Ultimatum to Fleet Mortgage: Perform or Else

Fleet Financial Group is turning up the heat on its chronically underperforming mortgage subsidiary.

Fleet will consider "alternative strategies," including a possible sale, in 18 to 24 months unless Fleet Mortgage Group boosts income to $100 million a year, executives told analysts Wednesday morning.

Earnings from the mortgage company-which was the fourth-largest servicer and fifth-largest originator of home loans in the United States last year- have tumbled from $86 million in 1995, to $40 million in 1997.

"The mortgage company continues to perform below what we would anticipate," chief financial officer Eugene M. McQuade said in a telephone interview. But, he stressed, a sale is not a foregone conclusion. Fleet still "likes this business very much" and is making sizable investments in technology to beef up origination capability and streamline servicing operations.

A spokesman said alternatives to a sale would include a reorganization and a joint venture.

The performance ultimatum to Fleet Mortgage-which until recently was considered one of Fleet's crown jewels-reflects the Boston-based banking company's close attention to profit measurement.

Over the past two years, Fleet has been stung by criticism that it was not reaping profits quickly enough from its acquisitions of Shawmut National Corp. and National Westminster Bancorp. It has responded by shedding redundant units, selling branches, and expanding into activities that provided superior returns, including investment management and processing.

On Thursday, for instance, it agreed to buy a 35% stake in Oechsle International Advisors, Boston, which manages $12 billion of assets. Terms were not disclosed. The deal, which is expected to close in September, would be the third in a string of investment and brokerage acquisitions for Fleet in the past year.

"The investment management business, including investment distribution, is a highly attractive business in terms of economics," said Gunnar S. Overstrom Jr., a Fleet vice chairman. "The mandate and the goal is to prudently make it a bigger chunk of Fleet Financial Group." The bank expects to earn 15% of its profits from investments this year, versus 7% last year.

The mortgage business, by contrast, saw its contribution to profit drop from 8% in 1996 to 4% in 1997.

Fleet Mortgage's return on equity in 1997 was 13%, versus 20% for the bank overall. The bank announced with its first-quarter earnings that it took a $75 million charge to cover losses in its $120 billion servicing portfolio.

Observers said bank mergers are putting pressure on everyone to assess the bottom line.

"This is not a time when you can afford to sit idly by and tolerate mediocre returns from any division," said Anthony Davis, analyst with SBC Warburg Dillon Read Inc., New York.

"This is the year to get the mortgage company fixed," agreed Sandra J. Flannigan, analyst with Merrill Lynch Global Securities.

Fleet Mortgage's failings are particularly arresting because its originations have been shrinking and its servicing portfolio barely growing at a time when the other giants of the mortgage industry have been bulking up.

"In this market, any mortgage originator that can't not only survive but thrive must be doing something fundamentally wrong," said a senior executive with the mortgage division of another large Northeastern bank.

Constantly changing management may have resulted in a lack of strategic vision for Fleet Mortgage, observers said. The unit, which is based in Columbia, S.C., has had six chief executives in the past three years.

Separately, Fleet has announced plans to sell three branches in western Massachusetts as part of an ongoing review of its retail network.

The banking company said it would sell the branches, with a combined $81 billion of deposits and $18 billion in commercial and consumer loans, for an undisclosed price to $654 million-asset Berkshire Bancorp in Pittsfield, Mass. The transaction, announced last week, is scheduled to close in the third quarter.

Analysts said Fleet has been pruning branches that fail to meet profit targets.

"Deposit size is critical to profitability," said Gerard Cassidy, an analyst at Tucker Anthony Inc. "For a company like Fleet that wants return on equity of 20% or more, the branches have to contribute to profits in a very meaningful way."

The announcement follows on the heels of a larger branch sale for Fleet. In April, the bank said it would sell 31 of its branches in Maine to Bangor Savings Bank, including $298.8 million of deposits and $186 million in commercial and consumer loans. That deal, also for an undisclosed price, is scheduled to be completed by midsummer.

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