Coming off a tumultuous few years, Webster Financial Corp. CEO and President James C. Smith sees bright spots ahead for his $18 billion bank.
The Waterbury-based regional giant, which took a beating from troubled loans during the downturn, reported a solid $25 million profit last quarter, handily beating Wall Street’s expectations. The bank is likely to raise its common dividend to shareholders by the end of 2011. And Webster is embarking on an aggressive multimillion-dollar strategy to modernize and transform its retail banking business by shifting investments from physical to electronic infrastructure.
Smith said he even sees significant growth opportunities in the changing health care landscape, especially with growing demand for health savings accounts, a line of business Webster put a down payment on last decade.
“The bank is strong, well capitalized, and confident with a clear strategy for growth,” Smith said in a recent interview with the Hartford Business Journal. “We are optimistic that credit will remain stable and that profitability will continue to improve.”
That optimism is a significant turnaround from 2008, when the bank reported a $320 million loss as bad loans, including from outside New England, forced the bank to set aside significant reserves, cutting deeply into profitability.
Those financial woes led the bank to raise significant capital including accepting a $115 million investment from New York private equity firm Warburg Pincus, as well as a $400 million cash injection from the federal government’s Troubled Asset Relief Program.
Smith said the improving economy has helped drive improvements in the bank’s credit quality, but the key to stopping the bleeding was an aggressive strategy to confront bad loans. That included setting up strong reserves to provide a buffer against deteriorating credit quality. Smith said Webster was also aggressive modifying loans and establishing a foreclosure moratorium and mortgage assistance program for borrowers who were experiencing problems.
Loan modifications are a strategy banks often like to avoid because it reduces the value of their original investment and it can be frowned upon by regulators. But Smith said the large amount of economic pain caused by the downturn forced Webster, and many other banks, to work with distressed borrowers more closely.
And he said the strategy has been effective: The re-default rate among modified borrowers has been less than 10 percent, much less than the national average.
“I think Webster has more than turned the corner,” said bank analyst Damon DelMonte, of Keefe Bruyette & Woods in Hartford. “While things got to be pretty bad, I think they met the challenges head on and did what they needed to do to survive.”
As the economy continues to improve, Smith said Webster is now comfortable with its credit quality across its loan portfolio and the bank has reduced its reserves in recent quarters, which has helped Webster become more profitable.
For all of 2010, Webster reported a $74 million profit, and the bank was also able to repay the rest of its $400 million in TARP funds, after raising $150 million in a common stock offering in December.
Smith remains bullish on the national economy, although he said New England will likely continue to recover at a slower pace. Still, he’s taken an aggressive strategy in the Northeast. Webster hired a couple hundred bankers last year and expects a modest increase in bankers in 2011. Webster shed hundreds of jobs during the recession through layoffs and attrition.
And Smith said the Waterbury lender advanced over $2 billion to borrowers in 2010 in new originations, renewals or modifications.
The bank did, however, fall short of its goal to underwrite $850 million in new business loans last year, although Smith said activity has increased lately.
Webster is considering raising its dividend, which had been cut from 30 cents to 1 cent. Mergers and acquisitions are a possibility, but probably not in the works for 2011, he said. In recent years, Webster has been rumored as an acquisition target, but its rebound may put it in a position to be the acquirer as time goes on.
Moving forward, the bank has begun to recast its strategy, particularly in retail banking by shifting investment from physical to electronic infrastructure. Smith said Webster will be regionally organizing around a hub and spoke model, which will ultimately mean fewer, smaller branches, situated around larger regional offices.
Even in the branches, most transactions will be automated and the bank will invest over $10 million in technology infrastructure over the next two years.
Webster recently rolled out its mobile banking service to customers with iPhones, Androids, Blackberrys and other web-linked handheld devices. And the bank expects to provide remote deposit capture to retail customers by the end of this year.
“We have to invest in our delivery system in a way that keeps up with the changing behavior and needs of customers,” Smith said.
The regional focus has also been integrated into Webster’s management strategy.
About four years ago Webster quietly began to name regional presidents for its seven core areas reaching from Boston to Westchester, County, N.Y. That strategy reflects the bank’s efforts to lure top talent from competitors and put an increased emphasis on business banking, something Smith said he wants to grow significantly. He sees particular promise for more Small Business Administration lending in Rhode Island, Massachusetts and New York.
Smith said he also sees great opportunity with Webster’s Wisconsin-based HSA Bank, a leading U.S. custodian of health savings accounts. Smith said he sees the popularity of health savings accounts continuing to rise as employees shoulder more of the burden of paying for their health care costs. Since 2005, when Webster purchased HSA Bank, the Wisconsin company has grown to more than $1 billion in assets, from $90 million.
“We invested in that business because we knew consumer-directed plans would be part of the long-term solution to lower health care costs,” Smith said.
DelMonte, the Hartford banking analyst, said one of the biggest challenges Webster faces is dealing with regulatory changes. The Dodd-Frank financial reform law is requiring higher capital and liquidity standards. There are also new restrictions on overdraft fees and proposed changes to “swipe card” fees, which could collectively cut into Webster’s revenue by more than 5 percent.
“The new regulatory environment is going to pose a lot of revenue headwinds for banks, including Webster,” DelMonte said.
Smith said new federal restrictions on overdraft fees have already taken a bite out the banks’ income, while the proposed swipe fee regulations could cost Webster as much as $20 million in annual revenue.
That has forced the bank to search for new revenue sources like adding checking account fees.
Smith said he has been very active in discussions about reform and he is trying to play a role in shaping how regulations eventually get implemented. He’s flown to Washington D.C. to talk to lawmakers directly, and is also active on the board of the Financial Services Roundtable.
“There were a lot of things that got thrown into the law that really had nothing to do with regulatory reform and could end up being punitive to consumers,” Smith said.
As reform is implemented, Smith predicts it will lead to further consolidation in the industry. The competitive landscape in Connecticut is already shifting with the recent acquisitions by Bridgeport-based People’s United Bank and First Niagara Financials’ pending acquisition of New Haven-based NewAlliance Bank. Wells Fargo Bank is also making an aggressive push in the state.
Smith said competition is getting stiffer, and that Webster must tout its local roots to differentiate itself.
“We were born here and raised here,” said Smith noting that his father, Harold Smith, started the company in 1935.
