Webster Financial Corp (WBS) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Webster Financial Corporation second quarter conference call.

At this time all participants are in 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 the call, press the star followed by the zero your touch tone phone.

As a reminder, this conference is being recorded.

Also, this presentation includes forward-looking statements within the safe harbor provisions of the Private Securities and Litigation Reform Act of 1995.

With respect to Webster Financial Corporation, results of operation and business and financial performance.

Webster has based these forward looking statements on current expectations and projections.

These forward-looking statements are subject to risks, uncertainties and assumptions as described in Webster Financial's public filings with the securities and exchange commission which could cause future results to differ materially from historical performance or future expectations.

I would now like to introduce your host for today's conference, Mr. James C. Smith, chairman and chief executive officer.

Please go ahead, sir.

Thank you.

Thank you all for joining us today for Webster's second quarter conference call.

I'm sure it's a busy day for all of you.

We'll try to summarize our report in about 20 minutes or so.

I am joined by Bill [Brummage] our president and chief operating officer, Bill Healy, our chief financial officer, Peter Mulligan, senior executive vice-president for retail banking, and James Sitro, senior vice-president for investor relations.

Bill Healy will present the details of the earnings report and Bill [Brummage] will report on the Duff and Phelps impairment charge as well as on the recently announced agreement to acquire about $500 million in asset based loans from IBJ Whitehall.

I think can you see from our earnings report that the second quarter was the best earnings quarter ever for Webster.

We also made significant progress in advancing our strategic plan.

The quarter was marked by growth in loans and deposits especially our core deposits by strong asset quality and by controlled expense growth.

Specifically loan originations in the quarter were greater than a billion which was up from about nine percent from the first quarter and a full 50 percent ahead of the second quarter a year ago.

Our loan balances increased nearly three percent in the quarter and are up seven percent year-to-date.

In particular we registered strong growth in our consumer loan portfolio as well as in our leasing portfolio.

Our core deposits increased by about six percent in the quarter and are up about ten percent year to date.

Our total assets which now stand at about 12 and a half billion dollars increased by a little over one percent in the quarter and before over five percent year-to-date.

Our asset quality remains strong as our nonaccrual assets declined from the first quarter.

Our coverage of nonaccrual loans exceeds 200 percent.

Our overall loan coverage ratio stands at a healthy 1.34 percent, specially considering that half of our portfolio was in residential mortgage loan.

Our efficiency ratio is holding steady at just over 50 percent.

These fundamentals fuel the 19 percent growth in operating earnings and in earnings per share over the comparable quarter last year to 82 cents per share.

Of course if that is adjusted for the good will amortizations the increase year over year would be about eight percent.

The return on average shareholders equity is at about 15 and a half percent.

The cash return is at 16 and a half percent.

The return on average assets is greater than 1.4 percent.

Our shareholders equity exceeds a billion dollars and amounts to eight and a half percent of total assets.

Our book value per share has risen 15 percent year over year to more than 22 dollars a share and our tangible book value has risen 27 percent year over year to $15.81 per share.

I think it's pretty clear that our improving results underscore our success in delivering near term results that meet or exceed expectations even as we are making sound investment in our future.

Webster clearly has momentum.

I'm very pleased to report that Webster announced a five percent buy back program yesterday on top of the existing buy back which is about two-thirds complete at this point.

The new buy back will allow us to buy an addition the 2.5 million shares on top of the 800,000 or so that remain in the existing authority.

This buy back is a clear he can express of our board's confidence in our financial strength and in our prospects.

We find Webster shares are extraordinarily attractive as an investment at today's prices.

You may also have seen our announcement concurrent with our earnings release that we'll begin to expense as compensation the cost of all stock options that we grant effective in the third quarter of this year.

All future employee stock option grants will be expensed over investing period bad on the fair value at the date that the option is granted.

As you know we previously disclosed the impact of stock options on earnings in a footnote in our annual report.

The impact of including the cost of the stock options in compensation expense will probably be to reduce dilute earnings per share by about one cent in 2002.

The anticipated fully phased in cost of adopting this method will be something less, we think, than about 10 cents per share in 2005.

We'll continue to use the fair value method of accounting for determining the value of the options.

And I just want to say that quite simply we've made this decision because we believe that expensing stock options is the right thing to do.

Finally, as you know from our press release and from our 8 K filing we've completed our review of the carrying value of all of our good will and other intangible assets in compliance with SAFS 142.

And as a result of that review we have determined that a portion of the good will related to our investment in Duff and Phelps is impaired and we have taken a one time transitional charge of $7.3 million after taxes.

With regard to the other 23 acquisition ~s that we have made over the last ten years or so, there was no impairment found.

The charge of 7.3 million after tax will be taken effective January 1 of this year and is in accordance with the transitional rules under 142.

I just want to say briefly, though, Bill [Brummage] will say a bit more about this, that Duff and Phelps has actually performed reasonably well but in a very difficult environment for financial advisory valuation and investment banking company.

The revenue actually is down by less than 15 percent from the year 2000.

And just the same as you know that companies in this business have seen their value erode quite significantly over the last year or so.

At this time I'd like to turn it over to Bill Healey and ask him to give the detail of the financial report.

WILLIAM HEALY: Thank you, Jim, and good afternoon.

We are pleased to report another strong quarter of balance sheet and revenue growth.

During the second quarter we saw solid growth in both the loan portfolio and retail deposits.

When compared to the prior year as well as to the prior quarter.

Our revenue for these periods also showed strong growth due to an expanding margin and the favorable interest rate environment and improving deposit mix.

On a link quarter comparing back to the first quarter of this year the interest margin is up ten basis points to 3.61 percent and we experience growth in core deposits of almost 27 percent annualized.

We continue to maintain our focus in meeting our strategic objectives of transform the balance sheet by improving our loan and deposit mix while continuing to grow fee revenue.

We also concentrated on control expenses and improving asset quality.

Reviewing the financial statements, I would like to start with the balance sheet.

Total assets at quarter end were 12.5 billion, up 673 million or six percent over a year ago.

Most of the growth came from increases in the securities and loan portfolios.

Total loans grew by 444 million or 6.4 percent year over year.

Commercial loans increased by 63 million, mostly in the lease financing area.

In addition, consumer loans grew by 665 million.

This is a result of strong demand for floating rate home equity product in this low interest rate environment.

This growth was offset by planned runoff in our residential mortgage portfolio totaling 290 million dollars.

This cash flow was reinvested into the securities portfolio.

Looking at our balance sheet on a link quarter, the growth was even more impressive.

The increase of 149 million dollars in total assets occurred entirely in the loan portfolio offset by a slight decline in the securities portfolio.

Overall for this quarter loans increased 193 million or 11 percent annualized.

Consumer loans increased by 157 million and commercial real estate loans rose 39 million.

Commercial loans grew during the quarter 7 million dollars with almost all the increase again occurring in the lease financing area.

Residential mortgage loans decreased by only 11 million dollars as we added to the portfolio purchased loans as well as loans originated through our retail network.

We continue to have great success in increasing consumer loans.

These loans are primarily home equity credit lines.

As I mentioned in previous calls, most of the growth comes from within our footnote and the majority are customers.

Loans originated outside the footprint are in contiguous state.

We underwrite and fund all production.

FICO scores on recent production are up over 740.

With these actions in the loan portfolio we have continued to improve the overall loan mix.

Commercial and consumer loans are now 51 percent of the loan portfolio compared to 44 percent a year ago.

On the liability side we continue to see progress in both growing deposits and in improving mix.

Core deposits grew in excess of 19 percent from the year ago period and 27 percent annualized on a link quarter.

These accounts now amount to 62 percent of deposits compared to 50 percent a year ago.

This growth continues to come in both checking and now accounts as well as in our money market account.

They are attractive to us because they are generally lower costing with a median pricing characteristics and they own able us to respond quickly in changing interest rates.

We continue to encourage migration out of the higher costing retail certificates of deposits into these lower costing core deposits accounts.

Turning now to the income statement.

Per share diluted earnings for the second quarter was 82 cents up 19 percent compared to a year ago.

For the first six months of 2002 pricing earnings increased to 80.2 million or 1.62 per share compared to 67.2 million or 1.35 per diluted share a year ago.

The second quarter and six months results in 2002 reflect the adoption of the new accounting standard eliminating good will amortization.

For comparative purposes, had the requirements of the standard been applied to the 2001 quarter and six month period diluted earnings per share would have been 76 cents and 1.48 respectively.

Driving the improvement in our operating earnings for the quarter was the overall growth in total revenues which increased ten percent to the year ago period and 25 percent annually compared to the first quarter.

Most of the revenue increase came as a result of growth in net interest income which increased 13 percent over a year ago due to the benefits of a favorable interest rate environment and strong loan and deposit growth.

The net interest margin was 3.61 percent in the second quarter compared to 3.39 percent a year ago and 3.51 percent in the first quarter of this year.

Noninterest income.

Our total fee-based revenues excluding security gains were up two percent in the second quarter compared to a year ago.

Commenting on some of the line categories, the increase in deposit fees come comes mainly from account maintenance and NSF fees plus increases were experiencing in our business and cash management accounts.

In the loan and loan servicing fees we continue to see increases in lease fees which were up $150,000, mortgage documentation and preparation fees as well as application fees on mortgages, loan prepayment fees and line usage fees.

The increase in insurance revenues were aided by acquisitions and premium price increases year over year.

Comparing link quarters, noninterest income rose one percent due primarily to the increases in deposits and loan fees.

The current state of the stock market, together with the lack of the M and A activity continued to adversely affect the fee income growth in our trust and investments growth and the merger and advisory fees at Duff and Phelps.

Expenses remain under control as the efficiency ratio was 50 percent for all quarters.

Almost all the growth over the second quarter of last year can be attributed to salaries and benefits.

About 85 percent of this are in salaries or about 4 million dollars and represents new people to support the growing lending and fee-based businesses.

The majority of the remaining compensation costs is attributable to higher medical insurance, payroll taxes, and pension costs.

Asset quality.

Nonperforming assets of 51.5 million are down 2.7 million from the first quarter.

The decline from the first quarter can be attributed to a reduction in residential and commercial real estate nonaccruals and Oreo.

Our coverage rate on nonaccruals is almost over 200 percent.

The loan loss allowance increased to 99.7 million dollars at the end of June and represents 1.34 percent of total loans, and this gives us a coverage of 1.34 percent on our total loan portfolio.

The net character for the quarter was 18 basis points of average loans.

Our interest sensitivity remains relatively unchanged from year even.

Should interest rates rise immediately 100 point, net interest income on a net annualized basis would be slightly positive.

This assumes management does not take any mitigating actions and we maintain a positively slow yield curve.

With those comments now let me turn the program back to Jim.

All right.

I'm going to ask Bill [Brummage] to give you a report on Duff and Phelps and the [inaudible] Lending portfolio.

Thank you Jim.

On Duff and Phelps first, if I may.

We filed a 8 K last night on Duff and Phelps.

Much of the information is in that filing.

And just by way of background, we purchased 65 percent interest in Duff and Phelps in the fourth quarter of 2000 after a lengthy period of court ship by both sides.

Since that time the investment banking market, has Jim indicated, has been under extreme pressure, and Duff and Phelps clearly has not been exempt from that pressure.

We have discussed previously that we have taken a 7.3 million dollars after tax transitional charge.

Clearly the cumulative value of Duff and Phelps has been impacted by the extremely challenging business environment, especially by the slow down in merger and acquisition activity which comprise a significant portion of Duff and Phelps revenues at the date of purchase.

As a result of these charges, as of June 30th, 2002, the carrying value of good will for Duff and Phelps will be 7.1 million dollars.

Additionally I should note that we have outstanding credit arrangement with Duff and Phelps totaling approximately 5.7 million dollars.

Jim indicated the revenues.

And just a little more detail on that.

Of the total revenues for the year 2001 were 15.6 million dollars compared to 18.2 million in 2000.

And recognizing that in 2000, 1.3 million of that was reported given our closing in November.

Total revenues for the six months for this year and for last year for the six months were 8.3 million dollars.

These revenue numbers should be viewed against our expectations at the time of acquisition of revenues in excess of 20 million dollars and growing from there.

Duff and Phelps services customers through regional offices in Chicago, New York, Los Angeles and Seattle, providing expertise in private placement, fairness opinions, middle market merchant acquisitions, valuation, ESOP and ERISA advisory services and special advisory services to both public and private companies, principally middle market companies.

It has an excellent brand name, a strong core competency, and a capable and committed professional staff.

All of those bode well for this entity once the economy recovers.

Now if I could move to Whitehall.

In May, Webster announced that it signed a definitive agreement to ais acquire the asset based lending division.

RBG Whitehall business credit corporation which was part of the industrial bank of Japan's family.

It is now anticipate that that acquisition will close in this quarter.

The ABL division will be renamed Whitehall business credit corporation and will do business under that name.

At closing it will have approximately 500 million dollars in loans outstanding and approximately 20 million dollars in deposits.

The business was founded in 1968 and has maintained a strong track record at providing asset based lending solutions to middle market customers which is clearly one of the Webster's core target markets.

I should note that Webster will be acquiring an operating business here, not simply a portfolio.

We will be retaining the current ABL management and staff and will continue to be head quarterrd in its New York facilities.

As we have had the opportunity since this announcement to work more closely with the management and staff of Whitehall business credit corporation, we have become even more encouraged with their knowledge, professionelism and discipline at this form of lending.

And that validates our confidence in the opportunity we see to grow this business.

ABL has been a business activity that we have been involved in at Webster.

We have a portfolio that's approximately 15 percent the size of Whitehall business credit.

And our outstanding track record in that portfolio in terms of MPAs and chargeoffs provide us extra confidence in entering into this business.

Moreover, in our third quarter release, we discuss new executives who will join the team, two of which I would note, Joe savage, to head our commercial banking activities, and Jo Keeler is our chief risk officer, both of whom considerably strengthen our activities on the commercial side and I think will be instrumental in our success in Whitehall business credit as we proceed in the future.

Whitehall is an excellent fit with Webster's strategic plan and further strengthens and diversifies our franchise.

It's a good add on to center capital which we purchased over a little over a year ago and since that time has had nearly a 40 percent growth rate with a continuing excellent credit performance.

It provides services to Webster's middle market customers and will complete our set based lending product offering, broadens our geographic reach to contiguous states with its strong north eastern presence.

It further helps Webster transform itself into a diversified financial institution.

We performed extension of due diligence and have become extremely comfortable with the portfolio we will be taking responsibility for.

Discussions began and due diligence began in 2001.

The acquisition is limited to current and fully performing loans in the ABL portfolio.

We will not acquire any loans carried as nonperforming or in default.

The loans will be coming over with a strong reserve in place.

The transaction is expected to be immediately accretive to our earnings, and this portfolio will be well diversified with between 20 to 25 percent in each manufacturing, retail, services, and wholesale.

In in sum, we see this an excellent fit for Webster.

ABL will benefit from our focus on middle market and a dedicated commitment we have to serving business customers.

We fully expect Whitehall business credit Corp. to become an integral part of Webster and combination is expected to have both institutions leverage the resources towards achieving profitable growth.

Jim, back to you.

Thank you, Bill.

I hope you can see from today's report that we have made convincing progress in our transition to a commercial bank line financial services provider.

We're the largest Connecticut based bank today as measured by assets, by capital, by market capitalization and profitability.

We have significant market share in our primary markets.

Our name recognition is growing through our invest.

In Webster, we find a way, branding program.

Our strategy is clear and widely communicated.

Webster now provides a broad range of financial services to consumers and businesses in our markets.

And we're making progress in building strong customer relationships across our business lines.

We're poised through for growth through or de nova granting expansion which has been quite successful to date.

And we believe that that de nova program will accelerate deposit and loan growth.

We've also been successful in penetrating our market through our insurance agency and in Webster Financial even in this very difficult market.

Our high performance checking program commencing next month will significantly increase our penetration in our existing markets.

We're confident in our ability to generate higher revenues, controlled expenses, strong asset quality and an ever stronger recurrent earnings stream.

Good corporate governance, fuel disclosure and transparency in financial reporting are part of Webster's strong foundation.

I cite our 10-K and 10 Q files as examples of this openness.

Our decision to expense stock options is consistent with our commitment to adopting best financial practices.

We believe that the more you are know about us the greater will be your confidence in our ability to achieve our goals.

As our performance continues to exceed expectations we expect that our investors will increasingly value us for what we are today, a commercial bank line financial services provider and over time we expect to earn the higher price earnings multiple generally according to our banking peers.

Now with thanks for your interest and support we'd like to open 00:25:51 the line for questions and feedback.

Thank you.

If you do have a question at this time please press the one key on your touch-tone phone.

If your question has been answered or you wish to remove yourself from the queue please press the pound key.

Our first question is from Steven grid son of second curve capital.

Please go ahead.

Hi guys.

Great looking quarter.

I was hopping I could get an update on your branch expansion strategies.

Thanks.

With regard to our branch expansion strategy we previously announced our intention to open de novo offices in Fairfield county and ultimately up through the Hartfield Springfield corridor and possibly more into southeastern Connecticut.

We have opened through new branches in Fairfield county bringing us to a coatel of 15 branches in that market.

We expect to reach 25 by the end of next year.

The results of the first branches that were opened there have been well beyond our expectations and we're quite pleased with the results, both in terms of the deposit in flows, particularly core deposits, as well as the potential for loan growth and the cross sales of financial advisory and insurance services.

Great.

Thanks a lot. .

Next question comes from Laurie hunts sacker of FBR.

Please go ahead.

Hi.

Good afternoon.

Great quarter.

First some questions here that I wanted to follow up.

I guess for starters, regarding your asset quality, your asset quality looked terrific and improved this quarter.

But I guess I was unclear as far as did that include the [Adelphia] exposure, which the last we pulled down your exposure was about ten million.

And could you give us an update on the share credit portfolio, where that stands.

And just wondered if you could comment, on your repurchase, it looks like - we saw your latest authorization.

But it looks like you were purchased about a million in the quarter.

Meaning that you have about three million or so left to go, and what time frame you look to complete that.

And finally if you could comment on the first call estimate of 03 of 359 if you're still comfortable with that.

I'll ask Bill [Brummage] if you would answer the question.

Yeah, on [Adelphia], Laurie, we have cut our exposure in half in [Adelphia]. by selling in the secondary market, we are down to approximately ten million dollars.

We have two different credits there.

Both of those are performing credits.

Both are to cable systems we think are well secured.

And we expect them to be paid.

With respect to the shared national crediting, same generally as you know that exam is going on right now.

The results are not available.

We think that our portfolio is properly reflected in our quarterly results.

And what is the balance as of June.

The balance in our syndicated loan portfolio as of June is approximately 420, 425 million dollars, which is, I believe, relatively flat from where it had been.

Okay.

And then just quickly.

On the other questions, let me see that, as I mentioned, we completed about two-thirds of the buy back that is currently authorized.

We have actually accelerated that buy back somewhat over the last five or six weeks.

As I indicated, our board believes that our shares represent compelling value at current prices.

And I think the time horizon we expect for completion of that buy back and then completion of the newly announced buy back is somewhere in the 12 to 18 month period.

But depending on market conditions we'd be quite aggressive in the buy back.

And then finally regarding first call.

I think that we're a little bit uncomfortable estimating what the earnings will be.

But let me say that that number that you mentioned of 359 appears to be somewhat higher than what generally had been out there.

I think that many of the projections that have been made by the analysts that follow Webster have been very thoroughly thought out and reflective of our potential to, as I said, generate an ever stronger recurring earnings stream.

Okay.

Great.

I mean, that estimate is higher than where we currently stand.

And I just wondered.

Okay.

Perfect.

Thanks.

We're scratching our heads about it, Laurie.

I just wanted to make sure there wasn't something we were missing.

Thanks Jim and Bill.

Thank you.

Our next question is from Bill [McCrital] of McConnell bud row management.

Please go ahead.

Good afternoon, very good quarter.

Sort of on the line with this shared national credit, do you have any risks or corporate securities in the investment portfolio.

Investment portfolio is generally extremely high quality.

Any core double A or better.

Virtually the whole portfolio is in agency or triple A securities.

Can you comment on whether there are any corporates, regardless of the rating.

I'll ask Bill Healy do give the detail.

I think anything we have in there, corporates, are less than one percent of the total portfolio.

I don't see them as being a big number.

Okay.

Very good.

Thank you.

Thank you.

Our next question is from Jerrod Shaw of KBW.

Please go ahead.

Hello, Jer rod.

A follow-up on the syndicated loan question.

Does the portfolio look roughly the same as it did at the end of the year when you disclosed the breakdown of the loans, or has it shifted in terms of the industry exposure.

The portfolio from an outstanding perspective looks relatively the same.

From an industry exposure perspective, I believe there's been no - I'm sure there's been some shifts as some loans have been booked and some leans have paid off.

I don't see any significant shifts materially one way or another in terms of industry exposure since that time.

The wire and cable portfolio that we had an exposure in is down moderately.

We have some loans and collateralized debt obligations that are down mod he hadly.

So there's been some modest shift but in terms of absolute dollars it's not material.

Okay.

And also you comment that the issue BJ portfolio has a reserve associated with it already.

What is that reserve level compared to I guess a percentage of total leans.

Three percent.

Great.

Thank you.

Our next question is from Chris [bonfeety] of Fox pit call ton.

Please go ahead.

Hello, Chris.

Hi guys.

Can we infer anything from increasing the buy back authorization, that acquisition opportunities may not be present at this time in terms of capital deployment.

Let me say we consider acquisitions to be a consider strength at the right price, of course.

And we are anticipating that we will likely have the opportunity to consider acquisition opportunities.

Having said that, we deem the value of our own shares to be so compelling that we're moving forward with the buy back program.

It is likely also that in any acquisition that we make it will be part cash and part stock.

And that even if it were significantly stock oriented there would be some buy back involved in the acquisition.

And therefore, we don't think that by buying back our own shares that we in any way reduce the potential for acquisition activity.

Okay.

Fair enough.

Thank you.

If there are any additional questions, please press one at this time.

There are no further questions at this time.

Please continue.

That completes our report for today.

We thank you for joining us.

We appreciate your confidence in Webster and we wish you well during these turbulent market times.

Thank you.

Ladies and gentlemen this concludes today's conference.

Thank you for your participation.

You may disconnect 00:35:00 at this time.

Have a good day.