Webster Financial Corp. of Waterbury, Conn., unveiled its first banking acquisition deal in more than 19 months, which it said would make both companies stronger competitors in a tougher environment.
The $17.9 billion-asset Webster said Tuesday that it plans to acquire NewMil Bancorp Inc., a New Milford, Conn., thrift company with 20 branches in the western part of the state, for $172.5 million in stock.
"We know our markets, particularly in Connecticut, and we've agreed that coming together as natural partners would strengthen the combined franchise to make us stronger competitors," James C. Smith, Webster's chairman and chief executive, said Tuesday in an interview. "That's the essence of what's happening here."
In the past Mr. Smith has cited tougher competition from new entrants - such as Bank of America Corp. - to his market, which covers Connecticut, Massachusetts, Rhode Island, and Westchester County, N.Y.
The deal would expand Webster's branch network in Litchen, New Haven, and Fairfield counties. Though it has expanded beyond its home state, 121 of its 158 branches are in Connecticut.
NewMil's "offices are located in areas that have higher per capita income," Mr. Smith said. "We see an opportunity to identify and meet financial needs for their customer base, including our investment management services, our insurance services, and, of course, our commercial banking services. So there are significant revenue enhancement opportunities."
Webster would also benefit from NewMil's small-business and professional banking services, and because it is a "contiguous partner," the deal would allow some branch consolidation opportunities, Mr. Smith said.
NewMil has $878 million of assets, $511 million of loans, and $619 million of deposits.
Webster has previously said that over the next three to five years it plans to expand mainly by building branches but also through small, non-disruptive acquisitions. On Tuesday, Mr. Smith reiterated that plan.
"To the extent that we can make acquisitions that augment that growth rate - that's the ideal environment for us," he said. "But we will rely primarily on organic revenue growth." The flat yield curve has hurt both companies, and both cited margin contraction in their first-quarter earnings reports.
Last week Webster said earnings fell 7.6% from a year earlier, to $43.9 million, or 82 cents a share, which still beat the average analyst estimate by a penny. Its net interest margin contracted 8 basis points from a year earlier but expanded 2 basis points from the fourth quarter, to 3.24%.
On Tuesday, NewMil said its profits fell 0.4% from a year earlier but rose 4% from a year earlier, to $2.22 million, or 52 cents a share. Its net interest margin shrank 52 basis points from a year earlier and 12 basis points from the fourth quarter, to 3.19%. No analysts cover the stock.
Once the deal is completed, Webster's deposit share in NewMil's three markets would advance one spot, to second place. Webster would have a 14.6% share, according to the Federal Deposit Insurance Corp.'s June 2005 data, the most recent available. People's Bank of Bridgeport, the only other banking company that is based in Connecticut and has branches across the state, has the largest share in those counties, 15.7%.
Webster's last bank deal was announced in September 2004, when it bought Eastern Wisconsin Bancshares Inc., the holding company for State Bank of Howards Grove, for $26 million. That deal closed in March of last year.
However, Webster did not retain the banking unit. It divested the retail branches and related loans and deposits, but kept the health savings account operations, the $100 million of HSA deposits, and the bank's trade name, HSA Bank.
Webster's largest bank acquisition was in May 2004, when it bought FirstFed America Bancorp Inc. of Swansea, Mass., for $465 million. The deal added 26 branches to Webster's network and brought its operations into Massachusetts and Rhode Island for the first time.
Webster said it would pay NewMil shareholders $41 a share in common stock, so long as Webster's average stock price is $44.85 to $50.25 a share in the 10-trading-day period that ends three days before the deal closes. But if Webster's stock price fell below $44.85, the exchange ratio would be fixed to 0.9142; if the stock went above $50.25, the exchange ratio would be fixed at 0.8159, the company said.
Also, Webster plans to repurchase its own common stock in open market transactions for up to 20% of the deal value. It expects the deal to close in the fourth quarter and be accretive to earnings next year.
On Tuesday, Webster's stock fell 1.1%, while NewMil's rose 37.8%.
Laurie Hunsicker, an analyst at Friedman, Billings, Ramsey Group Inc., said the deal is a "nice, small acquisition that is a good fit," with Webster's current operations.
"The pricing was rich but certainly in line with what we have been seeing," considering NewMil's scarcity value, she said.
