BANK OF NEW ENGLAND CORPORATION

1816–1985

Stock Index: New York

The Bank of New England is America's first interstate regional bank holding company. It was created in 1985 by the merger of the Bank of New England Corporation and CBT Corporation, another bank holding company, from Connecticut. BNE owns nine banks (with 470 branches) and 17 other companies that provide various financial services, chiefly consumer banking, wholesale banking, and operational services such as payroll, mutual funds, and data processing.

The Bank of New England and the Connecticut Bank and Trust Company both originated as state banks in the early days of America's efforts at creating a workable banking system. The older of the two is CBT, which was incorporated in 1792 as Union Bank of New London. Merchants Bank, the Bank of New England's earliest predecessor, was granted a state charter in Massachusetts in 1831.

In 1863 Congress passed the National Banking Act. Two separate centralized bank-charter systems, the First Bank of the United States in 1781 and the Second Bank of the United States in 1816, had failed to rationalize the nation's financial activities, leaving banking in America unsophisticated and unstable. Without a central organization and with unlimited (and frequently counterfeit) types of currency in circulation, the money supply was constantly fluctuating. The National Banking Act created a uniform currency and, more importantly, set the framework for a federally chartered system of privately owned national banks. Merchants Bank's successor, the Merchants National Bank of Boston, was one of the first of these, chartered in 1864.

Not long after, in 1868 and 1871 respectively, the Hartford Trust Company and the Connecticut Trust and Safe Deposit Company were founded (one of them as a successor to the Union Bank of New London, although the path is unclear). These two predecessors of the Connecticut Bank and Trust Company busily and quietly conducted their traditional banking businesses and, together with the Merchants National Bank of Boston, survived the postwar chaos and a series of panics which hit over the next 50 years.

Connecticut Trust and Safe Deposit Company and Hartford Trust Company consolidated in 1919 as the Hartford-Connecticut Trust Company, still providing traditional banking, safe deposit, and trust services. Between 1921 and 1934 Hartford-Connecticut Trust Company's history shows quite a few stock offerings and splits; in 1927 it had a grand total of 142 employees as it entered the Great Depression. The Merchants National Bank of Boston, little changed since it was chartered in 1864, was a bit larger in size and scope during this period; with 166 employees in 1928 it provided transfer, foreign-credit, and tax services as well. However, it did not go through any expansion until 1956, while Hartford-Connecticut Trust Company, through acquisitions and mergers of four entities between 1939 and 1953, was able to make a major move in 1954 when it merged with Phoenix State Bank and Trust Company to become Connecticut Bank and Trust Company.

Between 1929 and 1932, approximately 11,000 American banks failed and $2 billion in deposits disappeared.

1869–1985

Between 1929 and 1932, approximately 11,000 American banks failed and $2 billion in deposits disappeared. The failure of several important European banks as well in 1931 created an international monetary crisis. In 1933 newly elected President Franklin D. Roosevelt immediately declared a mandatory bank holiday until every bank in the country could be examined. Hartford-Connecticut Trust Company and the Merchants National Bank of Boston both passed inspection.

World War II finally brought economic relief. After America's entry into the war, in 1941, unemployment fell significantly. In the autumn of 1941 the Federal Reserve froze interest rates at Depression levels, where they remained until 1947. It also asked the banks to cooperate in reducing nonessential private borrowing so there would be more money available to the government.

In the mid-1950s the Merchants National Bank of Boston began to grow. It merged with one bank in 1956 and acquired another in 1958, finally merging on December 31, 1960 into New England National Bank of Boston (originally incorporated in 1869 as New England Trust Company and converted in 1960 to its national bank status) through a share-for-share trade to become New England Merchants National Bank, the fourth-largest bank in the Boston area. The Connecticut Bank and Trust Company was even more active, merging with five banks between 1958 and 1963. One of these mergers, with Wallingford Bank and Trust Company in 1962, was almost not allowed because it eliminated one of the few banks in a small town, and made Connecticut Bank and Trust the second-largest bank in the state.

The 1966 Douglas Amendment to the Bank Holding Act, which had authorized the formation of bank holding companies, in 1956, prohibited interstate banking unless it was authorized by the particular states involved. Massachusetts and Connecticut already had reciprocal arrangements with each other, as well as with Maine, New Hampshire, Rhode Island, and Vermont. In 1970 both Connecticut Bank and Trust Company and New England Merchants National Bank approved the formation of holding companies to acquire their assets: CBT Corporation and New England Merchants Company, Inc., respectively. (The latter was not actually incorporated until 1971.) New England Merchants Company continued to grow throughout the next 15 years, merging with or acquiring seven banks and financial companies. It changed its name in 1982 to the Bank of New England Corporation, and renamed its core bank Bank of New England, or BNE. CBT Corporation was equally active, adding seven banks to its portfolio during that time.

The eventual merger of these two large bank holding companies in 1985 was historic. But before the merger could be completed the banks had to wrestle with the conflict between state and federal powers. The state of Connecticut had a statute on its books allowing only banks from reciprocal New England states to acquire its banks; it was generally acknowledged that the reason for this (and similar statutes in other New England states) was fear of losing its regional identity and becoming absorbed by the major banking centers of New York, Chicago, and California. Although approval for the merger had been obtained from federal agencies in 1984, New York-based Citicorp, one of the nation's largest banking conglomerates, contested the approval on the premise that it represented an "Illegal compact between states" and was a violation of the Constitution. The two holding companies took the position that the Douglas Amendment to the Bank Holding Act allowed the states to make their own interstate banking laws. While this matter was being reviewed by the Federal Appeals Court, the merger was effectively in limbo.

Meanwhile, the Senate Banking Committee approved proposed federal legislation creating regional interstate banking zones. New England was the first zone to receive legal attention; the BNE case would affect the formation of other zones, especially in the Southeast, where several holding company actions were pending. In August, 1984 the Federal Appeals Court affirmed Connecticut and Massachusetts laws allowing interstate banking only in the New England states, thereby giving the green light to the planned merger. But Citicorp appealed to the Supreme Court, and another stay was enacted.

1970–1988

On June 11, 1985 the Supreme Court unanimously upheld the decision, declaring it a "historical fact that our country traditionally has favored widely dispersed control of banking." And on June 14 the Bank of New England Corporation and CBT Corporation merged to form the first interstate regional bank holding company; the "new" Bank of New England Corporation (BNE Corporation). As a result, interstate mergers became routine and new banking regions were quickly formed.

The Federal Reserve board also allowed bank holding companies to buy savings banks, opening the door for BNE Corporation to acquire ten more banks, savings and loans, and other financial-service companies throughout New England in just two years and laying the groundwork for its 1987 acquisition of the Conifer Group, a group of six community banks in Massachusetts. During this period BNE added nine banks to its ranks and Connecticut Bank and Trust added two. BNE Corporation's assets by the end of 1987 had grown to $30 billion, from $23 billion in 1986. In April, 1988 BNE Corporation was listed on the New York Stock Exchange as NEB.

Three men--all lifelong New Englanders--were particularly important to the formation and development of BNE Corporation: Walter J. Connolly Jr., Gordon I. Ulmer, and Peter H. McCormick. Working his way up the corporate ladder, Connolly became the Connecticut Bank and Trust's president in 1970, its CEO in 1977, and its chairman as well as chairman of CBT Corporation in 1980. A key player in the merger of BNE and CBT, he was named chairman of the newly formed Bank of New England Corporation in 1985.

Ulmer assumed Connecticut Bank and Trust's presidency in 1980. When Connolly moved to BNE Corporation, Ulmer became chairman and CEO of Connecticut Bank and Trust as well as a vice chairman of BNE Corporation and the president of CBT Corporation.

McCormick became president of BNE in 1978, in 1981 CEO, and in 1985 chairman as well. In 1978 he was also named president of the BNE Corporation, retaining the title throughout the transitional years until his retirement in 1988, when Ulmer became BNE Corporation's president.

In October, 1985 the Bank of New England and three of its employees were indicted on 43 counts related to an alleged money laundering scheme in conjunction with a customer who had previously been convicted of gambling and loansharking. BNE was charged with failure to file large cash transaction reports as required by the Bank Secrecy Act. BNE was only one of several large banks involved in the investigation. In February, 1986 BNE was convicted on 31 of the counts and fined accordingly, although all three employees and the customer were acquitted--a decision which didn't make much sense to BNE management and which didn't affect the bank's business to any noticeable degree. It did, however, make BNE very cautious about its compliance with regulations; the bank volunteered information on accidental violations of the same type in 1987 and was fined $125,000.

1985–1990

Customer service became BNE's focal point in 1988 as competition increased and growth slowed in the New England banking industry. Coming out of a time of high regional unemployment, its goal was to keep virtually all employees it had gained through acquisitions and mergers while keeping its profit at an acceptable level. Since expansion had increased both employee and customer ranks, more efficient use of employees, instead of reductions in staff, meant the bank could offer improved customer service.

But by late 1989 it had become clear that BNE could not afford the luxury of devoting itself to customer service. Uncontrolled growth and unwise acquisitions had obliterated BNE's profits. Although assets doubled between 1985 and early 1990, the company's profits began to plummet. Business Week estimated fourth-quarter 1989 losses at as high as $1.2 billion, down from a $74 million profit the previous year.

In its zeal to grow and to capitalize on the booming real estate market in the late 1980s, BNE bought too many banks that proved to be too hard to digest. Connolly also encouraged subsidiaries and branches to enlarge their loan portfolios at such a rate that many loans were approved without adequate security. These problems were exacerbated by an unwieldy management style and sloppy bookkeeping.

BNE entered the 1990s with about $2.3 billion in nonperforming real estate loans and with about 448 branches throughout New England, most of which were losing disenchanted customers. In January, 1990, following a stormy board meeting, Connolly agreed to resign as soon as a successor could be found. BNE's future will rest on the ability of its new managers to restructure and streamline the lumbering regional giant.