Webster Financial Corp (WBS) 2001 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Webster Financial (Company: Webster Financial Corporation; Ticker: WBST; URL: http://www.websterbank.com/) Corporation's fourth quarter and year-end earnings conference call.

At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during this call, please press star, followed by zero, on your touch-tone phone. As a reminder, ladies and gentlemen, this conference call is being recorded.

Also, this presentation includes verbiage and statements with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, with respect to Webster's financial conditions, results of operations and business and financial performance. Thus, Webster has based it's forward-looking statements on current expectations and projections about future events. These forward-looking statements are subject to risks and uncertainties and assumptions, as those found in the Webster Financial public filings with the Securities and Exchange Commission, which could cause future results to differ materially from historical performance and future expectations.

I would now like to introduce your host for today's conference, Mr. James C. Smith, Chairman and Chief Executive Officer. Go ahead, sir.

Thank you. Good afternoon, and welcome to Webster's fourth quarter earnings call.

With me today are Bill Bromage, President; Bill Healy, Chief Financial Officer; Pete Mulligan, Senior Executive Vice President for Retail Banking; and Jim Sitro, for Investor Relations. Other officers are also gathered to help us in responding to any questions which you may have.

We've blocked out about 20 minutes for our presentation. I will be making a statement at the outset, and then Bill Healy will present the financial results. Then, we'll close and look for your questions and feedback.

As most of you have already seen from our earnings release this morning, we have a lot of good results to report today, for the fourth quarter and for the full year, 2001. We said in our press release that simply put, 2001 was our best year ever.

We say this for several reasons: First, because of the strength of our balance sheet and our earnings performance, and what we know has been a recession, and, in our market, which has been marked, recently, by relatively slow growth. Our operating earnings for the fourth quarter and for the year, both up 20 percent over comparable periods in the year 2000, demonstrate our ability to adapt well to the changing environment, and underscores our continuing success in delivering near-term results that meet or exceed expectations, while making sound investments in our future.

Our revenue mix is changing for the better. Our balance sheet transition to more commercial bank-like, has accelerated. We've broadened our business lines, strengthened out infrastructure, deepened our management team.

And frankly, what I'm most excited about, is the strategic plan that we've built, our roadmap for the future, for growth and expansion, for optimization and in slower-growth markets, and for heightened productivity. Our strategic plan has a clear linkage to our financial plans and to our incentive compensation plans, which challenges our executives to drive future growth consistent with our conservative risk profile.

For the year 2001, with a little bit of help from the acquisition of a leasing company, a couple of insurance agencies, and the remaining effect from the mid-year 2000 Mechanics' Savings Bank acquisition, our revenue grew 17 percent, year-over-year, boosted by an expansion in our net interest margin during the year of about 30 basis points, to 3.6 percent, and by a 30 percent year-over-year increase in revenue from fee-based services. Fee income now represents 29 percent of total revenue, and we expect that number to cross 30 percent in the near future.

Modestly assisted by recent acquisitions, our assets, loans, and deposits all increased during the year, despite aggressive paydowns in the mortgage loan portfolio, due to the low interest rate environment and high prepayments.

Shareholder's equity now exceeds $1 billion, and book value per common share increased by 12.6 percent during the year. Or shareholder's equity-to-total assets now stands at eight-and-a-half percent, the highest level in over a decade, which creates an opportunity for us to consider a range of initiatives opportunities, including our ongoing share repurchase plan.

Our asset quality remained relatively strong in the challenging economy, as reserves grew year-over-year, and the allowance for loan losses-to-gross loans increased to 1.4 percent.

I'm especially pleased to report that in '01, even as we invested in the people and systems that will drive us forward, our efficiency ratio declined to less than 51 percent. We increased our dividend, improved our return on assets, and reported a cash return on average shareholder's equity, in excess of 17 percent for the year, all news for our growing company.

Now, I'm going to ask Bill Healy if he would provide a more detailed look at our results.

Thank you, Jim, and good afternoon. Despite a challenging economic and interest rate environment in 2001, we are pleased to report strong results for both the quarter and full year.

Current trends in the loan portfolio reflect the general slowdown in the economy, causing slower growth in the commercial loans, and offset by strong growth in the consumer portfolio. The income from the sale of retail investment products and capital markets have also slowed. Despite this slowdown, we were able to grow revenues from fee-based services by over 30 percent this year. Also, net interest margin increased as a result of the fed's aggressive actions to lower interest rates to stimulate growth.

Through this, we have maintained focus and made significant progress in realizing our strategic objectives of transforming the balance sheet by improving our loan and deposit mix, while continuing to grow our fee revenues. We have also concentrated on controlling expenses and maintaining asset quality.

Reviewing the financial statements, I will start with the balance sheet. Total assets at year end were 11.8 billion, up 608 million over a year ago. Most of that growth is due to increases in the securities portfolio. Although total loans grew by only 51 million during the year, significant changes occurred in the portfolio. Commercial loans increased 289 million, mostly as a result of the acquisition of Center Capital and it's small business leasing portfolio.

Consumer loans grew 396 million, a result of strong demand for floating-rate home equity product. This growth was offset, however, by planned runoff in our residential mortgage portfolio totaling $617 million during the year.

Looking at our balance sheet growth on a link-quarter, the increase of 236 million occurred primarily again in the securities portfolio. Overall, for this quarter, loans increased 66 million. Consumer loans increased by 260 million, with that growth offset by a decline in residential loans.

Commercial and commercial real estate loans increased by 31 million, reflecting the slow growth in the economy and in our market.

We had great success in increasing our consumer loans in the quarter. The majority of this growth, about 70 percent, is coming from within or footprint, and 75 percent of these borrowers were already Webster customers.

Loan originations outside the footprint are primarily in continuous states. We underwrite and fund all production. One item to note is that 30 percent of this business is done through our call center, as representatives call previously-targeted customers.

With these actions, we have continued to improve the overall loan mix. Commercial and consumer loans are now 50 percent of the loan portfolio, compared to 40 percent a year ago.

On the liability side, we continued to report progress in improving deposit mix. Core deposits grew by slightly in excess of 14 percent from last year, and now amount to 59 percent of deposits, compared to 51 percent a year ago. The growth continues to come in both checking and now accounts, as well as in money market accounts. We continue to encourage migration out of higher-costing retail certificates of deposits, into these lower cost core deposit accounts.

These are attractive to us because they are generally lower-cost deposits with immediate re-pricing characteristics that enable us to respond quickly in changing interest rates.

Turning over to the income statement, per-share operating earnings for the fourth quarter were 71 cents, up 18 percent -- 18 percent, compared to the prior year, and up 12 percent for the year. On a link-quarter, the 71 cents that we reported in Q4 compares to 70 cents reported in the prior quarter.

Driving this improvement in operating earnings were the increase in the net interest margin and the strong fee-based revenue growth we experienced. For this past quarter, the margin was 3.61 percent. That is up 29 basis points from a year ago, and seven basis points from the third quarter. The primary reason for this improvement is the lower interest rate environment we are experiencing and the favorable impact it is having on our borrowed funds position.

Our wholesale spread, which we defined as "the yield on our investment portfolio, less the cost of our borrowed funds," was at 214 basis points for the quarter, up from five basis points in the fourth quarter of 2000. That's an improvement of over 209 basis points.

We will continue to benefit from these spreads, as long as the short end of the yield curve remains steep.

Looking at non-interest income, our total fee-based revenues, excluding security gains, were up 30 percent for the year. Commenting on some of the line categories within the increase, deposit fees continue to come mainly from account maintenance and NSF charges, plus the increases we are experiencing our cash management and debit card programs. In loan service and service fees, we continue to see increases in our commercial and mortgage banking fees.

Increases in financial advisory and insurance commissions, were aided by acquisition. As for our non-interest expenses, the year-to-year growth in dollars is a function of our acquisition activity.

Excluding these acquisitions, the real growth is less than three percent. With lower levels of business growth this year, we continued to take a disciplined approach in managing our expense base. The efficiency ratio for both the quarter and year-to-date, was around 50 percent.

Comparing link-quarters, margin growth was strong for the quarter. This was -- this was partially offset by a decline in non-interest income, due primarily to the continued impact of the economic slowdown and the impact it is having on the sales of our retail investment service, and the M&A sector of our financial advisory business. Expenses were flat, quarter-to-quarter.

The new year also brings with it some new accounting standards for us: FAS 141 and 142, which relate to business combinations for goodwill and other intangibles. Webster expects to benefit in 2002 from the new standards, by no longer amortizing goodwill of approximately $13.5 million. The impact to 2002 EPS will be approximately 28 cents, or seven cents per quarter. Core deposit intangibles will continue to be amortized through the P&L.

On another front, loan service for other amounted to $1.2 billion at year end. We ended the year with 6.7 million -- billion, in capitalized servicing assets, and recorded a $265,000 write-down in the fourth quarter, the only one during the year. We do not expect any additional write-downs, based upon the current interest rate outlook.

Just to clarify capitalized servicing assets, 6.7 million, was it?

Yes.

OK. Then may I ask, Bill, just to help everyone to appreciate what we're looking forward to, without giving a true forward-looking statement, give us a feel for how things are shaping up.

OK. I've already talked about the impact of the new FASB on our goodwill amortization. Let me now give you an idea of our current outlook for the year 2002, without being specific about our bottom line results.

Overall, next year, we look for single-digit growth on average, in the loan portfolio. We expect that the loan portfolio will grow as a result of growth in the consumer and commercial portfolios. The consumer portfolio will achieve higher growth rates than the commercial, in this current interest rate environment.

Growth in commercial will come from the leasing portfolio, commercial real estate, and core C&I growth will grow modestly.

Residential loans will continue to run off, but at a much slower pace in 2002, assuming longer-term rates rise. We may add some volume to the portfolio to maintain balance. On the deposit side, you will see growth, particularly in core deposits, as we implement our growth strategy in Fairfield County.

Concerning the margin, it is clear that we have benefited from relatively low interest rates on the short end of the curve. We expect the economy to improve and rates to rise in the second half of the year, and deposits and loan growth to offset any modest decline the in the margin we may have out in the second part of 2002. Through the first half of the year, however, we should continue to benefit as the yield curve remains steep. Additionally, there are still opportunities for favorable re-pricing in our deposits, particularly as CDs continue to mature.

In the second half of the year as the economy improves, rates should begin to rise and growth in our loan portfolios should increase. Also, we will receive benefit of our expanding consumer portfolio in a rising rate environment, as home equity lines re-price.

Looking at non-interest income, we see growth in the high single digits. We look for deposit fees to continue to grow as deposits increase, but in the high single digits. We also look for similar growth from our trust, insurance, and financial advisory services.

In closing, we expect to continue to invest in our businesses in 2002. We will monitor our expense base, and expect to maintain an efficiency ratio in the low 50 percent range.

Now back to you, Jim.

Thank you, Bill.

It's clear from today's report that Webster has made convincing progress in our transition to a financial services provider. We're the largest Connecticut-based bank today, as measured by assets, capital, market cap, and profitability. We have significant market share in our primary markets. Our name recognition is growing through our investment in Webster's "We Find a Way" branding program. Our employees have told us in a recent bank-wide survey, that our foundation is exceedingly strong, which augurs well for our continuing growth.

We now provide a broad range of financial services to consumers and businesses in our markets. Our ability to build relationships across our business lines is accelerating. Our commercial customers value our insurance products, and our private banking capabilities. Every one of our business units has a growth plan and a manager capable of, and accountable for, realizing our goals.

We're poised for growth through de novo branch expansion, which will accelerate deposit growth, and through the successful penetration in our markets by our insurance agency and by Webster financial advisors. As consolidation continues, we may also have the opportunity to make one or two smaller bank acquisitions this year, in our usual disciplined manner.

The result of our continuing growth is likely to be higher revenues, controlled expenses, continuing strong asset quality, and an ever stronger recurring earning stream. As our performance continues to meet or exceed expectations, we expect that our investors will no longer look at us a thrift institution, but rather, as what we are today, a company which has made the transition to commercial bank-like financial services provider.

Over time, we expect to earn the higher price earnings multiple which our banking competitors enjoy. Today, we sell at 10-times consensus '02 new GAP earnings. Our banking peers are well above that. Through our continuing good performance, we're optimistic that we'll begin to close that gap.

And now, with thanks for your interest and support, we'd like to open the line for questions and feedback.

Thank you, Mr. Smith.

Ladies and gentlemen, if you have a question, please press one on your touch-tone phone. Then, you will hear a tone acknowledging your request. Your questions will be taken in the order that they are received. If your question has already been answered, you may remove yourself from the queue by pressing the pound key. In addition, ladies and gentlemen, if you're using a speakerphone, please pick up your handset before pressing the button. One moment, please.

Laurie Hunsicker, please state your company name, followed by your question.

Hi, Laurie Hunsicker from Friedman Billings, good afternoon. Kind of a two-part question here: with respect to the charge-offs, I wonder if you could kind of provide us the breakdown, and specifically of the 3.3 million, what portion were shared credits, and maybe an update on shared credits? And then, kind of hand-in-hand with that, a breakdown on the nonperformers, if you have that by type?

Yes, Laurie, thanks for being with us. I'd like to introduce Joe

, who is our Chief Risk Officer, and has overall responsibility for credit policy. And, by way of introduction,

is formerly a senior executive from Fleet (Company: FleetBoston Financial Corporation; Ticker: FBF; URL: http://www.fleetbankbostonmerger.com/), who joined us several months ago in this role as an executive officer.

, would you take that question?

Good afternoon. Thank you, Laurie. I'll try to respond, and, hopefully, this will answer directly the question. In the quarter, we had a net charge-off of one half of $1 million, as it related to syndicated loans. And, in terms of -- your second part was on non-performing?

Well, do you have a full breakdown of what the charge-offs were, by type, or -- in addition or?

Approximately 800,000 was from the combination of the leasing company, the consumer, and residential. 500,000 was the syndicated credits that I previously mentioned, and the balance was from what we could call our core middle market, commercial activities.

OK, great. And then, with respect to the absolute dollar balance in the shared credits, is -- is that still around the same level that it was last quarter, the 420 million?

It's down about 10 million, Laurie. I think we're about $410 million at the end of the year.

OK, great. And then, do you have a breakdown of non-performers, by type?

Yes. If you want to look at the breakdown of the 62-and-a-half million dollars,

, do you want to?

Yes, I'll handle that, Laurie. Just under eight million, approximately 7.7 million, is in the residential portfolio. 1.9 million, we attribute to the consumer portfolio. 6.7 million would be in the leasing book. And, C&I would be 46.1 million. And, to anticipate your next question, of the 46.1 million in C&I, 5.4 million is in the syndicated portfolio.

OK, great. And then, if I could just ask one more question, can you just generally comment on the buy-back. Certainly, your stock does look very cheap in here at these levels, and it looks like this quarter, you all didn't do too much of your two-and-a-half million shares?

Laurie, we have purchased, to date, about 375,000 shares of the two-and-a-half million shares that have been authorized by the board. So, that's how much we've purchased, to date, and we expect that, you know, we should complete the buy-back, you know, within the next six months.

Great. Thanks so much.

Chris Buonafede, please state your company name followed by your question.

Hi, Fox-Pitt Kelton. I want to ask about the insurance commission line item. With a lot of commercial line price increases flowing through in 2002, how will that affect the commission, or commission growth, for you guys this year?

It will have a positive impact on commission growth. Probably 60 percent or so, of our entire insurance book is in commercial P&C, with the balance split between financial services, including employee benefits and all, and personal lines. So, this will have a positive impact. It has been -- we expect to easily achieve double-digit growth in insurance revenue for '02.

Just on -- without any acquisition?

That's correct.

OK.

The other thing I'll tell you is that we've had a lot of success in '01 in consolidating the operations of all the agencies that we had acquired. They're meeting their targets. We still have all the sales capability in the appropriate markets, and that's gone very well for us.

OK. Just another question, how much more of the -- I guess, how much more willing are you guys to put -- I guess, leverage technology he balance sheet with securities and borrowings, at this point?

We're pretty comfortable with our current levels. We are always mindful of the speed with which an environment can change. We've seen that quite a bit, lately, and I think, as you know from our long experience, that we try to manage that such that we maximize net interest income, but recognize that we'll have rapidly changing markets, and we have reasonable closely-matched durations on the asset and liability side.

So, could the -- could the asset growth in '02 exceed that your projections for loan growth? Is that -- is that something that's possible?

It's possible, but we're not going to project it.

OK, fair enough, thanks.

Derrick

, please state your company name, followed by your question.

Hi, it's Jared Shaw, with Keefe, Bruyette, and Woods. The question I have relates to the amortization of goodwill. You had said that under 142, amortization should decline by about 13 million. Does that also include FASB 72, that they're now saying applies to branch purchases?

Jared, it's 13-and-a-half million that we'll not longer be required to amortize. And, it doesn't include the -- the FASB 72, you know, intangibles. That's about $1.1 million. You know, tax-effected, you know, that's less than one cents a share.

OK, great. Thank you.

Ladies and gentlemen, if there are any additional questions, please press one, on your touch-tone phone. Remember to pick up your handset before doing so. One moment please.

Gerry Heffernan, please state your company name, followed by your question.

Good afternoon. Gerry Heffernan with Lord Abbott. Gentlemen, we were able to enjoy some margin expansion here, due to the -- the rate environment we just experienced. I'm wondering if, given your current balance sheet, your views of interest rates look -- and the economy, looking ahead -- what can we do to preserve some of that margin gain that we've experienced, in a rising rate environment?

Well, it's a great question. You could imagine we spend a lot of time talking about that, Gerry.

I can imagine.

And, thanks for being with us. As you can see, we've really enjoyed significant benefit on the wholesale side, with the pricing of the liabilities there. And, we simply can't expect that's going to continue longer-term as the economy strengthens. And, we share the consensus view that's likely to occur relatively soon. It may not be quite a strong as some are projecting, but we would expect that by the second quarter, we'd some strengthening. And, we think that Connecticut actually is in very good shape to rebound fairly quickly.

So, while we won't be able to preserve the wholesale spreads longer-term, we think that as rates rise, we'll get an incremental benefit on the retail side, and we also would then expect to have some growth in assets, which would contribute on the volume side. So, what we're hoping for, is a stable spread environment in the first half, and we expect there would be a marginally declining spread in the second half, which ideally would be offset by asset growth.

OK. Would a rising rate environment occurring sooner, or later -- which -- I presume you would prefer it happening later? Is that correct?

For us, what's really most important is to have a positively-sloped yield curve.

OK.

So, if we had our choice, we'd have low rates in the short-term, and high rates in the long-term. That would be an ideal environment for us. We prefer a rising-rate environment from here, to a falling rate environment. Although, if you look at us in some kind of a scenario where rates would rise or fall 100 basis points instantaneously, it would have a modest impact on our P&L.

OK, great. And the -- could you give us a little bit more color on the -- what your current plans are, to what extent you already have the groundwork laid for the plans of the branch expansion?

You're probably aware that we have announced that we intend to expand into Fairfield County, beginning immediately. We have 12 offices in Fairfield County today, but they're in the northern and eastern portions of Fairfield County. We want to get down into the Darien, New Canaan, Stamford, and Greenwich areas. And, our plans are to open at least six branches in '02, and another bunch in '03, so that by then, we'd probably have 25-or-so branches in that market, and have a full presence, with continuity there.

And, this would not just be for branches; we'd have our insurance services, and Webster financial advisory services, and all of the commercial banking services that we offer. We've also indicated that we expect to move up into the Springfield area, as part of the Hartford Springfield Corridor, which is also a natural expansion opportunity for us. And, we need a little bit of additional presence down in the Southeastern Connecticut market. So, de novo will be an important part of our growth strategy, at least in the foreseeable future.

OK. How many branches did that all add up to? You mentioned six in '02 for Fairfield. How many in the Hartford area?

It's hard to say exactly, but I think that if you were to use a handle of 20-or-so branches, over 24 to 36 months, that that would be pretty good.

That would incorporate all three areas you just spoke of?

Yes, pretty much. And then, we'll see how it goes. It's possible it could be more than that, but...

And, would you suspect all of those to be de novo?

Virtually, yes, but a lot of times what happens is, if you start to move into the area and there are potential partners there, it might raise the possibility of a small merger which we would consider.

OK. And, your expectations for a de novo branch to go profitable?

Peter Mulligan.

Our expectations plans for that would be anywhere from 18 to 24 months, we should be in the profitable scenario, per branch.

OK. So, to what extent will the opening of the new branches put a damper on earnings growth, as you incur the expenses of starting them up?

Well, just -- I'll give you a broad answer to that, Gerry, if I could The impact is probably several cents a share, potentially, in '02, not quite as many in '03, as the newer ones start to make up for the cost of the very new ones. And, that's how we would look at it.

And, we're actually -- we're monitoring the impact on the P&L as the governor for the number of branches we'd open during any particular period. And, this is consistent with what we've been saying all along, which is that we're working hard to make our results near-term, even as we are investing in our future.

There's also the possibility that there could be further rationalization of the existing franchise, although I think we've done a pretty good job of that over the last year-and-a-half or so, where we've been able to close about 25 or 30 branches.

OK, great. Thank you very much for your time, gentlemen.

Thank you.

Again, ladies and gentlemen, if there are any additional questions, please press one, on your touch-tone phone. Please remember to pick up your handset before doing so.

We have a follow-up question from Laurie Hunsicker. Please state your question.

Yes, hi. Just to follow-on on the non-performers, and I think maybe somehow I missed something; commercial real estate, did you have a breakdown of that, within the numbers, or?

Virtually, less than a million dollars, Laurie, in commercial real estate.

And that compares to 14 million last quarter? Or, are my numbers off?

I think your numbers are off.

OK.

The ...

You know what? I can circle back with you guys, after the call. OK.

Yes, we'll -- that would be a good idea, I think.

OK, thank you so much.

Mr. Smith, there are no further questions at this time. Please continue with any closing comments.

I'd just like to thank you all for being with us today. We appreciate your interest and confidence in Webster.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for participating; you may disconnect now.