Shawmut National Corp. has significantly dropped its deposit rates - and its customers don't seem to mind.

In March, New England's third-largest banking company began reducing rates on its savings products by 30, 40, and 50 basis points, said Eileen S. Kraus, vice chairman in charge of retail banking and marketing. Shawmut's competitors did not follow its lead, she observed, nor did its customers flee.

"I have never seen a phenomenon- like this," Ms. Krus said.

Shawmut reaped the rewards of its plan in the second quarter, when it reported net interest income of $236.4 million. That was 10% higher than the $215.5 million reported for the first quarter.

Simple in Hindsight

The company traced part of the increase - which helped Shawmut book a second-quarter profit of $56.3 million - to "an improvement in the net interest margin generated by the lower rates paid on interest-bearing liabilities."

It sounds easy in hindsight. But Shawmut did not lightly make the decision to lower rates ahead of its competitors in the Boston and Hartford, Conn. markets.

"We were fully prepared for a whole range of actions," Ms. Kraus said. "We thought through what the competition would do and what the runoff of depositors would be. We were prepared with counteractions."

To Shawmut's delight, however, most of its competitors also dropped their deposit rates - but only by 5 to 10 basis points.

|A Unique Experience'

"It was clearly different from any other historical experience we've had," Ms. Kraus said.

Shawmut's Massachusetts banks recently were offering one-year certificates of deposit with an annual percentage yield of 2.43%. By comparison, one-year CDs at Boston's BayBanksInc. were yielding 2.94%.

Shawmut's gamble was well-timed, some observers said, in today's low-rate environment.

"Any bank with a strong franchise can take the calculated risk of proceeding ahead of the market," said Edward Furash, head of Furash & Co., a bank consultancy in Washington. When rates are low, he explained, few consumers consider it worthwhile to move their funds.

Strategy Has a Time Limit

The risk, however, is that rival banks will raise their deposit rates significantly if loan demand rises. "You become vulnerable to competitors who can pull funds out of you very fast," Mr. Furash said.

Ms. Kraus acknowledged that Shawmut's strategy "is not something you can continue for a year."

But in an interview after Shawmut's second-quarter earnings were released, chairman Joel B. Alvord said he was confident the bank will sustain robust interest income going forward.

"We will maintain a reasonable margin not because of dropping deposit rates but from growing loan activity," he said. "And we are restructuring our balance sheet so we have higher levels of interest-earning assets."

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