Despite intense competition in the Connecticut market, Webster Financial Corp. has more than quadrupled in size over the last five years– fueling that growth by closely observing customer needs.

The $9-billion-asset thrift’s expansion, up from $2.1 billion five years ago, has also stemmed from an aggressive acquisition strategy that has benefited, at times, from mergers between Webster’s big regional competitors. It picked up divested branches from Fleet Financial Corp.’s merger with Shawmut National Corp. in 1996, and it is a likely contender to benefit from Fleet’s merger with BankBoston Corp, announced last week.

John Brennan, Webster’s chief financial officer, said last week it was too early to consider assets that the proposed Fleet Boston Corp. will almost certainly have to divest. However, Webster gobbled up 20 branches and $850 million in assets and deposits directly from the Shawmut merger, and wound up with the remaining branches divested in Connecticut when it bought Eagle Financial in 1997.

Although Webster sees the importance in the new fee-income businesses that banks are getting into, its growth largely occurred on the back of thrifts’ traditional mortgage lending business. Fee-based income jumped just over 5% last year to 18.5% of total income–most of which stems from servicing loans–and is expected to climb to 25% in the next three to five years.

"If you think about our overall strategy, we already were a strong residential mortgage lender, a strong home equity lender, a strong deposit taker," Brennan said. "But we’ve been trying to broaden our product line over the last several years and we’ve been getting into other fee income lines, trust and investment management services and insurance."

The bank has two main strategies to gain even more market share. One is understanding the customer as thoroughly as possible with the help of market focus research groups and other marketing tools. The other is having better customer information to retain those customers driving the bank’s profitability, and offer them the best products and services for their needs through direct marketing, Brennan said.

John Menke, the bank’s database manager, said what sets Webster apart is that its database includes a lot of information most bank databases don’t have, such as data on specific transaction behavior of customers–not just what channel was used, but the specific location. And it makes better use of the information. "This information allows us to understand what we can do to effect a change in those behaviors, to increase the value of that product for both the customer and the bank." He said because the information is organized in a single data mart, the bank can view the true value and depth of a relationship.

Additionally, because models are getting better and better, the bank is better able to predict what services the customer will need. This week the bank is getting software delivered that will predict the most likely product a customer will purchase. "It’s just guidance, but in many instances, that’s all that is needed to get the customer to sign up for the additional service," Menke said.

Looking carefully at customer needs has kept Webster’s traditional banking business competitive, but Brennan said the bank–which anticipates keeping its flexible thrift charter–is looking into new areas to increase fee income and provide customers with a broader range of products.

One such effort was its purchase in June 1998 of Damman Insurance, which has clients all over the country. The insurance company is stationed under the holding company, whereas the bank’s other business lines are under the banking subsidiary.

He said the company’s purchase earlier this year of Access National Mortgage, an Internet mortgage company with $350 million in origination volume in 1998, fits into the strategy by increasing fee income. "And that’s one of the big differences as we evolve into a financial services provider; products that generate fee income rather than spread income," Brennan said. Access originates loans in 47 states.

The bank’s 105 branches across Connecticut have what Brennan calls "pretty strong" market share, ranking third in deposits in the state. It ranks either first or second in the Hartford, New Haven and Litchfield County markets, with at least 30% of the households in those areas banking with Webster.

The bank also originates loans in surrounding states, but it is not in a hurry to cross borders, Brennan said. "We would probably consider branching into other states if we could make it work economically. One of the problems with branching today is always somebody in that state that has greater cost savings because they’re there."

Brennan said part of the bank’s ongoing facelift involves diversifying the products and asset mixes. Currently, the bank has about 75% of its loans in residential mortgages. The goal over the next three-to-five years is to lower that number to 55%, while increasing the percentage of consumer and business loans to 25% from about 12% now. On the deposit side, the story is similar: management wants to boost checking accounts to 22%-23% from 19% now, while deflating CDs to 50% from the current 55% of deposits. The remainder, savings accounts and money market deposit accounts, is slated to drop to around 28%.

Striving for fewer and lower-cost deposits fits into Webster’s overall modernization strategy: "By increasing our commercial/industrial lending, small business lending and consumer lending–instead of residential mortgages–we will be selling more of those loans and retaining servicing, (thus giving) customer value," Brennan said.

Banks selling insurance are running into a problem with what should be a slam dunk: selling homeowners’ insurance to customers who have just taken out a mortgage. Solving the quandary is one of the main goals for the industry, sources said.

The problem arises when a bank turns to its insurance carrier to underwrite a policy and the underwriter cannot write any more policies for a particular area. Similar to a quota system, insurers do not want more than a certain amount of coverage in specific geographical areas, because significant coverage could mean financial ruin in the case of a natural disaster. The industry learned this lesson back in the early 1990s after Hurricane Andrew ripped through South Florida, causing hundreds of millions of dollars worth of damage.

To ask an insurer to write more policies in an area than it deems inappropriate, a bank would have to be able to balance the insurer’s exposure in danger-prone areas by bringing more production in non-danger areas. Today, the party who is protecting the primary insurer, the reinsurer, charges the insurer more than it would be worth to take on the extra business. Because the primary insurer has committed to the secondary insurer to fix the concentration of losses, the primary insurer must pay a hefty fee to go over the limit. So, in this situation, the bank’s insurance agency must find another underwriter to write the policy–and it may also be at capacity for that area.

Sources said now the only thing to do is work to appease insurance carriers by bringing more business in other areas. But that has not proved easy.

"That is the one thing banks hope to be able to do, especially ones that operate in many states. They can help insurance companies keep their ratio limits in line to help balance out coverage in less attractive areas. I haven’t seen many cases where they can make that work. It’s very early in these programs and they haven’t generated performance to show how much volume they’ll be able to generate. It’s hard to convince (insurance carriers) you can bring value," said bank consultant Frank Caccione, of the Mitchell Madison Group.

Jeff Huff, manager in sales for property and casualty for one of the bank-in-insurance industry leaders, BB&T, said the problem of insurance companies struggling to make the homeowners’ insurance line profitable is a tricky one. If a bank’s insurance unit has enough contractual relationships with enough carriers, he said, a policy can usually be found; it’s just that it will not be at a sellable price in the market. This is because some giant carriers that distribute only to their own agents, such as State Farm or Allstate, will probably have lower prices. But, at the same time, Huff said, "The bigger the bank and the more spread they have, the harder it is to have the right company for all the opportunities that it would have to provide insurance. Most banks are having some heartburn over this. How do you be all things to all people, but do it efficiently with as few carriers as possible? This is getting a lot of tension now as the industry consolidates."

He said BB&T has tackled the problem by trying to work with all of its carriers to understand their strategies, weaknesses and strengths. "We try to direct business to companies’ strengths as best we can. We hope they’ll look favorably on us and allow us to carry the banner into new territories for them. You just feel your way through the thing," he said.

The financial engineers behind the recently announced merger between Fleet Financial Group and BankBoston Corp.have chosen the pooling method of accounting, which avoids the creation of goodwill and any unsightly recurring charges to earnings. That probably wouldn’t be possible, however, if the Financial Accounting Standards Board’s current proposal to account for business combinations comes to fruition.

FASB is dealing with the question of when merging institutions must choose the pooling or purchase methods of accounting in the last week of March or first of April. However, FASB representatives have clearly stated that the standard setter is seeking to better harmonize accounting rules worldwide, and that bodes for much tighter restrictions on the use of pooling. International accounting standard setters generally permit pooling only when institutions are very close in size in terms of market capitalization. Fleet’s market cap, at about $23 billion last week, is nearly twice BankBoston’s at $13 billion.

"It’s hard to say because FASB hasn’t addressed the question yet, but it seems likely that pooling wouldn’t be permitted in this case," said Robert Willens, Lehman Brother’s accounting expert.

Assuming the newly merged bank, to be called Fleet Boston Corp., is denied the pooling method of accounting and must resort to the purchase method, the proposed standard would result in approximately $11 billion in goodwill. BankBoston Controller Terry Jefferson estimated that separating straight goodwill and core deposit intangibles, and then merging their typical 25-year and seven-year lives, respectively, would result in an average life of 15 years. Dividing that into a total of $11 billion in goodwill would result in a $733 million hit to earnings each year under current accounting. That hit would increase at least slightly for banks under the proposal because it presumes goodwill to have a life of 10 years or less, and sets a cap of 20 years, down from 25 years today. Other companies have a 40-year cap today, which under the proposal would double amortization in many cases.

The good side of being forced to use purchase method of accounting, however, is that it would give the new bank about $16 billion to reinvest in other business or stock repurchases, with restrictions on capital management.

There are complications, however. The proposal requires the merged entity to measure the value and useful lives of the various intangibles–such as brand, customer lists, trademarks, core deposits–and amortize them accordingly. Kim Petrone, FASB’s project manager, explained that there is more flexibility with intangibles, and that some may have lives over 20 years, or even indefinite lives eliminating the need for amortization all together–"If you can presume indefinite renewal, and there’s an observable market–like an FCC license–then you wouldn’t have to amortize it," she said.

Accounting sources fretted, however, that the proposal, particularly with respect to intangibles, not only may be difficult and burdensome to implement, but perhaps impossible.

The largest in-market bank merger in years, between Fleet Financial Group and BankBoston Corp., seems destined to result in dramatic realigning of the banking industry in New England and significant layoffs. Those two probabilities have an array of community groups already planning their opposition.

Ray Neirinckx, coordinator of Rhode Island Community Reinvestment Association, said his group is planning to voice its opposition to the mergers with regulators as well as rally other community groups. He added he believes the projected 5,000 cut jobs is a major issue.

"We are extremely concerned because job loss is a reinvestment issue. The devastation has a multiplier effect on local economies so we clearly see job losses as a CRA issue, Neirinckx said. He added that the current projection of 5,000 layoffs will likely increase. "A year later, when contracts expire, people are not renewed, they are reorganized, whatever the buzzwords are for ‘you’re out of a job.’"

In addition to the economic effects of layoffs, the merger is anticompetitive even after the newly-formed behemoth’s planned divestiture of $13 billion in deposits, said Matthew Lee, a consumer advocate attorney for Inner City Press/Community on the Move. The group, which has been active in pressing merging financial institutions, including the recently-formed Citigroup, on Community Reinvestment Act obligations and other consumer concerns, posted a Fleet Bank page on its Web site. The group is highly critical of the proposed merger, and calls for the Federal Reserve Board to deny approval. It describes the merger as anti-competitive and paints Fleet as a "fair lending rogue."

"Fleet has had long-term concerns," Lee said, citing a settlement the bank made in May 1996 with the Department of Justice on charges of discrimination for systematically overcharging minorities in the New York-area mortgage offices. Lee said that his group has monitored the bank’s mortgage lending operation in New York and New Jersey for some time and found no improvement. He noted in Long Island, N.Y., statistics for Fleet Real Estate Funding in 1997 showed 31% of denied applications to refinance mortgages were from African Americans, versus only 14% from whites–a 2.21 denial-rate disparity. It’s "much worse than the industry average in (statistics)," according to the Web site.

Lee cited other examples of disparities in New York and New Jersey, and said the bank’s CRA record alone is grounds for denial of the merger by the regulators.

The group also calls the merger anti-competitive due to its sheer size and concentration in the northeast.

"This is as classic (antitrust) as you can get," he said, noting that by law in Massachusetts and Rhode Island no bank can control more than 30% of the state’s deposits. The new bank would have 37.61% in Massachusetts and 51.63% in Rhode Island. While significant divestitures are planned, Inner City Press contends that the competition issue will remain because, practically speaking, there will be no other superregionals left in New England.

"What competition is really going to be left? A small bank with 10 more branches? It’s still not a credible competitor to Fleet. There’s one market for regional and superregional banks, and one for small banks, but they don’t compete. They won’t have the same products or the same turnaround time. It actually hurts access to credit on a fair basis to have no competition," he said.

Lee added that his group will also work with the Massachusetts Affordable Housing Alliance to oppose the merger by writing letters to regulators and testifying at hearings.

Bankers may soon have to think about restructuring existing qualifying special purpose entities, even though the Financial Accounting Standards Board grandfathered those structures, in order to comply with new accounting going ahead.

According to project manager Halsey Bullen, the board’s decision March 10 on guidance to implement the amendment to FAS 125 is similar to Emerging Issues Task Force (EITF) Issue No. 97-6. That issue grandfathered previous transfers to existing structures. Likewise, the new guidance would impose no retroactive accounting changes on existing SPEs. However, Bullen cautioned, existing securities structures to which transfers will be made in future may have to be altered to meet the new accounting requirement.

The guidance will mainly affect revolving period securitizations such as portfolios of credit card loans or home equity loans, Bullen said.

The board will discuss the effective date for the new amendment in a future meeting, possibly March 24. Previously the board had said the amendment would be effective at the end of this year. It recanted, however, because work on the amendment fell behind, and the completed document still must be approved by the board, go through a comment period and the issues must all be reexamined by the board. Bullen said whatever the new effective date, it would provide sufficient to give bankers time to restructure any necessary deals.

The board also limited the necessity of disclosures about characteristics, cash proceeds and gain and loss to securitizations, excluding previously-considered whole-loan sales or loan participations.

Finally, the board reaffirmed its previous stance that auditors and attorneys should make the decision whether sales treatment should be given to securitization deals done by banks subject to FDIC receivership, should the bank declare insolvency.

Princeton Telecom, the electronic lockbox firm that works to concentrate bill payment and remittance information and aspires to be a bill publisher between the billers and aggregators such as Checkfree, will soon announce plans to take its company public.

The 15-year-old company, based in Princeton, N.J., has not yet announced its IPO, but will do so soon, according to Dick Corl, executive vice president. Princeton Telecom is currently one of the best-connected firms in the business, with connections to 700 merchants.

Corl explained the company’s place in the big picture is between billers and a company like Checkfree, which currently has 80% of the bill payment market, and gives banks the bills to pay. Princeton Telecom would publish bills on behalf of billers, send the content to aggregators like Checkfree, which would aggregate the bills on behalf of the banks.

Corl sees a future world where consumers will have several options to pay all their bills, one of which would be a bank’s own Web site, because it would have links to all the major billers through bill publishers like Princeton Telecom and aggregators like Checkfree. Some other options for the consumers to pay their bills would Internet portals like Yahoo! or Infoseek in addition to the biller’s own Web site.

"For the bank, they’re going to want content and the only way they’re going to attract the consumer to Chase.com (for example) to pay the bills is to have a lot of bills. The banks are interested in having as many billers publishing as many bills as quickly as possible until there are a lot of presentments. Otherwise it’s probably not very compelling to the consumer," Corl said.

America’s Community Bankers say they will fight hard this year together with insurers to keep the proposed corporate-owned life insurance tax out of the budget.

Jim O’Connor, tax counsel with the ACB, said at the group’s annual legislation conference in Washington recently that most of the abuses that led to earlier legislation have been eliminated, and further restrictions on deductions for life insurance purchases are not needed.

"We want some closure on this," he said.

The Treasury has proposed this year a repeat of a $1.9 billion tax on corporate-owned and bank-owned life insurance by closing off deductions for employees, officers and directors of the company. The only eligible persons would be those who had a 20% stake or more in the company.

The law was changed in 1996 and 1997 as a result of companies like Wal-Mart using the provision to insure their employees and take large deductions, said O’Connor.

The changes eliminated the ability of companies to borrow against the policies and deduct the interest, he said. FAS 106, which was enacted by the Financial Accounting Standards Board in December 1990 requires financial institutions to estimate their future costs of providing employees health coverage. The COLI provision allows companies to offset some of that hit to capital, O’Connor said.

Last year a $500 million provision nearly made it into the IRS restructuring act but was pulled at the last minute after staffers found a more lucrative compromise. The ACB said they will "stay vigilant" to ensure it doesn’t return this year.

The House Banking Committee rejected a bid by banks to force the thrift industry to pay a deposit insurance differential for three more years, even though legislation was passed in 1996 that would end it at year-end.

A provision extending the differential was included in financial modernization legislation passed by the Senate Banking Committee March 4, but it failed to pass the House Banking Committee March 11 during its markup. A proposal by Rep. Richard Baker, R-La., would have exempted banks with less than $100 million in assets from paying the surcharge imposed on banks, but it was defeated. Under the bill passed in 1996, premiums would be equalized at 2.3 basis points effective Jan. 1, 2010.

The House banking panel voted 29-30 Thursday to reject an amendment that would have eliminated a provision now in the bill that bars chartering of new unitary thrifts and restricts sale of existing ones. An amendment to restore full grandfathering rights to existing institutions passed Thursday 29-26. That provision, proposed by Rep. Kent Bentsen, D-Texas, is comparable to the Senate bill and would allow acquirers of existing unitary thrifts to retain all powers associated with the current charter.

The issue deals with the interest payments on Financing Corporation (FICO) bonds. These were issued in 1987 to finance the bailout of insolvent thrifts. But, the funds provided through the bonds were not nearly enough to bail out the industry, and the whole thrift deposit system was revamped in 1989 when the government assumed the lion’s share of paying for the bailout. However, under the 1989 bill, nearly half of all SAIF premium assessments were diverted to pay the interest on the FICO bonds.

In 1996, given that 40% of thrift deposits were owned by banks, an agreement was reached to reduce the competitive disadvantage thrifts faced in paying premiums of 23 basis points while banks paid 1.25 basis points. The banks agreed to assume some of the burden as of Jan. 1, 2010. But to get banks to do this, thrifts agreed to make extraordinary, one-time payments totaling $4.5 billion, plus pay a disparate premium, albeit reduced, for three more years.

But the issue was reopened several months ago at the request of the American Bankers Association, which argued that under the current deal, Bank Insurance Fund members are being squeezed.

Large banks were able to whittle down a provision of financial modernization legislation being proposed in the House that would have required a public hearing in every city involved in a bank merger for most acquirers– but the victory came at the cost of the goodwill that had previously marked the proceedings.

The provision, approved on March 4 by a 22-21 vote, would have required that the Federal Reserve Board hold a public hearing in all affected cities for mergers involving institutions with $1 billion or more in assets. Steven Blumenthal, an analyst at Schwab Capital Markets and Trading Group in Washington, said virtually all bank mergers involve institutions of $1 billion or more. The amendment was introduced by Rep. Bruce Vento, D-Wis., and was supported by the Democratic members of the committee.

The large banks promoting the legislation "went ballistic," in the words of one lobbyist, and went to Rep. James A. Leach, R-Iowa, chairman of the House Banking Committee, to warn that if the amendment stayed they would back away from supporting the bill.

Their arguments galvanized Leach, who allowed two Republicans to introduce an amendment to give the Fed "discretion" to hold hearings, rather than mandate them. The amendment passed on a partisan vote late March 10, but the fact that the amendment was out of order under committee rules enraged Democratic members of the committee. The tenor of the proceedings grew so intense that Leach called a halt to the markup for the day at the request of Rep. John LaFalce, D-N.Y., ranking minority member of the panel and a key player in facilitating the bipartisanship that marked the proceedings.

Their argument, as explained by the lobbyists for several money center banks, is that holding public hearings adds to the already huge cost of consummating mergers. They said that when all costs are added up, it costs $1 million or more for the institutions involved to put on each hearing, even though they are held under the auspices of the Fed. At the same time, sources said, a merger-in-progress leaves both institutions vulnerable to takeover by other institutions. The longer the merger is in limbo, the greater the uncertainty and risk.

The legislation is called the Financial Services Act of 1999. The bill would make broad changes in banking regulation, including repeal of the Glass-Steagall Act, and would allow banks, securities firms and insurance companies to affiliate. However, the bill has many controversial components because it seeks to give all current players an equal voice in regulating the new institutions.

The House Banking Committee passed legislation March 11 that would repeal the Glass-Steagall Act and allow banks, insurance companies and securities firms to affiliate.

A similar bill was reported out March 4 by the Senate Banking Committee, but the Senate panel’s vote on the measure was more partisan because it would roll back commitments for banks under the Community Reinvestment Act. That bill was passed by an 11-9 vote and was believed to have an uncertain future.

The next step for the House bill is the House Commerce Committee, which is expected to impose much more restrictive rules on bank securities activities than that imposed in the banking panel version of the legislation. Specifically, the Commerce panel, which oversees the Securities and Exchange Commission and the activities of securities firms, is expected to revise the bill to require banks to "push out" their securities activities completely under SEC scrutiny. Commerce is expected to get a one-month referral on the legislation.

The House leadership wants to put the financial modernization bill on the floor the week of May 11. In comments several weeks ago, Rep. David Dreier, R-Calif., chairman of the House Rules Committee, said it is likely he would be in the unenviable position of refereeing between the Banking and Commerce panels’ versions of the bill.

Sen. Phil Gramm, R-Texas, chairman of the Senate panel, has said he hopes to have a bill on the floor the first week of April. However, Gramm appears committed to rolling back banks’ CRA responsibilities, so it is unlikely the bill will get to the floor under such a quick schedule. Indeed, there are doubts that the differences on the Senate bill can be reconciled by summer, at best.

The industry groups which put together the basics of the bill want it to be enacted by the July 4th congressional break. But congressional staffers and administration officials believe that such a fast track is unlikely.

The pattern in both the House and Senate banking proposals is to pass bills containing provisions sought by all lobbying groups, and to pay tribute to functional regulation, which calls for specific activities to be regulated by their current regulators. However, because of the compromises crafted to keep all special-interest groups happy, it is seen as unlikely that the bill will work in practice. Effectively, the bill is likely to lead to endless litigation and conflict between regulators seeking to protect their turf, and the turf of the industries they regulate, sources said.

The Obama Administration has already sent out a veto letter on the Gramm/Republican/Senate version of the bill. Besides CRA, it has controversial provisions such as safe harbors designed to protect current state laws restricting bank insurance sales; a definition of insurance; and the end of deference to federal regulators in determining whether a product is banking or insurance. All of these provisions could prompt a presidential veto.