No region of the nation has endured the current economic slowdown longer than New England. But Gunnar S. Overstrom, president and chief operating officer of Shawmut National Corp., the region's third-largest bank company, sees signs of revival

Shawmut's profits soared back to respectability in the last two quarters, primarily because problem assets are under control, expenses are down, and interest rate margins are wide. Now, Mr. Overstrom says in the interview below, the company is focusing on revenue growth, with a strong emphasis on fee-based products.

Mr. Overstrom, 50, who also is President of Shawmut's lead banks in Hartford, Conn., and Boston, earned undergraduate, law, and graduate economics degrees from local colleges, and joined a Connecticut bank now owned by Shawmut in 1975.

He was named chief financial officer of Hartford National Corp. in 1979 and chief executive of Connecticut National Bank in 1988, the year it merged with Shawmut.

Q.: How is the New England economy looking today? What are your customers telling you?

OVERSTROM: There's every indication that we've either bottomed or will bottom here very shortly. I just completed quarterly reviews of all of our business lines, and the fascinating thing is that we're finally seeing some loan demand in our core middle-market banking activity. We've had a runoff in that portfolio for a number of years now.

Our people sense that the decline bottomed in June, was up slightly in July, and, given where we've come from, picked up in August.

In the consumer banking sector, we have see some growth in home-equity lending and our auto finance business. And our mortgage activity is just booming. We're the No. 1 home-equity lender in New England and the leading indirect auto lender in Connecticut, so I think we're a pretty good proxy for activity on the consumer side.

We're a lot more positive today than we have been in some time.

Q.: Now that you have the leeway to focus a little less on credit quality, are you and other banks competing more vigorously by lowering prices or credit it standards?

We sense more competition in our marketplace both on credit nd and on price. It's not surprising at that it happened, but it's surprising that it's happening so quickly.

We think it's kind of foolish. What typically happens when you compete on price is the bank ends up the loser.

It's a bit irrational, but we've always been willing to compete on price if that's the appropriate competitive reaction.

Q.: What about the credit side?

OVERSTROM: We are not going to be persuaded to modify our credit standards to meet the competition where we think they are doing something inappropriate.

Q.: Are you talking about your equals, or the smaller banks?

OVERSTROM: It's generally across the board, with both our peers and some of the smaller banks.

Q.: What's your outlook for a consolidation of banks?

OVERSTROM: There's a compelling argument for a national consolidation. New England's more fragmented than most markets across the country, so there's greater opportunity here.

Smaller banks in the region recognize their competitive disadvantage in this difficult business we're in. There's a change, I think, in their attitude about being acquired by a larger institution.

They know that they won't be able to attract the out-of-region national players. There are probably a handful of likely candidates in New England to buy these smaller banks.

Q.: What kind of pressure do you feel to move quickly?

OVERSTROM: It's a great opportunity that we want to take advantage of, but it's not a pressure. Part of our strategy is to grow through acquisition. The economics are such that you can bring in between 95% and 100% of the targets' revenue and reduce their costs from anywhere from 50% to 75%.

We're going to focus primarily on Connecticut and Massachusetts. New Hampshire [where Shawmut is waiting for approval to buy New Dartmouth Banks] is already a consolidated state.

Q.: Is anything going on right now in terms of due diligence?

OVERSTROM: There's a lot of activity.

Q.: Let's switch to revenues. Can you elaborate on why you are moving so aggressively into selling mutual funds?

OVERSTROM: Our strategy recognizes the changing demographics and the clearly significant opportunities in the money-management business.

The fastest-growing product for us today is clearly the mutual fund opportunity. We've met or exceeded our expectations since we've launched the mutual fund activity back in February. We've added more mutual funds, we've added more salespeople dedicated to sales of the product, and each week that goes by we add more money under management.

Q.: How many salespeople do you have?

OVERSTROM: We have 100 dedicated salespeople, whose sole responsibility today is to sell mutual funds. As we roll out our annuity products later this year, they will sell those, too. We expect to hire at least 20 more salespeople by yearend.

Q.: Are all sales done out of the branches?

OVERSTROM: Eighty-seven people are in our branch system, and 13 licensed salespeople are in our private banking unit.

Q.: When do you expect to roll out the annuities?

OVERSTROM: In the fourth quarter.

Q.: What kind of product will you offer?

OVERSTROM: Both the variable and fixed-rate annuity.

Q.: Are you looking at selling money-management products nationally?

OVERSTROM: That may be a longer-term opportunity, but right now we're going to focus on New England.

In our institutional money-management activities, we do have a national effort taking place, selling defined benefit and defined contribution plans, that is going quite well.

Q.: Is the growth potential greater on the retail or institutional management side?

OVERSTROM: The market is growing much faster on the consumer side. You see very slow growth in demand for defined benefit or defined contribution, with defined benefit growing negatively. The institutional business is a market-share game for us since there is not a growing market.

Q.: Can you buy market share?

OVERSTROM: You mean make acquisitions? We've looked at buying institutional money managers, and continue to.

Q.: How is your mortgage business progressing.

OVERSTROM: Activity is at record heights. We think that will continue for a couple more months, but at some point the refinance business will be over.

The mortgage business is cyclical, to be sure. Originations go up and down based on housing activity and interest rates. But what the market seems to miss is that the true-quality profit stream from in mortgage banking comes from the mortgage servicing portfolio.

We've just crossed $6 billion-plus in our servicing portfolio. We've been the market leader in originations for some time. We would like to expand that business. We like the business.

Q.: You sound like you've made a new commitment there.

OVERSTROM: We think we can selectively make acquisitions of mortgage bankers and mortgage brokers, and we also see opportunities to grow internally.

Q.: How will you grow internally?

OVERSTROM: By opening up mortgage banking offices where we might not have a branch.

Q.: You've been a strong middle-market and retail bank, but you've recently pushed into national corporate lending by hiring some seasoned bankers. Why now?

OVERSTROM: We recognize an opportunity. Many of the money-center banks that were active on-balance-sheet lenders have reduced their appetite for corporate loans and have become much more investment bankers or brokers than traditional commercial banks.

They've taken some capacity out of the system.

Also, while we expect New England to stabilize and then grow, we think the rates of growth will be moderate. We need to find alternative sources of asset generation or income that allow us to grow faster. National lending lets us diversify our loan portfolio out of a given region, and it gives us the ability to attract people with skills and talents in another sector.

Obviously, the goal is to get not only the loan relationship. but to cross-sell other banking services. We're a nationally known cash-management bank -- the leading one in New England -- and have a national reputation in certain fields. such as servicing the insurance industry.

Q.: Will you open loan production offices?

OVERSTROM: No. We've added at least three or four lending people in Boston, and a syndication capacity in Stamford. Conn. We will continue to add resources as long as the market can accept that the business offers an attractive return for our shareholders.

Q.: Speaking of shareholders and balance sheets. do you have any plans to go back into the capital

OVERSTROM: Our capital is growing very quickly and we have excess liquidity. So, barring acquisitions of any significant size, we don't see the need to go to the capital markets today. We feel we can meet our growth needs through internal asset generation.

Q.: Are your credit problems behind you?

OVERSTROM: Our nonperforming asset ratio [as a percentage of total loans and foreclosed property] is 3.3%, so that issue really is behind it. Our reserve coverage is 170% of nonaccruing loans. The outflows of nonaccruals have exceeded the inflows for the last six quarters. So we're in very good shape.

Our company is now focused on growing revenues, growing our franchise, improving our financial performance, and growing our stock price.

Q.: Are you at the point where you don't need to take a provision against loan losses?

OVERSTROM: At this time we are not talking about that. But our, reserve is so large that we did not take any significant provisions in the last quarter, and don't expect to near term.

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