JAMES C. SMITH – ‘Solid performance’

Despite struggles both on the economic and geopolitical fronts, one of Connecticut’s largest in-state banks enjoyed a strong first quarter this year.

Webster Financial, the holding company for Waterbury-based Webster Bank, has reported a 32 percent increase in net income per diluted share for the first quarter of 2003, compared to the same period a year ago. The announcement came during an investor conference call on Tuesday.

For the quarter ended March 31, 2003, Webster’s net income increased to $39.9 million – or 86 cents per diluted share – compared to $32.3 million, or 65 cents per diluted share, for the year-ago period.

“Webster’s solid performance in the first quarter reflects our success in implementing our strategic plan for growth,” Webster Chairman and Chief Executive Officer James C. Smith said during the conference call. “Webster has strengthened its position as a leading regional financial services provider offering a broad range of useful products and services to our growing customer base. Growth in our balance sheet, revenues and earnings over the past year demonstrate that Webster is creating shareholder value by meeting the financial needs of its customers.”

Smith explained that the strategic plan is based around the idea of growing loans and deposits faster than the market, increasing the income of fee-based services and making acquisitions that enhance the product and service base of the bank.

Webster’s improvement in earnings per share was led by strong revenue growth. Total revenues, consisting of net-interest income and total non-interest income, grew by 14 percent compared to the same period a year ago. According to bank management, the growth was due primarily to expansion of non-interest income, growth in loans and an increase in core deposits over the past year.

According to Bill Healy, Webster’s executive vice president and chief financial officer, for the first quarter of 2003, net-interest income rose 8 percent to $104.7 million from $96.5 million a year ago and increased slightly from $104.1 million in the fourth quarter of last year. He explained that earning asset growth over the past year, particularly in the loan portfolio, was responsible for both increasing net-interest income and helping to offset the compression of net-interest margin caused by the lower interest rate environment.

‘Disciplined Approach’

For the first quarter of 2003, total non-interest income increased 28 percent to $53.1 million, up from $41.5 million in the year-ago period. That increase, according to Healy, was due primarily to growth in deposit service fees, insurance revenue, loan and loan servicing fees and net gain on sale of loans and loan servicing, all of which amounted to $36.5 million and increased by 43 percent from 2002. Recent acquisitions accounted for almost half of the 43 percent increase. For the first quarter of 2003, total non-interest income represented 34 percent of total revenue, compared to 30 percent in the year-ago period.

Total non-interest expenses for this year’s first quarter increased to $92.8 million, up 22 percent from $76.2 million one year ago and an increase of 4 percent from $89.2 million in the fourth quarter. The rise in total non-interest expenses over the same period in 2002 is due to acquisitions and strategic investments in core businesses. The $3.7 million increase in total non-interest expenses from last year’s fourth quarter is due primarily to acquisitions in the first quarter of 2003.

As of March 31, 2003, total assets had increased to $14.4 billion, up 16 percent from $12.3 billion one year ago and an increase of 7 percent from $13.5 billion at the end of 2002. Total loans of $8.5 billion at March 31, 2003, increased 19 percent from a year ago and 8 percent from year-end 2002. According to Healy, Webster’s loan growth is primarily attributed to the Whitehall asset-based lending acquisition in August of 2002 and to growth in the home equity portfolio.

At the end of this year’s first quarter, commercial loans – including commercial real estate – were $3 billion, up from $2.3 billion one year ago and $2.8 billion at Dec. 31, 2002. Consumer loans totaled $1.8 billion at the end of the first quarter, compared to $1.2 billion one year ago and $1.7 billion at the end of 2002. Commercial loans and consumer loans were 57 percent of total loans at March 31, 2003, compared to 50 percent of total loans one year ago.

According to bank management, Webster’s residential mortgage business generated $974 million in mortgage originations in the first quarter, compared to $449 million a year ago. In the first quarter of 2003, 72 percent of that amount came from national wholesale mortgage banking operations, while 28 percent came from Webster’s retail channel.

Total deposits were $7.8 billion at March 31, 2003, an increase of 9 percent from $7.2 billion in the year-ago period and an increase of 2 percent from $7.6 billion at Dec. 31, 2002. Core deposits at March 31, 2003, represented 66 percent of total deposits, up from 59 percent a year ago. Smith said Webster’s growth was driven in part by its High Performance Checking campaign initiated in August of 2002 and the continuing success of its de novo branch expansion program in Fairfield County.

Smith explained that the branch expansion program will be speeding up, and could reach a potential level of four new branches per quarter.

“Webster’s credit quality measures remain well within recent historical levels and our allowance for loan losses has increased by 20 percent over the past year,” said Healy. “Our ability to confront credit issues while maintaining overall measures of asset quality demonstrates our disciplined approach to risk management.”

The bank’s allowance for loan losses totaled $118.6 million at March 31, 2003, compared to $98.9 million a year ago and $116.8 million at Dec. 31, 2002. The allowance represented 1.39 percent of total loans at March 31, compared to 1.39 percent a year ago and 1.48 percent at Dec. 31, 2002. The ratio of the allowance to non-performing loans at March 31, 2003, was 219 percent, compared to 197 percent a year ago and 270 percent at Dec. 31, 2002.

Healy explained that an increase of $11.9 million in Webster’s non-performing loans is entirely attributable to one credit, an asset-based lending loan made three years ago and not related to acquisitions. He explained that the credit “popped up” around the end of the quarter and that little investigation has been made into the defaulting party.

It was noted during the conference call that fraud might be involved. A non-performing loan is a loan that is in default or is close to being in default. Smith noted that “we believe the [bank’s] reserve is more than adequate” to cover the non-performing loans.

In January, Webster announced the acquisition of The Mathog & Moniello Cos., an East Haven-based commercial property and casualty agency that specializes in providing risk management products and services to self-insured businesses and groups. The firm was one of the largest independent insurance agencies in Connecticut, with about 90 employees and additional offices in West Hartford and in Harrison, N.Y. Mathog & Moniello’s 2002 revenue was approximately $11 million.

Webster Bank also completed in January an offering of $200 million in subordinated notes to institutional investors. The subordinated notes were rated investment grade and constituted new funding that increased Webster’s regulatory capital.

Also in the first quarter of 2003, Webster Bank announced the acquisition of Budget Installment Corp., an insurance premium financing company based in Rockville Centre, N.Y. Budget Installment Corp. finances commercial property and casualty premiums for businesses that pay their premiums on an installment basis. The 30-year-old company currently has approximately 8,000 active borrower accounts located in New York and New Jersey.

There has been activity over the past several quarters in the area of mergers and acquisitions, and “clearly prices for selling institutions have been relatively high,” said Smith. He noted that Webster hasn’t yet “been able to find our way to compete in that market,” but that the bank is actively looking for opportunities for partnerships, as well as other acquisitions.