After languishing for almost six years, shares of Connecticut-based Webster Financial Corp. have started to take off.

The thrift's stock is up about 28%, to $17.875, since the company announced it would acquire the failed First Constitution Corp. of New Haven earlier this month. And analysts who follow it predict the stock could reach $20 a share by next year.

Still, Webster's management has its work cut out for it if the company, based in the economically ravaged city of Waterbury, is going to make good on Wall Street's bullish expectations.

Attractive Arrangement

At first blush, Webster appears to have struck a sweetheart deal.

The federal government is paying the thrift $24.2 million and offering protection against losses to take First Constitution off its hands. As a result, Webster will more than double in size, to $2 billion in assets from $883 million.

But those assets include First Constitution's $277 million commercial loan portfolio, an area of business where Webster has little expertise.

Webster's management insists it can handle the new challenge.

"We have managed with the idea that we would grow to be a $2 billion to $3 billion institution by 1995," said chief executive James C. Smith.

Negotiations Didn't Succeed

Indeed, Webster has unsuccessfully bid on two other failed banks in the past two years. In early 1990, it held unfruitful negotiations to merge with Eagle Financial Corp., a $459 million-asset thrift in Bristol, Conn.

Mr. Smith, 42, says the company does not plan any further acquisitions in the immediate future. He also is taking steps to bolster his company's ranks.

For example, he says he is actively recruiting Gary M. MacElhiney, First Constitution's No. 2 executive and a former senior vice president with Shawmut National Corp., to oversee Webster's newly acquired commercial loan portfolio.

Webster has long been conservatively run. It was founded by Mr. Smith's father, Harold, in 1936; the elder Mr. Smith ceded the CEO position to his son five years ago but remains chairman.

Mr. Smith appears to be as conservative a manager as his father. After going public at the end of 1986, Webster, like its peers, was under a lot of pressure to make high-return loans to real estate developers.

But Mr. Smith moved into that business cautiously and realized quickly that he and his colleagues were not good at it.

Their conservative posture kept the thrift from becoming crushed by the collapse of the commercial real estate market.

As of June 30, nonperforming assets were 3.2% of loans and foreclosed real estate; meanwhile, reserves were 140% of nonperforming loans, and foreclosed real estate values had been written down to below 40 cents on the dollar.

Stock Was Down Sharply

Webster's stock was taken public by Merrill Lynch & Co. at $11.50 a share. It traded as high as $16.50 in 1987 but fell back sharply in 1990 to $4.25 a share as the recession spurred panic selling in banks and thrifts. It has been rising ever since.

Successfully assimilating First Constitution won't by itself keep returns to stockholders high, analysts say. Webster will have to either grow its newly acquired commercial business or develop other, more profitable lines.

Mr. Smith predicts the company's return on equity will be higher than 10% in the next two years, up from a seven-year average of about 5%.

Webster has earned $2.2 million so far this year, on track to hit a return on assets of 0.52% - its best in four years.

However, with the Connecticut economy expected to remain sluggish for several years, some observers are skeptical that Mr. Smith will meet his goals.

"I think [15% return on equity] is going to be very difficult to achieve," said Stanley T. Wells, an executive vice president at Keefe, Bruyette & Woods.

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