JAMES C. SMITH – ‘Clarifies strategy’

While slowly spreading beyond the state’s borders, one of Connecticut’s largest banks has filed for a national charter in order to expand its commercial loan portfolio.

Waterbury-based Webster Financial Corp. announced on Monday that its principal subsidiary, Webster Bank, is filing an application with the Office of the Comptroller of the Currency to convert to a national bank charter.

Webster Bank is currently a federal savings bank regulated by the Office of Thrift Supervision. As part of the conversion, Webster is also filing an application with the Federal Reserve System to become a financial holding company. Webster expects to complete the conversion in late 2003 or early 2004.

“Over the past decade Webster has transformed itself from its thrift institution roots to be a full-service commercial bank. Now, as we complete that transformation, it is appropriate that we shift from a federal thrift charter to a national bank charter and become a financial holding company. Today’s filing clarifies Webster’s commercial bank strategy within the investment community,” stated Webster chairman and chief executive officer, James C. Smith.

He continued, “Our company began as a traditional thrift in 1935, dedicated to helping people in Greater Waterbury buy their homes. Today we remain a community-focused institution, yet our charter and our geography are broader, with $14 billion in assets and operating business interests in 48 states. It is with thanks and great respect for the OTS, with whom we have enjoyed a strong, constructive relationship for 68 years, that we make this important decision. We now look forward to a similar and long-term relationship with the Office of the Comptroller of the Currency and the Federal Reserve System.”

Thrifts typically have a balance sheet that is predominately associated with residential mortgages to the tune of 80 or 90 percent,” said John Carusone, president of the Bank Analysis Center in Hartford. “Commercial banks have a balance sheet whose loan portfolio reflects a more even distribution between commercial enterprises and consumers through residential mortgagees and consumer loans.”

Thrifts are savings banks that can be either federally or state-chartered. Where thrift charters are restrictive and require a minimum level of investments in mortgages, commercial charters are more permissive of a variety of different loan types, including commercial loans.

According to Carusone, commercial banks are viewed as having a higher profit potential, since the profit margin is higher for commercial loans.

“They typically have a greater risk attribute, and banks are entitled to charge for that extra risk,” he said. “Publicly traded banks, if they’re commercial, are typically rewarded in the stock market with a higher [profit/earning] ratio.”

Carusone said that Webster has been transitioning itself to a commercial bank profile over many years.

“This charter change is just catching up to what their strategy has been for quite some time – which is be Connecticut’s largest state-headquartered commercial bank. Their acquisition policy has reflected that strategy as well.”

According to Carusone, the charter change was appropriately timed to reflect the fact that Webster’s balance sheet has migrated toward a heavier emphasis on commercial activity.

“The staffing has been chosen to be able to support more of a commercial bank profile, and their culture has doubtlessly been influenced by strategy to become more commercially oriented. This is a natural evolutionary step in the lifecycle of Webster bank,” he said.

“Many of us have wondered why they didn’t do it earlier, but I give the bank’s management credit for waiting for their culture and staffing to be able to support the change. That reflects some wisdom and maturity in management,” he said.

On the Threshold

If the filing is approved, Webster will become the largest Connecticut-based commercial bank, “without question,” said Carusone.

“Insofar as what’s going to be changing for our business, our own commercial and consumer customers, nothing is going to be changing on a day-to-day basis. We’re still offering the same products and services,” said Clark Finley, spokesman for the bank. “What this will allow us to do is break our current threshold,” he said.

With a thrift charter, a bank’s amount of money invested in commercial and industrial loans cannot exceed 20 percent of the bank’s total assets. A bank with a national commercial charter can exceed that threshold by a great deal.

We’re pursuing this charter as part of our strategic plan, and have been planning on this move over the last decade,” said Finley. A few key acquisitions during the last few years have led up to this latest move, including the recent acquisitions of Center Capital, Whitehall Credit Corp. and Budget Installment Corp., he said.

Also as part of the strategic plan, Webster launched a de novo branch campaign into Fairfield County last year, as well as branching out into New York’s Westchester County. Finley noted that the bank has been expanding territorially for quite some time.

“This commercial charter doesn’t change our geography, but our geographic expansion is another component of our plan,” said Finley.

Although Webster is often linked with People’s Bank – they are the two largest Connecticut-based banks – Finley said that this application is “not a function of looking left and right.” Bridgeport-based People’s remains a thrift.

He continued, “What we think we’ve realized is that our greatest opportunity for growth in the future is as a commercial bank. Could we remain a vital, thriving thrift? Of course. Could we still offer good value to our shareholders? Yes. But we believe that out greatest growth in the future, and our best opportunity for greater value, is with a commercial charter.”

Webster’s commercial loan portfolio has grown considerably during the last five years. In 1998, of their $5 billion loan portfolio, 16 percent was taken up by commercial loans while 10 percent was in consumer loans. By June 2003, the portfolio had grown to $8.5 billion, with consumer loans taking up 23 percent and commercial loans accounting for 36 percent of the pie. Residential loans dropped from 74 percent of the portfolio in 1998 to 41 percent in June of 2003.

The strategic plan calls for commercial and consumer loans to total 75 percent of the bank’s entire portfolio by 2006. Specific areas that the bank has cited for growth include equipment financing, asset-based lending and commercial real estate loans. Consumer growth is expected through expanded origination capabilities and home equity loans.

Webster Financial Corp. is the holding company for Webster Bank and Webster Insurance. With $14 billion in assets, Webster Bank provides business and consumer banking, mortgage, insurance, trust and investment services through 110 banking offices, 220 ATMs, a Connecticut-based call center and the Internet. Webster Bank owns the asset-based lending firm, Whitehall Business Credit Corp.; the insurance premium finance company, Budget Installment Corp.; Center Capital Corp., an equipment finance company headquartered in Farmington; and Webster Trust Co.