. When the banking crisis hit New England in 1989, Bank of Boston was the first to get into trouble. It lost $395 million in 1990. Its stock dropped from over $30 a share to as low as $4. Its balance sheet was so imperiled that at one point more than 30 federal regulators arrived to scrutinize every facet of its operations. To improve its finances, regulators demanded that Bank of Boston raise capital, revise its lending practices, and improve internal controls.
NO BULL'S-EYE. Stepanian and Gifford, who moved into their current posts in 1989, have made those fixes and are now retooling the bank's strategy. The biggest change is a new focus on local markets. The bank is courting small businesses in New England for the first time in decades and plans to build up its retail franchise beyond its blue-blood base. It's also bolstering its regional presence by snapping up weaker rivals such as Multibank Financial Corp. and Society for Savings Bancorp Inc. The bank remains active in Latin America and is still lending nationally--but in carefully selected niches, such as energy services and cable TV.
All in all, an impressive list--but so far, all of this activity has produced only mixed results. Some analysts question whether Stepanian, for all of his culture-changing skills, is tough enough to make his rejiggering pay off on the bottom line. "The bank's basic business is stagnant...and they've got a problem with their overhead costs," says Gerard S. Cassidy, an analyst with Hancock Institutional Equity Services. Bank of Boston has aggressively disposed of bad real estate loans much faster than its competitors have. But the bank's profits have been flat for the last six quarters, and analysts expect a decline of as much as 10% in 1993, to about $235 million.
The desultory New England market is partly to blame. Commercial lending has been stalled for more than a year, and many bankers don't expect growth to pick up before 1994. Meanwhile, there's fierce competition for the few viable clients banks want to reach. A "credit initiative" launched by the Bank of Boston last year resulted in $3.3 billion in new loan commitments and boosted the standing of the bank in the small-business market. But Fleet Financial Group Inc. in Providence, R.I., says it loaned $4.3 billion to New England businesses during the first year of Bank of Boston's lending push. Retail banking isn't any easier. To win over customers who have been accustomed to thinking of the bank as a commercial lender, Bank of Boston will probably have to advertise heavily and cut prices. "Gaining market share will come at the expense of profitability," says Cassidy.
High expenses aren't helping either. Stepanian imposed a hiring freeze in March, but that was after he added more than 1,000 new employees in the last year to bolster Latin American operations and other businesses. That pushed the bank's expense ratios well above the industry average.
Bank of Boston deserves credit for getting rid of its stuffiness. But as the episode with LeeJay Bed & Bath illustrates, the bank's new image alone may not be enough to generate new business. If profitability keeps lagging, investors may well start to wonder whether Stepanian should be less of a culture-changer and more of a coldhearted banker.