Fleet's Ship Comes In

To buyers, the Bank of New England had all the allure of a toxic- waste dump. The nation's third-largest bank failure, BNE collapsed in January, 1991, after losing $600 million over the previous two years. With the region's economy in free-fall, busted companies and vacant real estate had buried the bank in bum loans. The chance of ever making money from Boston's BNE seemed laughable.

In a federal auction for BNE, Providence's Fleet Financial Group Inc., which submitted the top bid of $625 million, had only two rivals: Bank of America and Bank of Boston Corp. "If everyone knew then what we know now, there would have been 50 bidders," says an ebullient Terrence Murray, chairman of Fleet.

He may be right. Little more than a year later, BNE is generating healthier profits than many people had thought possible. Following the BNE acquisition, Fleet's earnings exploded (chart). On Oct. 21, Fleet reported third-quarter earnings of $72 million, with $31 million coming from former BNE banks located in Massachusetts and Connecticut. Fleet now forecasts that BNE will contribute as much as $200 million in profits in 1993. Even better, the BNE purchase has made Fleet the largest bank in New England, with $45 billion in assets, up from No. 4.

FDIC MOP-UP. True, Fleet has had some help. The banking industry is bouncing back nationwide, by exploiting the spread between the extremely low interest it now pays out for deposits and the higher-yielding Treasuries it has been investing in. Fleet has also benefited from the extraordinarily generous terms allowed by the Federal Deposit Insurance Corp. in the BNE sale. Citing the huge size of the failure, the FDIC absorbed all losses related to BNE's sour loans, set up a special "bad bank" separate from Fleet to hold these loans, and paid Fleet to liquidate them. Insulated from the lousy loans, Fleet had little trouble absorbing BNE's remaining assets. "The results are nothing less than spectacular," says Jeffrey L. Cohn, a banking ana-lyst at Boston's H.C. Wainwright & Co.

The real key to Fleet's success, though, was cutting costs quickly--not an easy task at a monster such as BNE, New England's No. 2 bank before it failed. Up till then, BNE had amassed $32 billion in assets by acquiring 41 banks over 10 years. It boasted New England's largest retail branch network and a huge share of the region's business loans. But it also had a confusing mishmash of back-office computer systems.

Fleet consolidated the computer systems, including BNE's six computerized deposit systems, which are now one. What's more, it closed one-quarter of BNE's 323 branches. And Fleet fired almost half of the bank's 11,000 employees. As a result, there has been a $350 million reduction over 15 months in BNE's $775 million in overhead costs.

Murray's previous experience in folding operations together has come in handy. His dress rehearsal was in 1987, when he acquired Norstar Bancorp in Albany, N.Y., a bank nearly as big as Fleet at the time. Murray, a stocky Harvard University graduate brought up in a mill town near Providence, has shown a deft touch at making regional expansion work. After a spate of other acquisitions, Fleet now has banks in five New England states, plus New York. He was among the first to centralize certain back-office functions, such as cash-management systems. He also successfully diversified Fleet into nonbanking operations, including the country's second-largest mortgage-servicing company and a large student-loan-processing unit.

UPROAR. All of this has been good news to Fleet's shareholders, most notably Kohlberg Kravis Roberts & Co., the New York investment firm that put up $283 million to back Fleet's bid in return for a 12% stake. KKR hasn't cashed in its profit yet, but there's bound to be plenty. On paper, KKR has nearly doubled its money.

Not everyone was so fortunate. Many of BNE's former borrowers, for example, had a real hassle. Although current on their loans, they ended up dumped into the FDIC-created, Fleet-managed bad bank, RECOLL Management Corp., because the value of their collateral had fallen below the loan amount. Fleet's attempts to call those loans triggered an uproar, so it backed off and now is trying to restructure instead of liquidate many of the loans.

Fleet has other problems unrelated to BNE. Nonperforming loans are not declining as fast as those of its competitors. Nonperformers fell by 6% in the third quarter, to $1.4 billion, but at neighboring Shawmut Bank they fell by 20%, and at Bank of Boston by 17%. Fleet is planning a quick fix: selling $500 million in rotten loans over the next few months to investors.

If Murray pulls that off, Fleet will have even greater financial flexibility to buy into new markets. "We want a broad base of profit centers," he says. He is eyeing bank purchases in the Midwest or the Mid-Atlantic region, where he sees better prospects than in his home area. With luck, they'll be less of a challenge than Bank of New England.