Webster Financial Corp (WBS) 2003 Q3 法說會逐字稿

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

At this time all participants are in a listen-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, please press star followed by 0 on your touch-tone phone.

As a reminder, ladies and gentlemen, this conference is being recorded.

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

With respect to Webster's financial condition, results of operations and business and financial performance.

Webster has based these forward-looking statements on currents expectations and projections about future events.

These forward-looking statements are subject to risks, uncertainties and assumptions as described in Webster's financials, public filings with the Securities and Exchange Commission, which could cause future results to differ materially from historical performance or future expectation.

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.

Good afternoon and welcome to Webster's third quarter investor call and webcast.

Joining me today are Bill Bromage, President, our Chief Financial Officer, Bill Healy, and Terry Mangan, Investor Relations.

Other members of the Webster management team also are here to respond to your questions after our formal remarks.

Diluted earnings per share increased 6% from a year ago to 89 cents per share as net income totalled a record $41.3 million dollars in the third quarter.

The quarter was marked by several positive developments, which I will summarize here.

Bill Healy will then provide more detail as appropriate.

The biggest single contributor to earnings growth during a 12-month period marked by continuing pressure on the net interest margin is the double-digit organic growth in both loans and deposits.

Every primary loan category, including residential loans, home equity loans, commercial and industrial loans, commercial real estate loans, lease financing and asset-based lending is up at least 6% year-over-year.

Deposit growth has been fueled in part by our high-performance checking program for consumers and small businesses, which has increased our market share in existing markets and by our de novo branching program, which is enabling us to gradually expand our footprint.

These results deliver emphatically on our promise to grow our loans and deposits faster than the markets while maintaining our credit discipline.

Starting with the balance sheet, Webster's loans have grown by 14% during the past year and now total $9.1 billion dollars.

All of the growth has been organic, without any acquisition-related effects since we acquired Whitehall asset-based lending in August of 2002.

Non-ready growth of 20% over the last 12 months, results in commercial loans, commercial real estate loans and consumer loans now comprising 50% of total loans compared to 56% a year ago against our goal of 75% by 2006.

And this growth occurs even after taking into account the planned reduction of $164 million dollars, or 37%, in our specialized lending portfolio over the past year.

The specialized lending portfolio totalled $284 million at September 30, including $85 million dollars of investment-grade rated collateralized loan obligations.

The non-CLO portion has declined by more than half from its peak in 2002.

Our deposit mix already exhibits the characteristics of the typical commercial bank of similar size to Webster.

Our core or non-CD deposits totalled $5.4 billion dollars at September 30, and have grown organically by $800 million dollars or 17% over the past year.

As a result, core deposits account for 67% of total deposits compared to 63% a year ago.

I'd like to talk about the net interest margin, which declined to 2.91% from 3.52% a year ago and from 3.10% in the second quarter.

Given that eight basis points of the decline resulted from the third quarter implementation of SFAS 150, the adjusted linked quarter decline was about 11 basis points, pretty much as expected and consistent with our view that the margin would likely bottom in Q3.

In fact, the margin stabilized mid-quarter and actually turned up ever so slightly in September.

We continue to believe that our modest asset sensitivity positions Webster to benefit from an improving economy and the higher interest rates that would likely result.

It's also worth noting the impact of prepayments on the margin.

Not only are the cash flows reinvested at lower yields, and in our case without extending duration, but the net investment premium amortization from prepayment of mortgage-backed securities and the FAS 91 expense realization from prepayments, directly impact the margin, as well.

In fact, to the tune of about $7 million dollars in the third quarter, about the same as the second quarter, but up significantly from less than $3 million dollars in the third quarter of '02.

As prepayment pressures abate, we expect less negative impact on the margin from premium amortization and FAS 91.

We also expects a significant positive impact on the net interest margin from the anticipated $1.5 billion dollar deleveraging of the balance sheet, which we announced last week in conjunction with the FirstFed merger agreement.

Looking down the income statement, excluding loan provisioning and gain on sale of securities, our revenues grew about 10% in the third quarter both year-over-year and for the nine-month period.

A significant gain in income from fee-based revenue, offset relatively flat net interest income.

Our strategic emphasis on fee-based revenue in recent years has contributed meaningfully to Webster's earnings per share growth.

Webster's core fee-based revenues have averaged over $50 million dollars in the first three quarters of 2003.

As a result, fee-based services have accounted for about one-third of total revenues this year, compared to about 28% a year ago, which puts us right on par with commercial banks of similar size to Webster.

Organic growth in areas such as deposit service fees, mortgage banking and other loan fees have contributed about three quarters of the increase with the Monthag and Montiello Insurance Agency acquisitions earlier this year accounting for most of the balance.

Webster's asset quality is exceptionally good as evidenced by a nearly 40% decline in non-performing assets from a year ago and a nearly 20% decline from the second quarter.

Classified loans have also decreased significantly, while non-accrual coverage ratios are enhanced.

Bill Healy will give the asset-quality details.

I want to focus on the net chargeoffs and the provisioning in the quarter, as they were both higher than normal.

Our net chargeoffs totaled $11.5 million dollars in the third quarter with a single non-performing commercial loan representing the entire increase compared to the year ago and linked-quarter periods.

This loan, which we discussed in our second quarter earnings call, is an asset-based loan originated prior to our acquisition of Whitehall Business Credit, which continues to perform well.

While the allowance for loan losses would have been adequate to absorb the chargeoff, we elected to increase the provision in the quarter because we believe that with our loan growth and changing risk profile our loan coverage ratio should be in the area of one and a quarter to 1.3%.

So, while our normal provisioning will likely be in the range of $5 to $6 million dollars per quarter over the next several quarters, we increase that amount to $10 million dollars in Q3.

The increase in the provision was primarily funded through gains taken on $4.2 million dollars on telecom loans, which we had previously written down through the allowance in the fourth quarter of 2002 and carried as loans held for sale.

As a result, the loan coverage ratio at September 30 is 1.29% and the provisioning year-to-date exceeds net chargeoffs.

As we mentioned last quarter, the complexity of the recent interest rate environment has caused us to focus our efforts that much more critically on improving our operating efficiency.

Our core expenses, adjusted for FAS 150 effects, were essentially flat once again on a linked quarter basis.

We expect that expenses will remain relatively flat in the fourth quarter and into 2004, as well.

A review of our procurement practices, which is expected to achieve potential annual savings of $3 to $4 million dollars and the recently initiated Webster process optimization program, will support this expected operating leverage.

Turning to the growth through acquisition prong of Webster's strategic plan, we have commented throughout this year about how our four recent strategic acquisitions, Whitehall Business Credit, our asset-based lending group, Budget Installment Corporation, our premium finanancing company, Fleming, Perry and Cox, our financial planning specialists, and Monthag and Montiello Insurance Agency have broadened and deepend our product line, driven growth in revenue and profits, and contributed to our progress in achieving our strategic goals.

In June, we announced the acquisition of North American Bank and Trust, which will add five branches to our Connecticut footprint.

And just last week, we announced our partnership with FirstFed America Bancorp in a breakout transaction that creates a true regional competitor, possessing the franchise, the products, the capital and service mentality to compete successfully across southern New England.

As I said in our call last week, we've waited patiently and exercised discipline in pursuit of a partnership which would meet our strategic and financial goals, and this is that partnership.

Our combined powerful franchise has a 141-branch retail footprint stretching from lower Fairfield County through Connecticut and Rhode Island to southeastern Massachusetts.

The merger opens new opportunities and establishes a new platform for growth in FirstFed's market area.

Our two companies have come together in pursuit of their shared vision, to be a leading regional financial services provider.

The combination of Webster and FirstFed creates the 46th largest publicly traded bank in the United States with $16 billion dollars in assets after a planned balance sheet deleveraging of up to $1.5 billion dollars in connection with the transaction.

Our combined market cap will be about 2.2 billion dollars.

We are united in our conviction that together we are bigger, stronger and better able to achieve our ambitious goals.

We expects to operate as a federal reserve bank financial holding company for a national bank regulated by the OCC, providing a full range of consumer banking, mortgage banking, commercial banking, insurance and trust and investment management services for our growing customer base.

I now ask Bill Healy to present the details of our third quarter financial performance.

Thank you Jim, and good afternoon to all of you joining us on the call today.

Following up on Jim's comments, Webster's third quarter performance once again fits within the context of our strategic plan to grow loans, deposits, revenues and earnings while transforming the balance sheet and maintaining a disciplined approach to credit and expenses.

Key trends in the quarter include continued strength in our core loan growth, improvement in asset quality with reductions in non-performing assets and classified loans and continued strong growth in fee revenue.

We continue to experience compression of the net interest margin during the quarter with almost half of the linked quarter decline coming from the implementation of FAS 150, reclassification of $2.8 million of capital trust securities expense as interest expense.

On a positive note, we did see margin stabilization during the quarter and expect improvement in the fourth quarter.

The above items contributed to Webster's net income of $41.3 million in the third quarter, or diluted earnings per share of 89 cents for an EPS increase of 6% over a year ago.

Total revenues excluding security gains were $158 million in the third quarter.

Included in this figure are two one-time items.

These items would be a $4.2 million dollar gain from the sale of telecom loans which were charged down to their realizable value in December 2002 and transferred to loans held for sale, which Jim indicated funded the higher loan loss provision during the quarter and a $1.6 million dollar gain included in other income related to an insurance investment.

Excluding these items, the security and security gains, total revenues for the quarter increased by 6% compared to a year ago and 1% on a linked quarter.

Revenue growth compared to each period was led by fee-based services.

The increase in linked quarter total revenues demonstrates the effect of the recent interest rate environment and its impact on net interest income and our net interest margin.

Net interest income of $98.2 million in the third quarter declined by 4% compared to a year ago and by 2% on a linked quarter basis.

Part of the decline is due to the July 1 implementation of FAS 150, which resulted in the reclassification of $2.8 million dollars of capital trust securities expense from non-interest expense to interest expense.

Excluding this, net interest income would have been $101 million in the third quarter, a slight increase over the $100.6 million in the second quarter.

This growth came as a result of the increase in our loan portfolio.

Regarding the net interest margin, the adjusted 11 basis point decline reflects a $3.7 million dollar reduction in interest income from the securities portfolio compared to the second quarter, as we still were impacted by lower rates and prepayments during the quarter.

We expect to see improvement in the margin for the fourth quarter compared to the third quarter as prepayments abate and premium amortization slows in the investment portfolio.

We are seeing higher reinvestment yields on fixed rate assets, and we continue to see benefits from deposit repricing that occurred in the third quarter.

And during the fourth quarter we expect some maturity of our high-costing borrowed funds.

During the quarter we realized security gains of $4.6 million compared to $8.7 million in the second quarter.

All the gains this quarter were from the common stock portfolio.

Fee-based revenues, excluding the two one-time items that I mentioned earlier, grew by 31% over the prior year and amounted to $54.2 million dollars in the third quarter.

With the exception of the Monthag and Montiello insurance acquisition earlier this year, growth in fee-based revenues over the past year has come from organic sources.

Deposit service fees were up 13% year-over-year, mostly a result of growth in accounts from our high-performance checking campaign.

Insurance was up 56% due to the Monthag and Montiello acquisition, and increased premiums in the core business.

Loan and loan servicing gains, excluding the $4.2 million dollar gain on the telecom loans, were $5.2 million dollars, up 206% due to strong loan origination volume that carried over for the second quarter.

Loan and servicing fees increased by 78 basis points due primarily to higher prepayments and line usage fees and a write-down of our mortgage servicing rights in the year-ago quarter.

The book value of our mortgage servicing rights was approximately $4.6 million at September 30th, including a $2.3 million valuation reserve.

Other incomes compared to a year ago and linked-quarter periods includes a $1.6 million dollar gain from an insurance investment.

Comparing to the second quarter, core fee-based revenue increased by 9%, mainly as a result of a $3 million dollar increase in loan and loan servicing fees while gains on sale of mortgage loan originations and servicing increased $1.6 million.

Non-interest expense growth over the second quarter of last year reflects the effects of FAS 150.

Adjusting for the $2.8 million -- adjusting for the reclass of the $200 -- $2.8 million back into non-interest expense in the third quarter, growth over a year ago would have been 11%.

Salaries and benefits expense represents the majority of this growth, which reflects the effects of our strategic growth investments made to support the expansion of the mortgage origination business with four new regional offices, the addition of five new de novo branches, the Mayfhog acquisition and an increase in our lending staffs.

On a linked-quarter basis non-interest expenses were flat as a result of our expense control efforts.

As Jim commented earlier, we are taking an especially critical look at expenses in light of the current interest rate environment, and we would expect our core expenses to be flat in the fourth quarter.

Turning to credit quality, our underlying trends are very favorable with significant improvement in our coverage ratios.

Classified loans declined to $109.4 million at September 30th compared to $113 million at June 30th and $168.3 million a year ago.

Non-performing assets declined to $46.1 million at September 30th compared to $57 million at June 30th.

One charged off loan in our asset-based portfolio represents about $7 million dollars of this improvement.

And some recovery may be possible on this loan in subsequent quarters.

Net chargeoffs totalled $11.5 million dollars in the third quarter and also reflects that $7 million dollar asset-based loan chargeoff.

As a result, our annual chargeoff ratio during the quarter was 52 basis points.

We would expect this ratio to return to the high teens in the fourth quarter.

The provision increase to $10 million from $5 million in the second quarter due to the increase in net chargeoffs.

We funded this increase in the provision with the $4.2 million of telecom gains.

For the first nine months of this year, the provision covered our net chargeoffs as the provision totalled $20 million and non -- net chargeoffs worth $19.2 million.

Turning to our review of Webster's balance sheet, total assets of September 30, 2003 were $14.6 billion.

This represents growth of 10% compared to a year ago and 1% from June 30th.

Webster has posted a strong loan growth over the past year, all of which is core.

Our year-over-year loan growth of 14% comes in all categories.

Looking at growth on a linked quarter, residential mortgages grew by 6% and is mostly in market Connecticut as we generally retain customer-related volume.

Total residential mortgage originations were $1.2 billion dollars for the quarter and $2.1 billion dollars on a year-to-date basis.

Commercial loans were up slightly, though underlying core growth is matched by a $56 million dollar decline in the specialized lending portfolio during the quarter.

Excluding this segment, commercial portfolio increased by almost $65 million from June 30th for a linked-quarter growth of almost 4%.

Commercial real estate grew by 4% and totalled $1.2 billion.

Consumer loans grew by 6% or over a hundred million.

Our consumer loans continue to be primarily home equity.

On the liability side of the balance sheet, our deposit growth slowed on a linked quarter basis, but we still showed growth of 7% since the beginning of this year and 11% compared to a year ago.

The investment portfolio declined $111 million on a linked quarter basis and now represents less than 30% of our total assets.

With the increase in interest rates since the end of the second quarter, the duration of the portfolio has only increased to 2.9 years at September 30th from 2.4 years at June 30th.

We continue to position the portfolio to benefit from rising rates and concentrate our efforts on purchasing well-defined cash flow securities like super packs and ARMs that will not extend as interest rates rise.

The portfolio yielded 4.04% during the quarter, and at par plus 58 basis points has little premium risk.

Unrealized gains at September 30th were $43 million dollars.

Our interest rate profile continues to be asset-sensitive.

For a 100 basis point increase in rates, we expect net income to benefit 2% or 10 cents per share over a 12-month time frame.

Now let me turn the program back to Jim for his closing comments.

Thank you, Bill.

The past few months have been significant for Webster as we pursue our goal to be a leading regional provider of financial services.

Our September application for a national bank charter served to formalize the commercial bank model that we have implemented over recent years.

And our partnership with FirstFed holds great promise for a powerful franchise across southern New England.

We appreciate the supportive comments that so many of you have made about this acquisition and our view for the future.

We remain committed to ongoing creation of shareholder value and to our belief that we are building intrinsic value at a relatively faster rate compared to our 17 mid-cap commercial bank peer groups.

While Webster's stock price has appreciated by 52% since the end of year 2000, compared to 45% for the peer group median, s6ignificant valuation gaps still is evident.

Our business profile looks very much like a commercial bank, yet our PE multiple is the lowest in our peer group with a 19% discount to the peer median.

The implied discount against Webster's future earnings also lags the peer median substantially.

We're encouraged by the gradual reduction in our PE discount relative to the peer group median since we undertook our currents strategic plan in 2001 and are beginning to see improvement in the implied discount rate also.

We remain committed to closing these valuation gaps through our strong performance and attainment of our clearly stated strategic goals.

A important part of closing these gaps is maintaining an active dialog with each of you in the investment community.

We do this on the basis that the better you know us and the more you know about us, the more confidence you'll have in us and in our ability to achieve our goals.

Thank you for your interest in Webster.

We will now proceed to repsond to your questions.

Ladies and gentlemen, if you would like to ask a question, please key star 1 on your touch-tone phone.

If your question has been answered and you wishing to withdraw your question, please key star 2.

Gentlemen, your first question comes from Sal Dimartino from Bear Sterns.

Please go ahead.

Good afternoon, guys.

How are you?

Well, Sal.

Just two quick questions.

One is on the commercial portfolio.

I know Bill talked about how the runoff in the specialized lending masks the true underlying growth.

I was wondering maybe if you can give us some color on your customers' state of mind and if you're seeing any increases in the utilization rates?

And then the second question is for Bill, Bill Healy.

I think Bill mentioned some maturing high-cost borrowings or debts in the fourth quarter.

If you can just add a little color on that?

Okay, Sal.

Let me try for the first one and say that Webster conducts a consumer confidence survey in partnership with the University of Connecticut, and we take a quarterly look at consumer confidence, which includes business confidence in Connecticut, and we have found it to be reasonably stable and marginally upbeat, particularly as regards the future.

We haven't seen a lot of that translated into utilization yet, but we do see some signs of life there.

And when you look at our growth on the commercial banking side, the biggest portion of that is from market share gains that we have achieved over the last year or so.

We also have seen some small utilization impact on the positive side across all of our commercial segments, and we've actually seen some demand for increased lines.

But that's in the real minority of cases.

And then finally, we've achieved some gains through the footprint expansion that has accompanied the de novo branch expansion program.

And Bill, on the question of the borrowings?

Sure.

Sal, we have some high-cost money market borrowings, repos and federal home loan advances coming due in the fourth quarter.

I think the interest rate's on that probably 3 to 4%.

And we've got a senior note payment on our -- senior notes, I think it's about an 8% coupon, maybe a $20 million dollar payment coming due in the quarter, also.

Okay.

Great.

Thank you.

Your next question comes from Karen Colter of INAUDIBLE Research.

Please go ahead.

Hi.

It's Flay Lewis talking on behalf of Karen Colter.

I just had a few questions for you about the FirstFed deal.

I guess we've been under the impression that Webster was headed for New York, not Rhode Island and Massachusetts.

Does this mean -- what does this mean for the future expansion of Webster?

Is New York still of interest, and how does that happen?

That's question number 1.

And question number 2 is, you mentioned one bad loan had accounted for a pretty large part of the provision for loan loss.

Could you just tell us about that loan?

I don't want to know who it is or anything, but just so we can understand the risk profile of the commercial business now that it looks much more like a commercial business?

All right.

Flay, I'll take the first question, which is if you've seen our investor presentations, you probably have seen the concentric circles that we talk about that expand, really, in a radius around our existing footprint of probably 70 or 80 miles, which includes the southeastern Massachusetts and Rhode Island areas.

It includes other parts of Massachusetts and then moves down into New York.

So, the acquisition of FirstFed is entirely consistent with the plan that we've been talking about for some time now, as is the continuing expansion down through Fairfield County in southwestern Connecticut and then out into Westchester County.

We do intend to continue the de novo expansion into that market.

We have plans to open an office in Westchester County actually by the end of the year.

And then on the drawing board we have a cluster of branches that would be opened in that area that would be consistent with the contiguous expansion of the franchise through the de novo opportunities.

Do we have the financial -- I mean after the money's spent on the FirstFed acquisition, do we have the financial firepower to move in that direction with any kind of force?

We included the continuing de novo program in the projections that we made in conjunction with the FirstFed acquisition, yes.

Okay.

Good.

And I'm going to ask Bill Bromage if he would comment on the commercial loan.

Yeah, that loan was a loan that we discussed in our first quarter call.

And it was, as Jim indicated, in the asset-based lending portfolio in our Connecticut asset-based lending, not in Whitehall.

And it was a distributor of consumer goods that we financed receivables and inventory along with a number of other banks.

That loan had a fire, and subsequently was discovered that there was a significant fraud in our estimation that took place and charges have been filed in that regard.

We took a $3.5 million dollar loss in the second quarter and charged off nearly $7 million dollars in this quarter.

We have filed insurance claims, have had one settlement.

There's a series of insurance policies.

And expect that we will have further recoveries from those insurance claims.

But the timing of that is uncertain.

So, the action is to take the loss now and recognize that and deal with any insurance recoveries as a recovery matter.

Okay.

Thanks.

Your next question comes from Laurie Hunsicker of FBR.

Please go ahead.

Hi.

Good afternoon.

A couple of questions.

I wonder if you could just give us the balance of where we stood at September 30 of the other comprehensive income line, since that was probably down from June?

And then, if you could give us balances within the commercial categories.

Specifically we're looking for balances on the business banking, the SNC and the leasing.

You gave us non-performers, but actual total balances and I apologize.

You probably gave out the SNC.

And I wasn't listening as closely or something like that.

And then, I guess if you could just comment on -- it looked like you had a fair number of your chargeoffs came from SNC at your SNC balance in terms of non-performers still increased.

So, without the chargeoffs you really went from, like, 3 to 10 million there.

If you could just maybe, I guess, give us an update of SNC and tell us where we are, tell us what you see?

Thanks very much.

Well, let me start out, Laura, with your question on equity.

Maybe the easiest way to do that would be to roll it forward from the second quarter.

I guess we started the third quarter with a billion-099 in equity.

Our earnings were $41.3 million.

We had an adjustment to our carrying value of our held for sale or available for sale portfolio of $23 million dollars.

I can get the details on that for you, but it was a negative $23 million dollars.

You remember the market value of the portfolio has come down, I think, from over $80 million to $43 million dollars at the end of third quarter.

And as I said, that precipitated a decline in equity year of $23 million dollars.

And we had a dividend payment which came out to about $9.6 million dollars.

And we had Treasury stock repurchases during the quarter, you know, very small amount, totaling about $3 million dollars.

So, that should come out to about a billion 105 million.

Okay.

So just -- I'm sorry, just to recap, because the one number I'm looking for, the accumulated comprehensive income, just because it's not in the release, that was negative 23 million?

That's correct.

Versus a positive 52 million at June.

Is that -- I'm just comparing apples to apples there?

That sounds correct.

Okay.

Okay.

And then I guess with respect to the commercial balances, and maybe if you're looking that up, I have just one other quick question, Jim.

The commercial bank charter, when is that likely to become effective?

Probably late in Q4 or sometime in Q1.

And why don't I ask Bill if he'd comment?

Yeah, let me comment, if I may, on the commercial portfolio.

We have, as of September 30th, $284 million dollars outstanding in our specialized industries portfolio.

That's been the SNC syndicated loan group that we have discussed in the past. 85 million of that is to investment grade holders.

So that the balance is slightly under 200 million now in terms of syndicated.

And of that amount -- that was a $57 million dollar reduction, as Bill reported, in our outstandings at that time.

As with -- with regard to Center Capital, which our equipment finance desk, $489 million, up $23 million for the quarter, up nearly $100 million dollars for the year.

Whitehall is about $575 million.

With the small business and middle market and commercial real estate portfolio that's approximating a billion 9 to $2 billion dollars now.

With respect to the credit I mentioned earlier in asset-based lending, that was a shared national credit in that there was in excess of $20 million dollars with more than three banks involved, which is the measure.

We had an active relationship with the management of that company.

And as such, it ended up being in our asset-based lending department in Connecticut and had been in that for three or four years before the fraud occurred.

I think that's -- I think I've covered what you've asked, Laura.

Okay.

Wait.

I'm sorry.

So you're -- yes.

Yes.

Okay.

And could you just comment with respect to the SNC?

I mean with respect to the increases, I guess, in non-performers?

The non-performers actually went down.

No, the specialized non-performers.

They went from 3-4 to 6 and a half.

And really you had them as 4 million of chargeoffs there.

We had one credit that we had had for some -- been in bankruptcy for some time.

It has been paying us for a number of years.

We had been carrying that as a performing classified performing asset.

And that coming out of the shared national credit exam was downgraded to being a non-performing loan, which was about $5 million dollars.

And that stands at $5 million today?

Yes.

That stands at 5 million 1 today.

And then the Safety-Kleen loan is still a part of that?

The Safety-Kleen loan has been charged off.

That's part of our chargeoff.

That's the one that's been charged off.

Okay.

I'm sorry for being confused here.

That's fine.

That -- the Safety-Kleen loan was part of our chargeoff, as was a portion of that loan that went non-accruing.

And the balance is still a non-accrual.

We had, by way of information, one other credit in our specialized indicated portfolio for slightly under $7 million dollard that was classified.

The balance of our portfolio was ratings held.

Okay.

And so, of the 7 -- okay.

Just so that I'm clear on this, the $6.5 million now that sits in non-performing, a portion of it is the $5 million credit and a portion of it is this other?

Yes.

There are two credits in there.

Okay.

Is there any more detail you can provide us at this time on those two credits, or no?

I think that we have taken a -- on the largest portion of that, Laurie, I think what I would offer is it's a company that's been in bankruptcy.

It's about to come out.

A charge has been taken, and we think that the balance remaining is something that we will collect in full once the bankruptcy claim has been settled.

That's how the loss was determined.

Okay.

Great.

Fair enough.

Thank you very much.

Lori, I'm going to add one comment to that, which is to say that to the best of our knowledge today, if this helps you in responding to your question, we expect that our normal fourth quarter provisioning will be well more than adequate to cover any exposure to chargeoffs.

Okay.

Terrific.

Thank you very much.

Thank you.

Your next question comes from Bill McCrystal of McConnell, Budd and Romano.

Please go ahead.

Good afternoon.

In terms of just general asset quality, at current levels are you at or getting near a sort of systemic level of non-performers, or do you think there's the possibilities of improvement going forward ?

Bill Bromage.

Yes.

I think that from my perspective, I think that we're getting near the systemic level.

I think that when you look at our portfolio, as we have transformed ourselves to be commercial bank-like and look at our ratios of non-performers and classified levels, I think they're about where we should expect them to be.

And I think that the idea of movement up or down any particular quarter $5 or $10 million dollars in aggregate, I think would be within what I would characterize as norm.

I think that Jim's point of even with a large chargeoff our provisions to date exceed the chargeoffs to date, our planned provisions for the fourth quarter exceed what we foresee in our portfolio as we look forward.

I think that our loss experience has been good, and so, I think that we should be thinking of where we are as kind of the norm.

And I frankly think we all collectively should be looking at -- there will be some ups and some downs as we go forward, and that fits well within where we see ourselves.

Okay.

And then just going back to the de novo branches, what's the overall experience?

Have you had to pay up as you get into these new markets, or could you just give us some idea of how you're faring as you get into the newer markets?

Yes, we're faring very well, and our performance at these branches has been beyond our fairly high expectations that we had set.

So, we're pleased with the performance.

We're looking at break-even per branch basis somewhere in the 15 to 18-month range.

We are finding that there's competition for good locations for offices, but we're trying to be reasonable in terms of what our commitment is on the capital side with the idea that the branch should make its break-even point by 18 months.

And then we look at the overall program, which we think will have two to three branches per quarter beginning in the first quarter of '04 as having a cumulative break-even point on the entire program of somewhere around five years.

Okay.

Thank you.

Your next question comes from Jared Shaw of KBW.

Please go ahead.

Good afternoon, Jim and Bill.

Hello, Jared.

Just a few questions.

On the mortgage banking side, on the $5.6 million of residential loans that you sold off, I guess what percentage of those were refinances versus purchase?

And I guess what would be a good level to look for in a more normalized environment?

Jared, I would just say off the top of my head that probably the vast majority, maybe 80, 85% of those had to be refis.

Okay.

And then the mortgage servicing rights, you said they're occurring right now at $4.6 million.

What is that on a basis points of loan service for others?

I think it's somewhere between 65 and 70.

Okay.

And then finally, on the line item here where you have gain on sale of loans and loans serviced, was that all loans sold, or was there some servicing sold at the same time?

All of our loans are with servicing released.

Okay.

So, you didn't sell any servicing that you --

No, no servicing.

Okay.

And then finally, on the growth on the consumer side on the home equity loans, is that due to more new customer relationships, or is that an increase in the draw of the lines?

I think that the majority of them are really new relationships and new loans as opposed to additional draws.

Okay.

Great.

Thank you very much.

Thank you.

Your next question comes from Kevin Timmons of CLK.

Please go ahead.

Hi, guys.

A couple questions here.

I want to follow up on a question Laurie asked about the comprehensive income.

But when you went through the changes, 41.3 positive income and so forth, you mentioned $23 million dollars as the adjustment to the carrying volume held for sale.

That's the change.

What you mentioned there was the change from Q2 to Q3, correct?

Right.

That's the net change.

Okay.

Also, during the commentary you mentioned that the spread or margin had picked up late in the quarter.

Did that occur on both the retail and the wholesale sides, or is the wholesale spread continuing to squeeze?

The wholesale spread is continuing to squeeze.

You know, we saw it decline maybe about 30 basis points this quarter.

Right.

But during the course of the quarter, did it continue to go down?

You know, July, August, September.

Or did it begin to stabilize?

I think it continued to come down, but I think it has stabilized between August and September.

Okay.

Looking at the average loan balances, the change from Q2 to Q3, essentially that number was unchanged.

I know you went through some percentage gains in the loan categories.

I believe those were period end.

On the average from Q2 to Q3 was the fact that that was flat due to a rundown in the residential portfolio, or what was behind that?

Was it total loans that you're talking about, Kevin, or just the commercial?

Total loans on average basis from Q2 to Q3.

They were essentially flat.

I think they were up a couple million or something like that.

Mm-hmm.

I don't have that in front of me.

Okay.

I'll have to look at it and get back to you, okay?

That's fine.

A couple of fairly small items on the P&L.

The financial advisory business, any comment on the tone of that?

Is that looking up, down or sideways?

Bill?

This is Bill Bromage.

I think that I would characterize as looking sideways.

The variation quarter to quarter really is dependent upon the transaction nature of that business and whether they're successful in closing the transaction or not.

So, you see some variation of several hundred thousand to a million dollars in any given quarter.

And I think the prospects for that are -- have been for some time and continue for the foreseeable future to move sideways.

There has been a considerable amount of action taken in that organization.

That's Dr. Phelps..

Right.

And there's considerable action taken to reduce the expense load so that the level of revenue we're getting is not a drain on our earnings.

But I think that we don't expect a recovery in the short-term there to significant profitability.

Okay.

On the share repurchase, I assume with the FAB deal now that you guys will be essentially out of the market here in the near term?

We'll be quite restrained over the near term.

Right.

And finally, during the commentary I think you mentioned that there was a total of $7 million dollars impact to net interest income related to prepayment -- accelerated amortization plus the FAS 150 adjustment.

I just want to make sure that the $7 million was the total.

And that means about $4 million, $4.2 million was related to amortization of premium?

That's about right.

Yes.

Okay.

Great.

Thank you very much.

Thank you, Kevin.

Your next question comes from Jim Ackor of RBC Capital Markets.

Please go ahead.

Good afternoon, guys.

Hi, Jim.

I wanted to see if I could get somebody to give me sort of maybe a 30,000-foot type of a viewpoint on the mortgage market.

If you look at how you guys performed in the quarter, the one to four family origination volume was very strong.

We saw loan and loan servicing fees which were much higher than what I had modeled, and then also gains from the sale of mortgage loans were a little higher than what I was looking for, as well.

Can you comment on any trends since long-term rates have started to pick up to the upside as to whether or not you expect the volume to slow materially and how we might consider looking at some of these gains in prepayment fees and all that stuff on a go forward basis?

Jim, I would expect that as we go forward that, you know, we're gone that see some slowdown in the amount of mortgage originations that, you know, come out of our -- you know, our business.

What we hope to do through our franchise, our national wholesale as well as our retail outlets, is try to generate more in the way of fixed home equity loans or home equity credit lines.

And I think the other side of your question was the increase in the loan and loan servicing fees.

If you remember, back in the -- I think it was the second quarter, we had a write-down of about a million 8 in our mortgage servicing rights.

Mm-hmm.

So, you had the reversal of that this quarter, if you will.

We didn't have a write-down this quarter.

Plus this quarter we saw a lot of amendment fees and prepayment fees probably to the tune of, you know, maybe a million and a half to $2 million, which created the strength in that number.

Would you sort of view that as non-recurring, or would you view that as the prepayment or amendment fees?

I think that those will go down.

You know, some of those came in the commercial portfolio, too, you know, with people, you know, refiing, particularly in our asset-based lending portfolio.

But you know, with this contraction that we're probably going to see in our mortgage business, you know, I would say that the offset to that coming with the expansion in the margin.

And you mentioned that you guys are somewhat asset-sensitive, yet you expect your margin to improve in the fourth quarter.

Is that primarily going to be driven by reduced amortization of premium?

Well, there's the four items that I went through.

One is going to be the reduction in the amortization of the premium.

The other is that, you know, with a, you know, -- you know, the rates having ticked up a little bit, we're seeing higher reinvestment rates in all of our fixed rate assets.

We had taken steps during the third quarter to bring down the average cost of a lot of our deposits.

That came down throughout the quarter.

Going into the fourth quarter, you know, we're going in with a much lower deposit cost.

So, even if we didn't decrease it any further, we're gonna pick up some spread there.

And then, as I mentioned, you know, to Sal's question, you know, we've got some higher cost borrowings coming off.

The combination of all those items should help the margin expands in the fourth quarter.

Okay.

Very good.

Thanks a lot.

Thank you, Jim.

Gentlemen, your final question comes from Jim Besone of Delphi Management.

Please go ahead.

Good afternoon, guys.

A quick question.

Are you still writing syndicated loans?

And also, what percentage of the non-performers were from the syndicated portfolio?

The percentage of the non-accrual is about 10%.

So, we have about $5 million or so syndicated credits that are non-performing.

And that's out of the total of 41.

With respect to writing incremental credits, we have on occasion booked what we view to be higher quality.

But I think when you look at our portfolio and you see it shrinking as much as it has over the past quarter, that's an indication that we are moving our portfolio much more towards direct lending.

The cornerstone of our commercial lending activities these days is to be a direct lender.

We're looking to have a relationship and do that on a direct basis.

We're also looking to have that relationship be deepened further than simply the credit side.

And that really drives us as we move forward and look at our loan portfolio.

Okay.

Thanks.

Thank you.

Gentlemen, there are no further questions.

Thank you.

Then let me close by thanking you all for your time and interest.

And we appreciate your confidence in Webster.

Good day.

Ladies and gentlemen, this concludes your conference for today.

Thank you for your participation.

You may now disconnect.