Webster Financial Corp (WBS) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Webster Financial Corporation and third-quarter earnings conference call.

My name is Bill and I will be your conference coordinator for today.

At this time all participants are in a listen-only mode, however, we will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's presentation, Mr. James Smith, Chairman and CEO of Webster Financial.

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

Joining me today are Bill Bromage, our 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, which should take 20 to 25 minutes.

As you have seen in our earnings release, third-quarter net income improved 19 percent year-over-year while earnings per diluted share increased 3 percent.

The first full quarter effect of our acquisition of FIRSTFED contributed to asset, loan, and deposit growth as well as to net income.

Return on average tangible equity improved to 23.6 percent in the quarter, compared to 21.6 percent a year ago, while cash return on average tangible equity was 25.6 percent, compared to 23.4 percent a year ago.

Noteworthy aspects of our third-quarter performance include continuing double-digit organic growth in loans and deposits, meaningful improvement in the net interest margin, exceptional asset quality, ongoing progress in our efforts to tightly manage expenses and noticeable improvement in tangible capital.

We continue to make progress in pursuit of our statistic plan and our vision to be the leading regional financial services provider.

In looking at the quarter our loan portfolio has grown by about $2.5 billion or 27 percent over the past year and now totals $11.6 billion.

FIRSTFED added about 1.5 billion of this amount with no change whatsoever to our overall loan mix.

Year-over-year loan growth of 11 percent apart from FIRSTFED has been virtually all organic and if I could make just a couple of comments regarding linked-quarter phases (ph) because our momentum is strong, loans grew by about $300 million or 10 percent annualized from Q2 '04.

All of this growth was organic.

We have seen growth at every loan category, with particular strength in commercial, including commercial real estate, and consumer loans.

Excluding residential mortgages, loans grew at an annualized rate of 15 percent from Q2, '04.

Commercial loans now total over $4.2 billion while we continually strengthen our credit culture.

In our commercial middle market effort in Connecticut we're gaining meaningful market share from the competition and delivering the full complement of Webster products and services to our clients.

Total deposits grew by almost $2.3 billion or 28 percent over the past year.

Deposit growth apart from FIRSTFED remained robust at 10 percent, virtually all of it organic.

I'm very pleased to report that our relentless efforts to grow core deposits have propelled Webster to number 1 market share among Connecticut banks with statewide deposit market share of 12.35 percent at June 30, '04 according to recently released FDIC data.

We picked up 92 basis points of statewide market share in the past year.

While I know it is an audacious goal, we believe we can also over time achieve number 1 share in Connecticut among all banks.

Total revenues excluding securities gains, the effect of FIN 46R, and the sale of Duff & Phelps grew by about 14 percent year-over-year.

Spread revenue grew 24 percent, primarily on the basis of our double-digit organic loan growth, the FIRSTFED acquisition, and a 15 basis point improvement in the FIN 46R adjusted net interest margin.

Fee based revenue grew by 8 percent when also adjusting for $5.8 million in gains that were specific to the third quarter of '03.

Mortgage related income volatility continued to pressure the net interest margin during the quarter to about the same degrees as in recent quarters but to a lesser degree than a year ago.

We look at overall mortgage related income volatility as a combination of several items that affect various revenue streams to neutralize the impact of these items.

As you have seen in recent quarters, we took securities gains primarily through the sale of mortgage-backed securities.

We told you about our commitment to expense control as an essential ingredient to shareholder value creation.

Our year-over-year core expense growth was 3 percent adjusting for the FIRSTFED and North American acquisitions, Duff & Phelps, and FIN 46R.

Included in that core growth are continuing investment in personnel, technology, and de novo branches under our strategic plan for growth.

Webster's asset quality is strong.

Our nonperforming assets have declined by 13 percent from a year ago even including FIRSTFED and now represent 0.22 percent of assets compared to 0.32 percent a year ago and in turn our coverage ratios are strong as well with nonperforming loan coverage of over 400 percent.

Credit quality has been and remains among our most critical success factors.

You have seen in today's earnings release that we plan to complete during the fourth quarter the remaining $750 million of the $1.5 billion deleveraging that we announced a year ago as part of the FIRSTFED acquisition.

Bill will provide the specifics during his financial review, but I will spend a moment on the strategic aspects of this decision.

When announced a year ago, we anticipated that the FIRSTFED acquisition would cause our tangible ratio to be around 4.7 percent after deleveraging of $1.5 billion compared to our target level for tangible capital of about 5.5 percent.

Subsequent to closing the FIRSTFED acquisition, we decided to execute only the first half of the deleveraging due to better-than-expected capital ratios and market conditions at that time.

As of September 30 we have improved to a tangible capital ratio of 4.92 percent.

You know that we compare our financial performance and profile to the 20 publicly traded MidCap commercial banks with asset size of 10 to $30 billion and we are aware that at less than a 5 percent tangible capital ratio we lagged the group.

We also saw the opportunity to improve our standing in areas like the net interest margin and borrowings as a percent of our funding base and to reduce by half our tangible capital exposure to rising interest rates.

So we decided to implement the additional $750 million deleveraging.

We think that the current interest rate environment presents an ideal time to take this step which will solidify our commercial bank profile and move us closer to the fortress like balance sheet which we believe is highly valued by our shareholders.

The benefits on a pro forma basis over what we otherwise would have expected over the next 12 months assuming the forward curve include a tangible capital ratio that would be 22 basis points higher and in the range of our 5.5 percent target.

Our related transfer of $920 million of 15-year mortgage-backed securities on available for sale to tell to maturity further protects our tangible capital.

The deleveraging and related transfers to held-to-maturity also improved the ability of our tangible capital to withstand an upward shock in interest rates.

In a 200 basis point increase, the capital ratio impact would be less than half of our current exposure.

We will reduce our sensitivity to interest rate increases such that we now will be modestly asset sensitive going forward.

We also benefit almost immediately from an increase in the net interest margin of between 15 and 20 basis points, a reduction of 3 percent in ratios of securities to total assets and borrowings to total assets.

Webster's borrowings to total assets will have declined by 5 percent since March 31.

And we expect to earn back about 80 percent of the charge within 3.5 years.

Let me now ask Bill Healy to present the financial report including more details of the $750 million deleveraging that will occur during the fourth quarter.

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

Some of the key trends and highlights of the quarter that I will focus on in my comments are the continued strength in our core loan growth of 10 percent annualized for the quarter and up 11 percent compared to a year ago adjusted for FIRSTFED.

Improvements in our net interest margin up 4 basis points from the second quarter and up 15 basis points from a year ago.

Expense control, up 1 percent for the quarter when adjusted for FIRSTFED and up 3 percent from a year ago adjusted.

Significant improvement in our already strong asset quality, as evidenced by the reduction in our nonperforming assets, a reduction in our charge-offs, and a reduction in our classified loans.

In total, the above items contributed to net income during the quarter of 49.4 million or diluted earnings per share of 92 cents, an increase of 3 percent over a year ago and up from the 91 cents in the second-quarter.

Since Jim in his comments talked about our year-over-year comparisons, I will focus my comments for the most part on our linked-quarter performance.

Total revenues excluding security gains were 174.5 million in the quarter, compared to 164.9 million in the second quarter, a 6 percent increase.

Most of this increase was in net interest income, which totaled 121.3 million in the quarter and grew by almost 8 million or 7 percent from the second-quarter.

This increase reflects core loan growth of 10 percent annualized and an improvement in our -- of 4 basis points in our net interest margin.

For the quarter net interest margin was 3.06 percent, up from 3.02 percent the prior quarter and 2.91 percent when adjusted in the year ago period.

These increases can be attributed to the growth in earning assets particularly in higher yielding loans as well as the rising interest rate environment during this quarter.

The balance of the revenue growth was in non-interest income, which on a linked quarter excluding security gains grew by over 3 percent.

Growth in core categories of deposit services, insurance, and wealth management helped to offset a reduction in loan fees.

Deposit service fees increased 7 percent, reflecting a continuation of strength that we also saw in the second quarter.

The majority of the increase came from NSF and ATM fees and check card interchange income.

Wealth management and advisory revenue grew by 200,000 or 3 percent.

This performance follows a strong first half.

Loan servicing fees declined by 6 percent.

Most of the declined represented a reduced level of fees from our mortgage origination activities.

Excluding FIRSTFED on a linked-quarter basis expenses grew by 1 percent.

Active expense management and implementation of efficiency programs contributed to this result.

Our combined measures of asset quality remain very strong.

NPAs declined during the quarter over 7.7 million or 16 percent and our allowance represents 401 percent of nonperforming loans, compared to 332 percent at June 30.

Net charge-offs totaled 2.3 million in the quarter for an annualized net charge-off ratio of 8 basis points, same as in the second-quarter.

The provision for loan losses was 4 million and exceeded net charge-offs by 1.7 million.

The ratio of the allowance to total loans was 1.28 percent, compared to 1.30 percent at June and remains strong given the risk profile of our loan portfolio.

Turning to a review of Webster's balance sheet, total assets at September 30 was 17.8 billion for growth of 22 percent compared to a year ago and 5 percent from June 30.

Webster posted 11 percent organic loan growth over the past year in addition to the 1.5 billion of FIRSTFED loans added during the second quarter.

Linked-quarter loan growth is 10 percent on an annualized basis, all of which is organic.

Looking at the linked-quarter comparisons, commercial loans were up 130 million or 21 percent annualized.

Strong growth was recorded in middle markets, equipment finance, and asset-based lending.

Commercial real estate loans grew by almost 50 million or 12 percent annualized.

Our credit quality in this 1.6 billion portfolio which has grown by over 36 percent this past year remains very solid.

Consumer loans increased 65 million or 10 percent.

The pick up in outstandings we've seen reflect how home equity loans have become more attractive relative to fixed-rate conventional mortgages in recent times.

Residential loans increased by about 40 million during the quarter, though they declined to 41 percent of total loans from 42 percent at June 30 due to the higher growth rates in both portfolio segments.

On the liability side of the balance sheet, deposits grew 28 percent from a year ago or 10 percent excluding FIRSTFED and 3 percent annualized from June 30.

The slowdown in the level of linked-quarter deposit growth reflects a couple of trends.

Seasonality in our escrow entrust accounts, no deposit promotion programs during the quarter, and new account activity from HPC continues but at a seasonally lower rate given the summer months.

Let me comment on our investment portfolio for you.

The securities portfolio totaled 4.5 billion at September 30, an increase of 350 million from June 30, reflecting the reinvestment of second-quarter cash flows.

We continued to position the portfolio to benefit from rising rates and concentrate our efforts on purchasing short-term duration securities like hybrid ARMs and CMOs that will have minimal extension risks as interest rates rise.

The average duration of the portfolio including health and maturity was 3.0 years.

The yield in the portfolio was 4.20 during the second quarter, up from 4.11 percent the prior quarter.

Unrealized losses at September 30 were 15 million compared to 50 (ph) million at June 30.

Jim provided a strategic overview of our decision to deleverage an additional 750 million in securities and wholesale borrowings.

I now will provide some of the particular elements of the transaction.

We will be selling 600 million of mortgage-backed securities that have a current yield of 3.53 percent and an effective duration of 2.1 years.

In addition, we will not be investing 150 million of cash flows that we otherwise would have during the quarter.

As a result you should expect to see our securities portfolio total around 3.7 billion at December 31, compared to 4.5 billion that you see in our balance sheet at September 30.

Our related transfer of 921 million of 15-year mortgage-backed securities, which are the longest duration securities that we own, will result in a 3.75 billion securities portfolio consisting of about 2.5 billion in available for sale securities and 1.25 billion in health and maturity securities.

On a pro forma basis the securities portfolio will represent 22 percent of total assets compared to 25 percent at September 30.

By comparison the average for the MidCap Commercial Bank peer group that we compare ourselves to was 25 percent at June 30.

We will be repaying a total of $750 million of borrowings with the deleveraging proceeds.

Of this amount, 500 million will be Federal Home Loan advances that were swapped to floating rates and 250 will be overnight borrowings.

The home loan advances are a fixed-rate coupon of approximately 6.25 percent that is swapped at an average 1 month LIBOR of 190 plus 364 basis points.

Most of these advances have a final maturity of May, 2007.

The profile of the 4.2 billion of borrowings that will remain on our books is approximately 1.2 billion will represent term home own advances with a 2-year maturity and an average cost of 3.45 percent.

That is about 50 basis points over the LIBOR curve.

The balance of the borrowings is all short-term with an average life under 3 months.

Repayment of the 750 million in borrowings results in pro forma borrowings to assets of 29 percent compared to 32 percent at September 30.

The average of our peer group was 19 percent at June 30, so we make important progress in this measure through the deleveraging and look to reduce the remaining gap through ongoing progress in our business model transformation.

The deleveraging will result in an after-tax cost of 34 million, which will be a reduction to our fourth-quarter earnings.

The vast majority of this cost of 32 million comes from the prepayment of home loan advances.

Losses on securities represent the remaining 2 million.

We expect to earn back to 80 percent of the charge within 3.5 years but as you can tell from Jim's comments, the benefits to Webster are numerous.

To recap, the tangible capital ratio 12 months from now will be around 5.40 percent, almost back to our target of 5.50 percent.

This will be more than 20 basis points higher than without the deleveraging transaction.

It also gives us improved ability in our tangible capital to absorb an upward shock in interest rates.

Pro forma at September 30 on a 200 basis point shock, this transaction would reduce the hit on our tangible ratio to around 40 basis points.

Tangible capital is protected further through the transfer of the $921 million of 15-year mortgage-backed securities to our health and maturity portfolio.

And in addition this transaction would position us to be modestly asset sensitive compared to our current liability sensitivity position.

And we would benefit immediately from a net interest margin improvement which would range about 15 to 20 basis points.

And also a reduction in our securities and borrowings to total assets.

Before turning the program back to Jim, I will conclude by saying that while we are tempted to want to give you specific earnings guidance for 2005 on this deleveraging transaction, we will wait to do so until January when you would normally expect us to do that.

But in the meantime we are pleased to point out that this transaction provides an overall reduction of uncertainty as you look at our balance sheet and sensitivity to interest rates and it provides a higher quality of a revenue stream as we complete our transformation to a full commercial bank profile.

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

Thanks, Bill.

The third quarter was our first full quarter as a commercial bank and it was a busy quarter at that.

We announced the acquisition of First City Bank, which strengthened our presence in the Hartford market as the leading Connecticut based bank.

We announced an overall IT infrastructure upgrade that will significantly increase our capacity to function as a leading commercial bank, and we became an early entrant in the rapidly growing national market for health savings account deposits through the announcement of the acquisition of an existing industry leader, HSA Bank.

As you have just heard Bill Healy describe in some detail, the deleveraging we have announced improves our tangible capital ratio and our net interest margin while significantly reducing our securities portfolio, borrowings, and exposure to tangible capital to rising interest rates.

We look much more like a commercial bank as a result of the deleverage.

We shift to an asset sensitive position and significantly improve ongoing quality of earnings at the expense of 16 percent of consensus '04 EPS.

Webster now competes as the largest independent bank headquartered in Southern New England.

Our brand of banking has gained us significant market share and relevance in Connecticut in a relatively short period of time.

Good things already are happening with our FIRSTFED acquisition, with more to come.

As a reminder, we remain guided by our strategic principles to grow loans and deposits faster than the market, increase income from fee-based services, maintain a disciplined approach to credit and expense management, and carefully augment our product lines and our geography through strategic initiatives including mergers and acquisitions.

We remain committed to eliminating the valuation gap that exists between Webster and our MidCap banking peers through our ongoing performance to the substantial benefit of our shareholders.

Thank you for your interest in Webster and for participating in today's call.

We would now be pleased to respond to your questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Jared Shaw with KBW.

Actually just a few questions.

The first one, what is the yield on the securities that were moved to held to maturity?

Jared, it's probably somewhere around 3.5 -- 4.30 percent.

Okay and on the securities restructuring, just doing the basic spread, I'm coming up with about 5.6 million of savings on an annual basis.

Could you just walk through how you’re able to recoup 80 percent of the charge in 3 years?

I think, Jared you are just looking at the spread between the assets and the liabilities.

When we looked at it, we looked at it independently, how we fund the liabilities.

We would be transferring those liabilities from a LIBOR plus 364 and funding that at LIBOR, so we would be saving 364 basis points going out over the period of the borrowings to 2007.

And then we looked at the investment separately and looked at it as if we were funding those securities with overnight funds and we were looking at giving up that overnight spread on those securities right away and then looked at how that would transpire over the remaining 5 to 7 years of the average life of those securities.

We used the forward curve in doing this.

So our calculations are based off of -- what is implied in the average curve today.

How long would it take you do you feel to recoup the remaining 20 percent?

We would recoup it probably within 5 years, a little over 5 years.

If rates were to go up more than the curve, we could recoup it a lot sooner.

That would be 5 years from today, not 5 years from the 3 years from now?

That is correct.

I just want to say, we're not going to make that claim because if you look at the average lives of the assets and liabilities, we could make the case that we would recoup it but we are content to say we will recoup 80 approximately over 3.5 years.

And you said you -- as a result of this you'll be mildly interest rate sensitive?

Asset sensitive, yes.

Is that going to be basically neutral?

Modestly.

We chose the word carefully, so it will be something asset sensitive side of neutral.

Then changing subjects on the insurance income side with the news that has been out there, are most of your insurance subsidiaries, are they brokers or agents?

Most of our -- we are primarily an agent, over 90 percent of the business we do is as an agent as opposed to as a broker and in the instance where we are brokers, I would say that the contingent income that we have is less than $100,000.

Okay and then your contingent income overall as a percentage of your --?

The contingent income in aggregate as a percentage of our total revenue is something slightly under 10 percent.

Finally if you could just give an update on the (indiscernible) integration and how things are going out in Massachusetts?

From a business perspective let me just make the observation that things are going we think very well.

We obviously as we have reported in the past, we have made the determination that going forward with the infrastructure project is a critical ingredient to get us on a single powerful platform.

So that part of it and some of the cost saves associated with that are still in (inaudible), but from a business perspective we introduced High Performance Checking in that marketplace, as we have talked about in the past.

The small-business side of that is working consistent with our own performance here in Connecticut, which is a 2 times lift in the rate of account openings.

The consumer side has not hit the level that we have here, the 1.75 to 2 times.

They're probably around 1.25 to 1.3 times.

We recently have seen a lift up to about 1.4 and we have been refining that program and honing that program for that market to see that we get the leverage out of it.

Deposits in that markets were consistent with our own, slight switch from the CD to the core which we were pleased with, but we have got a strong small business effort really getting some traction in that market.

We're working on the commercial, which we think will take a little longer, longer lead time on more sophisticated accounts, but we're working on that as well.

Okay, great.

Finally, Jim, you had said that your goal is to get the number 1 deposit market share overall in the state.

To do that it would look like you'd have to continue to do acquisition in the state.

Is that a goal once you get your capital ratios back up or how soon do you think you could do some instate deals other than -- I know that you are closing on the First City deal.

Yes, good question Jared.

The higher tangible capital ratios do create additional capacity for growth through strategic initiatives.

But I want to be clear that it really is a combination of the internal growth, which as you know has been faster than the market and the potential for acquisitions that we might make that we think as a goal for us over the long term could propel us to the number 1 share.

It is what we call a big, hairy, audacious goal, one that permeates the organization, one that we believe that we can achieve.

It is going to take us awhile but through relentless increase in market share you will ultimately, inevitably achieve that goal, which is our desire.

So we shouldn't expect to see that in the next 2 quarters then?

I would say not. (Laughter) This could take a while but very importantly the primary focuses on organic growth and we think that very definitely there will be opportunities for us to take like-minded partners to achieve that goal as well.

Great, thank you very much.

Laurie Hunsicker of SBR.

Good afternoon.

Just a follow-up on Jared's last question.

I guess specifically as it pertains in Connecticut, can you just update us on how many branches there are in Fairfield County and how much in deposits; what percent of the market you have?

Also just in terms of your other plans as far as going down to Rhode Island, other expansions in Massachusetts also Westchester County, I know that was a targeted area.

If you could just update us on that?

Sure, this is Bill.

We have today and 18 to 20 branches in Fairfield County.

We have 3 in Westchester County and 25 in the southeastern Mass/Rhode Island marketplace.

We have about 5 percent market share, maybe a little north of that in Fairfield County, which if you look at our share over time we are very pleased with the rate of growth we have had in that marketplace.

It is obviously with 3 new de novos in Westchester it is imperceptible at the moment.

We have expressed our intent of opening 2 to 3 branches per quarter.

We would expect to do that from the fourth quarter on through next year.

We have a number -- 5 under construction with a couple of those are in Westchester.

The balance in strengthening our franchise in Connecticut.

We would expect in the first half of next year to -- as part of that to -- in addition to rounding out the Fairfield and Westchester franchise further, we also expect to be starting to strengthen our franchise in the Rhode Island/Southeastern Mass market as we go forward.

So we are looking at both the Fairfield and Westchester westward look if you will as well as taking that eastward, east side footprint we have and strengthening that at the same time.

Okay, could we expect to see de novo at the same rate up in Massachusetts and Rhode Island?

We would expect that our aggregate de novos going forward would be in the 2 to 3 (multiple speakers)

2 to 3 per quarter, okay.

Great, and just a couple things going back to the deleveraging.

When do you expect to have this fully competed, when in the quarter, just to help us with modeling purposes?

I guess from a modeling standpoint, Laurie, probably mid quarter.

Mid quarter and then I just wanted to clarify something you said.

On the residual 4.2 billion in borrowings that will remain -- you are going to have about 1.2 billion with a 2-year maturity costing 345?

That is correct.

The other 3 million will be 50 basis points over LIBOR?

No, the fixed-rate 1.2 billion averages about 50 basis points over the curve at that maturity and the remaining 3 billion is all very short with an average life under 3 (multiple speakers).

Got it, okay.

I just couldn't read my notes here.

Thanks.

The last thing just in terms of our model and you briefly touched on securities gains, obviously we've been seeing that run at 7, 8 cents a quarter.

Can you just help us in terms of what you are forecasting for next year with that? (multiple speakers)

I think that hopefully with the deleveraging that we're doing here we will reduce our reliance as we go forward on security gains and then you're going to see a more dependable, predictable revenue stream from our core businesses as we go forward.

Okay, great.

Thanks.

Bill McCrystal of McConnell, Budd.

I wondered if you could give us some of your expectations for the mezzanine financing on and also on the health savings account business?

On the mezzanine side, a new initiative for us, something we think we can add value to our client base and our footprint and maybe slightly beyond, but that is the principal focus.

Individual transactions we expect will be relatively small and so our expectations for that in the next year or so are relatively modest.

I wouldn't think that portfolio would get to be much more than 10 or 15 to $20 million in that type of time horizon.

And I will take the question, Bill, on the HSA.

The pipeline is very strong.

There is a rapidly increasing demand for the administrative particularly the enrollment and record-keeping, as well as the custodial and trustee services that we provide.

HSA Bank has already close to 60,000 accounts from virtually all of the states in the country and something over $100 million in HSA related accounts, which at this point we expect to grow very significantly.

I think it is what we would like to say during the enrollment period which is just now getting underway as of the end of '04, we expect to see a good bump in a growth over the next 3 to 6 six months.

And then continuing throughout the year.

I'll give you an example of how strong the pipeline is.

Since we announced our acquisition, HSA has doubled their employment from 30 to over 60 people with a target that would be significantly higher than that over the next 3 to 4 months because of the volume of business and the strength of the pipeline that they have.

So significant growth off of its current footings and we expect that growth to continue at very high rates through the '05 enrollment period as well.

And in terms of profitability could you gives us a sense of -- is this more a funding vehicle or do you see it as adding, ultimately adding significantly to the bottom line?

We look at it as an ability to attract core deposits and generate fee income from what we think will be a hypergrowth business over the next 2 to 3 years.

So it meets our test of helping to grow deposits, replace wholesale borrowings with deposits, and generate fee income as well.

That is the primary potential here.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Kevin Timmons of CL King.

My questions were basically answered.

If I can just ask though as opposed to a parallel shift in the curve with the flattening of the curve we've had over the past quarter or so, how much of that was captured in the results and to what extent do you see exposure there?

I will just say, Kevin, that the flattening of the curve that we saw in the last quarter was not in itself a positive development.

What was positive is growth in core deposits, growth in yield sensitive loans, and that was part of what has driven the improvement in the net interest margin.

We look at the interest rate environment with parallel shifts and we also look at yield curved twists and we know that if there is a bold flattening of the curve that is not as good for us as if there is a parallel move in rates.

So I will just say that if the bold flattening were to continue that would not be a positive for us and it would mitigate the positive impacts even of the deleveraging, but if we do have the parallel effect that that will generate the results that we have suggested.

Even if we have a continuing bold flattening we will be better off than we would have been to have made this move.

The numbers seem to reflect that and your position is pretty good.

You know, in Q3 numbers, I will just comment that we are really quite pleased that on a FIN 46R adjusted basis that the margin was up 15 basis points year-over-year.

Right and quarter-to-quarter.

So thanks.

Just, Kevin, going forward the 2 deleveraging transactions that we have done is taking a lot of the leverage and the wholesale exposure that we've got with the collapsing of that spread as we go forward and this making it asset sensitive and combined with we think our ability going forward to fund our long growth with deposit growth should take a lot of that interest rate risk that you've seen and mitigate it going forward.

Thank you.

Hemant Hirani of Fox-Pitt, Kelton.

I wanted to get an idea about loan growth going forward.

Would there be any kind of an exchange between consumer commercial or we would see something that we have seen in the past year?

This is Bill.

We would expect to continue to see the trend that we have towards increasing the commercial and consumer in relation to the residential portfolio, so that trend if you will that you have seen would we would expect to continue to see.

We have held our residential portfolio substantially flat over an extended period of time while we have grown our consumer and commercial book, and we anticipate continuing to do that.

When we look at the commercial we have seen good growth quarter-over-quarter consistently and based upon looking at the pipeline we have in place today, which is strong, and also the usage that we are seeing under our lines of credit for example, the usage is under our asset-based lending lines of credit have gone up 4 percent over the past quarter, so that type of growth we think is a good harbinger -- rather the pipeline and the usage are good harbingers of continued performance for the foreseeable future in the commercial.

And our consumer book year-over-year is up 9 percent and we look to continue to emphasize that as well.

One question if you can address, home equity line of credit, how do you see the growth of that in a rising rate environment on the short side?

The home equity environment as an environment -- what we have seen in the marketplace is a cooling of the growth that has taken place there, so we would expect at a higher interest rate environment that may continue and I think this year has been obviously, not only in the refi boom was refi's at first, but heavy usage of equities and so we are looking at that market as a market being a softer market.

We're looking for ways that we can enhance our product mix to continue our own momentum.

Okay, thank you.

At this time we have no further questions.

I would like to make a short announcement.

Today's presentation included 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 current expectations and projections about future events.

These forward-looking statements are subject to risks, uncertainties, and assumptions as described in Webster's financial 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 turn the call back over to James Smith for his closing remarks.

Thank you very much for being with us today.

Bill, thank you for moderating.

Thank you, ladies and gentlemen for your participation in today's presentation.

You may now disconnect as the presentation has concluded.

Have a good day.