Webster Financial Corp (WBS) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation third quarter earnings 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. [OPERATOR INSTRUCTIONS].

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 current expectations and projections about future events.

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

I would now like to introduce your host for today's conference, Mr. Jim Smith, Chairman and Chief Executive Officer.

Please go ahead, sir.

Good morning, everyone, and welcome to Webster's third quarter investor call and web cast.

Joining me today are Bill Bromage, our President;

Jerry Plush, our Chief Financial Officer; and Terry Mangan, Investor Relations.

Others will be with us to assist in responding to questions.

Our formal remarks should take about 25 minutes, and we'll then respond to your questions.

I'll provide the highlights and business context for the quarter.

Jerry will provide details on our financial performance.

In our earnings release earlier this morning, we reported $0.77 in diluted earnings per share exclusive of a loss of $0.60 per share that we recognized under our securities portfolio repositioning, compared to $0.86 a share a year ago.

Cash EPS before the charge was $0.83 compared to $0.95 a year ago.

The $0.06 difference between cash and GAAP EPS this quarter reflects intangible amortization of $0.04 per share and stock-based compensation of $0.02 per share.

Jerry will cover the securities portfolio repositioning in more detail, but I want to assert that the restructure is a strong move because it accelerates into Q3 the continuing negative impact the flat to inverted yield curve would have had on future period earnings.

It boosts the tangible capital ratio, improves the net interest margin and net interest income, and importantly, it will help us shift the focus toward Webster's core franchise growth and our momentum as New England's bank and away from continual discussion and analysis of what used to be called the wholesale spread.

As of today, the wholesale spread at Webster is dead.

The net -- the interest rate environment of the past year has negatively affected our performance as can be seen in our EPS decline from a year ago.

The decline reflects the impact on our net interest margin was sharply higher short-term borrowing costs as compared to yields on our securities portfolio, coupled with the heightened consumer preference for higher-yielding deposit products.

Looking specifically at the consumer preference for MMDAs and CDs, the spread between the yield on loans and cost of deposits contracted by about 20 basis points from both the second quarter and a year ago as increases in loan yields failed to keep up with increases in deposit costs.

Looking past the margin pressure, Webster possesses strong underlying business momentum.

Commercial, including commercial real estate and consumer loans, grew at a combined rate of 11% from a year ago, as we continued to emphasize these categories as the portfolios of choice.

Residential loans grew only 1% by design, as most mortgage originations are sold into the secondary market.

Commercial loans now total more than $5 billion and grew by 11% a year ago.

Commercial growth was led by C&I loans, which were up 13% from a year ago. [Technical difficulty] components of C&I growth consisted of equipment financing, which was up 18%; middle market banking, which was up 17%; and asset based lending up 14%.

Webster is today the 34th largest C&I lender among publicly traded banks, which underscores our successful transformation to a commercial bank profile.

Our C&I portfolio was about twice the size of our commercial real estate portfolio.

We emphasize direct lending as opposed to buying participations in transactions originated by others.

The portfolio yielded 7.38% in the quarter compared to 6.24% a year ago.

The C&I portfolio was balanced, diversified and granular.

These characteristics underpin our favorable charge-off experience and overall asset quality.

Commercial real estate outstandings were $1.8 billion as of September 30, and increased 6% from a year ago.

The $1.8 billion portfolio consists of 1.2 billion of institutional quality real estate with long-standing relationships, while the other $600 million represents owner occupied and non-owner occupied loans from middle market and small business lending.

The total commercial real estate portfolio yielded 7.27% in the quarter, compared to 6.37% a year ago.

As with the C&I portfolio, credit performance has been strong with virtually no CRE charge-offs in the past decade.

The consumer portfolio now totals over $3 billion and grew by 11% from a year ago.

Consisting primarily of home equity loans and lines, the portfolio yielded 6.94% in the quarter compared to 5.64% a year ago.

The annualized net charge off ratio was 3 basis points in the quarter and 4 basis points for the first 9 months of this year.

We've recently appointed Michelle Crecca, formerly of Citigroup, to head up our consumer lending activities.

Michelle's skills and experience will be beneficial to us, as we see consumer lending as a major growth opportunity.

Turning to deposits, Webster gained another 33 basis points of state-wide deposit market share in Connecticut according to the FDIC's annual summary of deposits released last week.

We had over 13% of deposit market share in Connecticut in June 30, '06, and solidified our number two ranking.

NewMil added 0.8% of state-wide share, so Webster's pro forma share becomes 14.1%.

This puts us about 5 -- and only 5 -- percentage points away from the number one position compared to a gap of nearly 11 percentage points two years earlier.

Our market share gains are a clear sign of Webster's progress and momentum.

Looking at the third quarter, the industry wide story is the heightened consumer preference for higher yielding deposit products and the effect on net interest margins, and our experience is no exception.

Our total deposits grew by 6% over the past year, led by CD growth of 11%.

NOW and saving account balances declined from a year ago, while demand deposits increased by 2%.

We opened a branch in Newtown, Connecticut, during the third quarter and now have a total of 23 branches under our de novo expansion program, with two more scheduled for opening through the end of this year.

The de novo program had total deposits of just over $700 million at September 30, compared to 497 million a year ago.

The de novo program is helping to ensure Webster's sustained organic growth and creating opportunities for us to deliver our broad product set across business lines to new market areas.

The net expenses related to the de novo branching program were $0.02 a share in the third quarter, same as a year ago.

We now have $278 million of total deposits at HSA Bank compared to 276 million at June 30, and 199 million a year ago.

The flattishness to June 30 reflects individuals reimbursing themselves from accumulated deposits for medical expenses incurred earlier in the year.

The deposit growth from a year ago is 40%.

We're adding close to 2000 net new accounts per month.

Fourth quarter is when many companies undertake their annual benefits enrollment process for the following year, and HSA Bank has invested to compete for its share of expected industry-wide growth in HSA deposits in 2007 as market acceptance for health savings accounts continues to build among employers.

HSA Bank provides Webster with a diversified source of core deposits which is helpful in funding what we expect will be continuing strong loan growth, especially as we rely less on wholesale borrowings for funding.

I'm pleased to announce that we closed on our acquisition of NewMil Bancorp in early October.

Systems conversion occurred over Columbus Day weekend with former NewMil branches opening as Webster branches on Tuesday, October 10.

NewMil extends Webster's western Connecticut franchise, and also bolsters our position in Fairfield County.

This truly is a combination of like-minded partners with a shared vision of a bright future.

I want to commend NewMil chairman and CEO Fran Wiatr and his capable, dedicated team for being such strong partners during the integration.

A committed partner, particularly one who values our currency, makes a very big difference to the success of a merger.

I'll now turn the program over to Jerry so he can provide full details on financial performance in the third quarter.

Thank you, Jim, and good morning, everyone.

My comments for the most part will be on linked quarter performance.

I will also look to elaborate on the key business drivers.

It's important to note here that our operating principles are to build tangible capital level, to have a reduced reliance on securities and wholesale borrowings, and improved loan to deposit ratio, narrowing of the gap to our peers in net interest margin, and a focus on expense optimization.

We believe they are positive results to report; however, we readily acknowledge we have more work to do.

But progress is evident.

Select aspects of third quarter performance include improvement in our intangible capital ratio from 5.48% at June 30 of '06 to 5.68% at September 30 of '06.

We also announced today a 1.9 billion repositioning of mortgage-backed securities classified as available for sale. 1.25 billion yielding under 4% will be sold, and the proceeds will be used to pay down higher cost short-term borrowings.

The remaining 650 million yielding approximately 4.5% will be sold, and the proceeds reinvested in higher yielding securities.

As a result of these actions, we recognized a $48.9 million pretax loss in the quarter ended 9-30-06 and have also announced an estimated charge of approximately 6 million upon completion of these security sales in the fourth quarter.

It is important to note that the previously unrealized loss on these securities had already been deducted from tangible capital.

These actions will positively impact our tangible capital ratio, [our NIN], and our future earnings.

As part of completing our balance sheet transformation process, we previously announced earlier in the quarter -- in the third quarter that we would sell all residential fixed rate mortgage production, again, starting in July of '06.

We may evaluate, among many other alternatives, such actions as securitizing residential loans and portfolio which may require reclassification of these held to maturity loans to available for sale.

Then, as part of our ongoing asset liability management process, in addition to the recent portfolio actions and the impact of future loan growth in consumer and commercial loans could have on our interest rate risk position, we will consider the need for utilizing interest rate swaps, caps, floors or collars to position ourselves to minimize interest rate risk.

Also, as part of our ongoing capital adequacy review and our plans for future growth, we have discontinued buying back shares at this time and instead will build our tangible capital levels.

This decision was based on several factors, including our changing asset mix and our stated goal of building our tangible capital levels.

We continue to see solid growth in higher yielding commercial and consumer loans, while lower yielding residential loans declined from June 30th.

Loan growth was slightly higher than deposit growth, which pushed our loan to deposit ratio up to 105%, from 104% three months prior.

We continue to see a deposit mix shift as a result of continued consumer preference for higher costing money market and CD accounts and the impact that the inverted yield curve has had on the cost of short term borrowing, which resulted in a net interest margin compression from 313 for the second quarter of '06 to 301 for the third quarter of '06.

We also saw linked quarter decline in expenses, the details of which we will talk about in greater detail in a few minutes.

Overall, we reported $0.77 of diluted earnings per share in the third quarter before the impact of the securities repositioning write-down to fair value which had a $0.60 per share impact.

Actual -- actual net income inclusive of the write-down was 9 million or $0.17 per share.

Included in these results, non-recurring expense of approximately $900,000.

We previously stated that we would have 3.5 million in one-time costs associated with the NewMil acquisition.

We actually absorbed 900,000 or approximately $0.01 per share of one-time initial acquisition costs from NewMil in the third quarter.

Our expectation is for the remaining projected expense of approximately $2.4 million to now occur in the fourth quarter.

Our results also included $0.04 a share from Federal Home Loan Bank dividends whereas the second quarter had none.

Adjusting for these items, comparable EPS, excluding the securities write-down to fair value, was $0.74 a share versus $0.81 a share.

In this comparison, we have excluded the FHLB dividend from both calculations.

The most significant driver of performance for the third quarter was a 12 basis point decline in the net interest margin from 313 to 301.

The yield on total loans increased by 11 basis points from the second quarter.

Higher yielding commercial and consumer loan categories, which each grew by 3% on average from the second quarter, did not offset the 33 basis point linked quarter increase in the cost of deposits.

On an average basis, 229 million of net deposit growth from the second quarter reflects an increase of 445 million in MMDA accounts as well as time deposits.

Money markets increased by 284 million from the second quarter and 55 basis points, while time deposits increased by 161 million or 33 basis points.

Savings now in demand declined in the same time period by 216 million.

This mix drove the 33 basis point linked quarter increase in the cost of deposits and the 11 basis point decline in the net interest margin.

The costs of short term borrowings was 4.78% in the third quarter, up 46 basis points.

The cost of short term borrowings and the yield on the AFS portfolio was the primary driver behind our decision to reposition our securities portfolio as previously noted.

The repositioning will result in a net interest margin increase of approximately 15 basis points in the fourth quarter and a fully phased-in benefit of between 20 to 25 basis points thereafter.

Our expense performance improved in the third quarter, declining 1% from the second quarter.

Adjusting for the 900,000 in initial acquisition costs under the NewMil acquisition, linked-quarter expenses actually declined by 2.3 million or 2%.

Comp and benefits benefited from head count remaining stable in the period; and expense declined from, among other factors, incentive based accrual adjustments.

Professional services expense increased due to the increase cost of compliance and internal audit.

I'll also quickly comment on two elements within non-interest income.

We had a loss of 185,000 in the third quarter in gain on sale of loans and servicing, which resulted in a linked quarter decline of approximately 2.7 million.

This line primarily represents mortgages originated for sale, with hedges in place between the time of origination and eventual sale.

The direction of interest rates in the quarter resulted in losses on the hedges being recorded without the corresponding recognition of the increased value of the mortgages being sold based on lower cost through market accounting.

So the accounting actually will create the appearance of a loss on the origination in one quarter and the actual benefit from sale in the next, while the underlying economics of the transaction remain intact.

We had 2.3 million in gains from the sale of securities in the third quarter, apart from the recognized losses on the securities repositioning.

This increase over the second quarter reflects a gain on sale as a result of an acquisition announcement of one of our portfolio companies.

Credit performance remained favorable in the quarter with an annualized net charge off ratio of 10 basis points.

I will point out that we no longer include 90-plus day past due in accruing loans in the total for nonperforming assets, and have reclassified for this back to September [2000 of '05].

As most of our mid-cap commercial bank peers do not include the 90-plus day loans in their performing assets, we have elected to also reclassify for comparability.

Charge offs slightly -- slightly exceeded, excuse me, the provision by 140,000 in this period.

We generally have provided for what we charged off in recent periods.

We believe our adequacy-based approach to reserves is appropriate, and we've looked at our reserve this way in the third quarter and will continue to do so going forward.

It is also important to note that in the future, as we change our asset mix, our provision will need to reflect the risk associated with this asset mix change.

I'll now take a moment to discuss some of the financial impacts of the NewMil acquisition.

Since the transaction closed on October 6th, it will have a fairly clean full-quarter effect on fourth-quarter averages.

Specific elements helpful for modeling would include approximately 500 million in loans, approximately 600 million in deposits, an $18 million non-interest expense base subject to the phase-in of estimated cost savings, and a capitalized after-tax restructuring charge of 8 million reflected in the 1231 numbers. 2.4 million, 1.6 million after tax, of remaining one-time acquisition costs in the fourth quarter in addition to the 900,000 in pretax costs incurred in the third, and an approximately 10 basis point reduction in our tangible capital ratio from the intangibles being added as a result of the acquisition.

Looking ahead to the fourth quarter and taking the securities repositioning benefit and NewMil into account, we anticipate our net interest margin to be approximately 315, with expectation that the consumer shift to higher yielding deposit categories continues.

I'll now conclude by commenting on how the considerable progress that Webster has made over the past several years in transforming our business model and balance sheet has been somewhat obscured in the current interest rate environment.

The repositioning we announced today will help bring this performance to the forefront.

A narrowed focus and a heightened intensity will allow us to swiftly complete the balance sheet transformation and realize our goal of improving our performance.

In that regard, as we have recently stated, we have initiated a comprehensive strategic review of the bank and of all lines of business.

We are asking ourselves the question, what is core?

What is non-core to our future?

What is the growth potential in each business segment?

How does it continue to fit with our goals and mission?

We'll evaluate what we should do ourselves.

Should we outsource?

What should we invest in?

Are there any lines of business to acquire?

Are there opportunities to divest where lines of business no longer meet specific hurdle rates?

In addition, we will have a clear focus on, and a goal towards, improving our performance against key peer group metrics.

I'll now turn the program back to Jim for his closing remarks.

Thanks, Jerry.

I'm very pleased to say with the actions announced today, Webster is nearing the completion of its transformation to a full-service commercial bank.

We're growing commercial and consumer loans at double-digit rates.

We're growing deposits faster than the market.

We're keeping a lid on expenses even as we invest for the future, and we're building a stronger balance sheet that is better protected against future interest rate shocks.

The quality of our earnings has improved significantly in recent quarters.

Our decision to restructure is a decisive action consistent with our stated operating principles and one which will help close the performance gap to our peers.

I hope you've gotten a clear sense from Jerry as to how we're focused on the goal of improving our performance relative to key peer group performance metrics.

We're looking at our businesses through a new lens, holding our managers to a higher level of ownership and accountability, allocating capital and expenses according to the greatest opportunities to advance the mission, realize the vision, and deliver strong shareholder returns.

We have ambitious goals and we believe we can achieve them.

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

We'd now be pleased to respond to your questions.

[OPERATOR INSTRUCTIONS].

Andrea Jao, Lehman Brothers.

Good morning, gentlemen.

Good morning, Andrea.

Just wanted to clarify a few details regarding the balance sheet with restructuring.

First of all, the $15 million benefit, that is over what projected net interest income [inaudible]?

Andrea, the 15 million benefit was for '07.

But -- yes, that's over what projected base?

Oh, over the base?

I thought you said over what period.

This would be the impact of not having the mortgage-backed securities that are funded by higher costing borrowings.

That would be the impact of that in '07.

Okay.

Now, having this benefit, does that make you a little more comfortable, let's say, reaccelerating your de novo program in 2007, or make you more comfortable carrying other expenses that would go to investing in your franchise, for example?

We really look at this as a step among many to ensure that we improve our performance.

So on its own it doesn't incline us to move forward anymore aggressively with any of these programs, all of which are being analyzed relative to their contribution to the mission.

But I would say that we are committed to our de novo program, and while I would not predict that this will cause an acceleration in the program, we do believe that it will strengthen the earnings.

Perfect.

Thank you.

Jared Shaw, KBW.

Hi.

Good morning.

Good morning, Jared.

Just a couple of questions.

First on the -- the commercial loan growth that was great seeing good strong growth there.

How are you doing with the -- the newer markets with the commercial loan growth?

Is this primarily all Connecticut, or are you seeing some good traction in Westchester County in Massachusetts?

I'll ask Bill Bromage to comment.

Yes, I would.

The loan growth has been pretty much across the board.

I would not say we've -- having outsized performance in Fairfield County and Westchester nor Mass and Rhode Island.

They tend to mirror the overall middle market performance that we've had.

We've had strong growth in asset-based lending.

Commercial real estate was down because of some prepays this quarter, but we expect that to rejuvenate in the fourth quarter.

So it's pretty much all of the, if you listened before, Jared, we have a multiplicity of business sectors, and the performance we're seeing is pretty much across the board in all those sectors, but I would not characterize the growth in the new regions as outsized in relation to what you see in the portfolio in total.

Okay.

And then -- I guess in terms of looking at it, do you think that the commercial growth in those markets is keeping up with the deposit growth in those markets, or the proportion of your -- of your deposits, are they similar to the proportion of the loans?

I would say they're similar.

Okay.

I don't think there's a -- I don't think there's a -- there's no discrepancy of performance with respect to deposits and our loans in those markets.

Okay.

And then, Jerry, you had said that looking at repurchases, that you -- you're not looking at repurchases right now, is that through basically 2007?

Can we assume no repurchases?

Jared, at this point, I would say that we are not looking it through 2007.

We believe that our primary goal is to build tangible capital to poise ourself -- position ourself for the growth in the Company that we have projected in that same time period.

And also as we shift the mix of asset generation in the Company, we feel it's appropriate to have a stronger tangible capital position in addition to also then looking toward reserves.

So we view capital plus reserves as the part of what we need to have in place, a stronger position, particularly capital.

Not necessarily reserves, but particularly capital, as we look to ourselves being a more broader, commercial bank-like balance sheet.

And I think as we've taken down securities and we add additional consumer and commercial loans to the portfolio, it's appropriate to have a stronger capital base.

So we may see under that scenario maybe a lower quarterly provision as long as the capital is still growing, looking at more of the combined capital and allowance as opposed to one or the other?

No, I feel that our provision should also reflect the asset generation, and you'll see that as we look into '07.

I mean, currently we're providing in this quarter and what I would see, depending on, and I guess really the prior quarters, probably in the 2 to 3 million range.

I think it's safe to say that we would provide at least where we are today on a forward look at 3 million.

Again, of course, we'll always look at adequacy first, and determine.

But I would say just in terms of looking on a forward look, that the 3 million is appropriate.

Okay.

And then just finishing up on the buy-back, does that also then assume that you're not going to be buying back any of the shares issued in the NewMil deal?

Yes.

Okay.

And then just finally on the margin, you said the 315 for fourth quarter, that's pro forma for the NewMil and the securities, and that's also pro forma for a normal FHLB dividend?

Yes.

Okay.

And -- and then finally the duration on the securities that you sold and the duration on the securities you'd expect to replace those with?

Do you have that?

Yes.

The duration on the securities sold is approximately 2.

The duration on -- and it's important to note that the bulk of the securities that we talked about 1.9 billion, 1.250 billion sold and is used to pay down short term borrowings.

Of the 650 that was in the separate set of transactions, that 650 has also a duration of about two years, and it will be replaced with durations between three and four.

Great.

Thank you very much.

Mark Fitzgibbon, Sandler O'Neill & Partners.

Good morning, and thank you for taking my question.

First, I wondered if you could tell us whether there are any prepayment penalties on the borrowings that you're planning to repay?

No, there aren't.

We were -- borrowed short enough that we have been able to fit the repayment of the vast majority of the 1.250 billion immediately, and there are maturities within the next 30 to 45 days where the sales will take place and we will complete the payoff of those borrowings as well.

Okay.

And could you give us a sense for the kinds of securities that you'd be looking to buy and where those -- what the yields are on those today?

I know you said sort of a 3- to 4-year average life or duration, but --

The securities being sold are MBS.

The likelihood that there would be a replacement and a similar instrument and the yields in today's environment would be approximately 50 basis points higher.

50 basis points.

Okay.

Secondly, I wondered if you could give us a sense for what your target capital ratio might be by the -- say, the end of 2007.

First, I think this is an addition to the prior question, I just want to add, the effect of not buying back shares in conjunction with the NewMil transaction, it has no impact to earnings per share as we project for our fourth quarter.

It would have a $0.02 per share impact as we project '07, but the trade off is to have 21 basis points higher in tangible capital.

So I think that was important and that translates into $34 million more in capital when we've evaluated that specific piece, and that decision to not buy back.

So I thought it was important to first state that.

In terms of our tangible equity, our goal is -- I think our original stated goal was to be between 5.5 and 6%.

Given the acceleration of our transformation here in terms of the balance sheet, this repositioning, we have now looked at the equity ratios and it looked to be somewhere in the neighborhood of approximately 6%.

We believe we can achieve that goal in -- at the end of '06, or in very early '07 with the stated goal to be in the range of 6 to 6.25 during 2007.

Okay.

And then, lastly, a question for Jim.

Jim, I wonder if you could kind of comment on the M&A environment out there.

There's -- maybe give us a sense for the kinds of transactions that Webster might look to do in the quarters ahead.

What kinds of things might make sense for you folks.

Thank you -- thank you, Mark.

I did want to say that -- also that having the higher tangible capital ratios does give us flexibility not only to support our loan growth but also in the M&A environment.

We're quite bullish about our potential as a partner for other institutions, given our standing now as the largest independent bank headquartered in New England.

We're a natural partner for institutions who might consider more of a shared vision than going it alone.

We think that with the pressure on spreads and with all the regulatory burdens that are out there today, that there is a possibility that more people will consider taking a partner than did in the past.

So we just want to be in the best position in terms of the strength of our balance sheet and also to be a good partner to those who might decide to join up with us and we think there is a possibility that could occur.

Thank you.

Kevin Timmons, CL King.

Hi, guys.

Most of my questions were answered.

Can you give us a little more color on the outlook for the core spread which declined a little bit more than I expected this quarter?

Kevin, Jim Smith.

I'll just say that the spread declined largely because of the desirability of the higher yielding MMDA accounts and the CD accounts.

We already mentioned there wasn't much growth in the DDA/NOW or savings accounts and that was the primary contributor to the decline in the spread in the quarter.

So the higher increase in costs of deposits, as compared to the yield on the loans, which Jerry discussed in his comments.

And we expect there will be a continuation of the trend for consumer preference of those higher-yielding accounts.

But for modeling purposes, the core spread we expected something similar to what happened in Q3 relative to Q2, would that be appropriate?

The guidance you gave on margin would imply that the -- I guess when I try to factor in the effect of the repositioning and the guidance on the margin, and the change in the core spread in Q3, I'm having trouble reconciling getting to the guidance margin that you mentioned.

Okay.

Jerry?

Yes, Kev.

Could you give me a little bit -- I apologize.

I didn't hear the last part of your question.

Could you just restate?

There's two moving parts here.

You gave a guidance margin for Q4.

Right.

We know what the change in the core spread was from Q2 to Q3.

Seems like the likelihood of further compression of Q4 is there.

You've obviously done --

Right.

Oh, I think -- yes, part of --

-- repositioning.

Yes, part of it is you need to pick up and I'm not going to give a specific answer, but part of it is you need to pick up the improvement in what is left in the available for sale, as well.

Okay.

In other words --

You still can't -- there's an -- there's an improvement in the 650 million in that portfolio going forward.

Okay.

I'll try to talk to you offline.

Thank you.

No, that's fine.

But, again, that's the piece that when you look at -- if you're trying to tie back to the overall numbers, you need to factor that back in, the improvement that we're projecting off of the reinvestment of about 650 million in higher-yielding securities.

Okay.

Thanks.

Laurie Hunsicker, Friedman Billings Ramsey.

Hey, good morning.

Just to following up on margin points.

I know that Kevin, Jared and Mark hit these, but just looking at it from a starting point, you're starting margin really should be 4 basis points below where you were, not adjusting -- in other words, not adjusting for the mortgage-backed securities sale, just simply saying you had two FHLBB dividends in the quarter, right?

So we're 15 basis points up from the 297?

Yes.

Okay.

And then can you just refresh us on the dates of the sale?

Laurie, yes, the -- about we have sold approximately 900 million yesterday.

Our projections are to sell the balance of that.

The original tranche in the next day to two days.

And the remainder will be sold, the 650 million within the next 30 to 45 days.

30 to 45 days.

Okay.

Okay.

And then, Jerry, I wonder can you just go back over again the charges associated with NewMil?

Because I had initially an after-tax charge of 8.4 and an after-tax merger of 2.3, of which, obviously, you took 900 or 600K this quarter.

And just remind me where the differences are and what the actual numbers are expected to be.

Yes, the original projection was a $3.5 million charge of the one-time items in the fourth quarter.

Okay.

Now, you're talking 3.5 million, you're talking pretax.

Right.

I'm talking pretax in the 3.5.

Okay.

Okay.

What we're now projecting is -- and we took 900,000 of that 3.5 in the third quarter.

What we're now projecting is 2.4 million, or 1.6 million after tax, of remaining one-time expenses in the fourth quarter.

Okay.

And then what about the after-tax restructuring charge?

It was initially -- it was initially 8.4 million after tax.

Right. 8.5, I believe, is the exact number that'll be booked.

And that's after tax?

Right.

And that 8.6 is -- right.

It's 8.5, excuse me.

That is after-tax.

Okay.

And then I had just a small question here.

Just looking at the number of branches that you guys report as where you are currently 175.

Does that mean you closed 6 NewMil branches, or am I just doing my math wrong?

I think that's about right.

Okay.

And are there any more branch closings to come or is that pretty much it?

Not scheduled.

Okay.

And the shares issued, you issued about 3.7 million shares in connection with NewMil?

Yes.

Okay.

And then I know people hit on repurchase, but it looks like this quarter you guys repurchased about 800,000 shares.

Is that correct or am I just off somewhere?

No, we're going to have to follow up.

I don't believe it was that high of activity.

We had curtailed buy-backs in August, so let me double-check on that number and come back.

Okay.

Okay.

Great.

And then just two last questions.

The commercial non-performing category jumped up this quarter.

Can you talk a little bit about that?

It went from 23 to 29 million.

Not the commercial real estate, the commercial business, excluding leasing.

Sure.

Bill?

Yes, Laurie, the asset quality had -- numbers in the non-performing numbers experienced the various flows that we do in any given quarter.

In aggregate, we think the performance remained strong.

The number was flat.

Underlying that we had some significant activity.

We successfully resolved three commercial credits through either payment in full or a return to accrual and we took a small charge on one of them.

Offsetting those, we had an equal amount of inflow so the puts and the takes were about the same.

I would note we had one large $9 million commercial credit that became non-performing.

That credit is problematic for us; however, we have a full allocation under our reserve methodology against that.

That ultimate resolution may require a charge in the fourth quarter; nevertheless, as Jerry covered, we view -- in his comments, we view the allowance to be very strong and we can handle whatever charge comes.

Okay.

And are there any more details you can give us on that $9 million credit?

Jo, would you like to amplify?

Well, we don't comment on our -- Laurie, this is Jo Keeler.

Hi, Jo.

We don't comment specifically on our borrowers, as you know, but it is a middle market Connecticut-based manufacturing firm and it has undergone a fair amount of stress is I guess all I think I can say about that.

And there's a shortfall in terms of how we value the collateral versus what the loan is outstanding.

We're working with the client now and it remains to be seen, what if any charge we have to take on it.

But if -- if our worst concerns are realized, there will be, in all probability, a charge against that credit.

Okay.

Okay.

Great.

And then just one last macro question, and I know Mark kind of asked this, too, but Jim, can you just comment a little bit more specifically on M&A in terms of how many deals you would potentially like to see in the next one to two years and what the sort of target asset-sized company you're looking at and sort of your general footprint for where you're looking?

Laurie, we're in a good position to be able to grow, and as we've indicated we intend to grow with our principle focus on organic growth and I think we've done pretty well there, and we also think that we're an attractive partner from an M&A perspective.

Internally, we have invested significantly in our platforms.

You know that we've had our information technology data processing upgrades, a complete reinvestment on our part.

We also have invested significantly in compliance and audit and we think that our platform is stronger than ever before and also is scalable.

So on the one hand, we have the ability to grow through natural growth and through particularly growth in our loan portfolios, and we think that to the extent that there are banks primarily in and around our markets that are looking for partners, that we may well be an attractive partner to them.

I'll cite NewMil as an example where our partner took 100% stock and we've now closed that transaction.

They did a great job as our partner.

The deposits remained pretty much flat, all through the period from the signing of the agreement until the closing, which is a good performance.

They're a motivated partner because they took our shares as well.

We think that's a great example for other who may be thinking about taking a partner.

So without being able to handicap it in terms of how successful we'll be, we think that there will be institutions who may be attracted to us and they could be smaller than us.

They could be of our same size.

As long as we have that shared vision of what we can achieve together, we're interested in considering the possibilities.

But I would see Webster as being a significantly bigger company over the 3- to 5-year planning period than we are today.

Okay.

And is your primary focus still Massachusetts and Rhode Island in terms of acquisition?

Our focus is New England and generally we look to expand contiguously.

If greater opportunities exist for us, of course, we want to consider them.

But I would say it's Connecticut, Massachusetts, Rhode Island would be the most likely areas for expansion, at least over the near-term.

But I think that we're an attractive partner through the moves that we've taken.

We've made ourselves more attractive.

We've also boosted our tangible capital which gives us a little bit of room to consider acquisitions, as well.

Okay.

Great.

Thank you all very much.

Hey, Laurie, it's Jerry.

I wanted to come back to you on the stock repurchases.

For the quarter, we bought back 169,000 shares.

169.

Okay.

Great.

Thanks, Jerry.

Mark Lynch, Wellington Management Capital.

We've talked enough about my topic.

Thanks, guys.

Thanks, Mark.

Jim Ackor, RBC Capital Markets.

Good morning, guys.

Thanks for taking my call.

Morning, Jim.

I think earlier in the call you made a comment with regard to taking a thorough, strategic review of all business lines and just looking at every aspect of the Company and trying to refocus and perhaps shedding some business lines or adding some business lines.

Is there any specific couple of business lines or businesses that you think might fall under the purview of this strategic review and ultimately be shut down or sold?

And also, I guess in terms of looking at it from the outside, do we -- do we get a sense of timing or do you have a sense of timing as to when we might know what the results of this review are or have been?

Sure, Jim.

I think it's premature to be trying to identify what might be businesses that would be disposed of or divested of.

We're really talking about doing an analysis and looking at what is truly core for Webster and making sure that we focus our resources, as well as our capital in growing those businesses.

I guess what I should say is that -- and we've said this before, that the strategic review is under way.

It probably would be completed within a period of six to nine months or so.

And as we made decisions along the way, that we would announce them.

And I would anticipate, therefore, that you'd hear something about specifics, even in Q4.

And then we would keep you posted as we move along.

Okay.

Just a follow-up to that.

Is this all being done internally or are you utilizing any outside resources to help with the strategic review?

It's primarily an internal focus.

Again, with my being new to Webster, and new to the role, I've spent a great deal of time trying to understand the various components and drivers of revenue and expense in terms of total return, and I would think that the expectation would be that's absolutely where I should be spending my time and energy and understanding, and as such the vast majority of what we're doing in terms of that evaluation is being driven really as a result.

It's not to say that it wasn't a continuous process before.

It's more of a fresh look with the organization change.

Okay.

Great.

Thank you very much.

And, Jim, specifically where appropriate, we will use outside resources.

Okay.

Thanks, Jim.

[OPERATOR INSTRUCTIONS].

Collyn Gilbert, Ryan Beck.

Thanks.

Good morning, gentlemen.

Good morning, Collyn.

Jim, could you just give a little bit more color and maybe comment on the pricing expectations that you're seeing in the market as it relates to M&A.

Sure.

I mean, I'll say what I always say, they're always too high.

I actually think that the -- with the pressure on earnings with all the regulatory pressures, that we keep expecting that those expectations will come down a little bit, but then you see a transaction announced where a non-bank buyer buys a bank, there is always some reason why the valuations can be sustained and that keeps expectations up.

So we're not really able to control what the expectations are, but we can control what we believe we're able to pay.

And therein lies the potential for negotiation with like-minded partners.

We're not going to win any auctions.

But to the extent there are like-minded partners that want to talk to us about a good solid deal where we share the vision of what we can achieve together, those are the people, I think, that'll have an interest in talking with us, and I think that's where our growth will come from.

Okay.

But you're still committed to organic growth being the primary driver of future growth?

Absolutely, and I can't overstate that, that that is the primary driver.

Okay.

So it's going to be organic growth that within two or three years is going to get you to be a much larger organization?

No, it's a combination of both.

I believe that organic growth creates momentum, it creates revenue growth and profit growth, it expands the franchise, it puts us in additional markets where there may be like-minded partners that want to team up with us.

I can't handicap whether we're going to be successful in combining with just with smaller firms, which would be satisfactory, or whether there's an opportunity or two to make connections with larger firms where we can do something that would be more transformational.

We're interested in exploring either.

Okay.

Great.

And then, Jerry, just on the -- on the balance sheet sort of repositioning, can you just help us understand a little bit more in terms of the timing and maybe this, too, is a question for you, Jim.

I mean, the balance sheet has been -- for the wholesale part, obviously, has been dragging earnings for some time now.

What made you decide at this point in time to go ahead and do the restructuring?

Let me jump in first on terms of timing and I guess for clarification.

We made the announcement today.

We had triggered the beginning of sale activity yesterday afternoon.

Again, our expectation is between Monday -- between Monday afternoon, Tuesday all day, and into early part of tomorrow if not all completed today, we will have sold the entire first tranche which is the 1.250 billion.

Again, the 650 million we are evaluating the maturity of borrowings in each case, and we anticipate that in, again, a time frame to project that would be 30 to 45 days.

Collyn, I want to try to give you a little bit of an answer about the timing.

You know that we had back about three years ago 33% of our assets were funded by wholesale borrowings, and we had a very big securities portfolio.

We started in -- actually in early '04 when we were buying FirstFed.

We did a delever of about 750 million.

We did another one at the end of '04, so that amounted to 1.5 billion in that year.

You'll recall we took a charge at that time.

Then toward the end of '05, we announced that we would use the cash flows from our securities to pay down wholesale borrowings to try to accelerate the reduction in the borrowings because we could see what was coming and the fact that the spreads were going to get tighter and tighter.

Then in June of '06, in addition to that, we said that we would sell all fixed rate mortgage loan originations which not all of which we had sold in the past.

So this really has been building over a period of two or three years.

When you look at the -- what we call the wholesale contribution, the difference between the cost of borrowings and the yield on securities, plus gain on sale of securities, the contribution to earnings in 2003 was over 100 million pretax.

That contribution now is just about zero.

So we've made a huge amount of progress as far as the earnings stream is concerned, and we had over a period of what's now three years been gradually and then in spurts more aggressively delevering.

So this really completes the process, looking at the market the way that it is, interest rates where they are, we said it's time for us to get this behind us and this is a good time to do it.

Okay.

And then what would be your position going forward in terms of a satisfactory level of securities in terms of percent of earning assets that you'd want to maintain?.

Frankly, I'd say that securities may be a tad on the low side right now as a percentage of our assets, and borrowings are well within an acceptable range.

So what we've done is we've said for now we removed the question of the negative impact of wholesale borrowings on our performance to a great degree.

Over time, would we look at securities relative to assets even up toward the 20% range?

Sure, that's a possibility in the right kind of environment.

Would we look at wholesale borrowings that were somewhat higher than they are today?

Sure, under the right circumstances we may.

But for now, we wanted to take a decisive action that would ensure that we wouldn't be in this position again.

Got you.

Okay.

That's helpful.

Thank you.

[Mark Rousseau], UBS Financial Services.

Hi, Jim.

Hey, Mark.

Hey, Jim, could you give us your opinion on whether the deposit premiums that you're getting -- the deposit fees that you're getting have been growing at double-digits for about the last five or six years.

Is that sustainable?

Well, it depends upon how fast our deposits grow, actually.

We have done very well in terms of deposit fees from our debit card activities, in particular.

Interchange income has been on the rise, we've been promoting the use of the cards.

We've also been more and more successful with getting the cards into the hands of our customers so they use them in the first place.

So the idea of penetration, activation, and usage programs have been very successful for us.

We also have done well on other kinds of deposit fee income, whether it's the service charges related to it, and so that's helped us with our focus on that, compel that growth.

Whether we can sustain indefinitely double-digit growth, I can't say at this point.

But we have had, as you've seen, good performance in '06 to date.

But a lot of it is happening because of the quality of the marketing programs.

Okay.

Great.

You have had a lot of success in that.

So in the near term, we can model, then, that that'll continue, at least for the near term?

I'm not going to tell you it'll continue at the same strong rate it has in the last two quarters year-over-year, but we expect continuing growth.

Okay.

Thank you.

Andrea Jao, Lehman Brothers.

Hello, again.

Hi, Andrea.

The next step in the transformation of your balance sheet that of commercial banks of course reducing the contribution of certificates of deposit and the increase in contribution of business transaction accounts.

Hoping to hear your thoughts on initiatives going to 2007 towards this goal.

I'll just say, we agree with you that there's a lot of room for growth in commercial deposits, and that's both in the middle market and the lower end of the market in terms of the business-end professional banking services.

CDs are a valuable source of funding.

And there is value there between the cost of the CD and the transfer price.

So we view that as being much more attractive than having wholesale borrowings, and we expect that -- we want to be responsive to the customer preferences.

And there are times, as you know, because it's a mirror image of what happens to consumer preferences when the fed funds rates are rising.

So the activity we've seen there is not surprising.

We want to have good strong consumer relationships across all of these accounts, depending upon what part of the cycle that we're in.

We happen to be in a part now where there's a high preference for CDs.

That may change at another time.

We have explicit programs for attracting small business and middle market business, DDA accounts as well as other deposit accounts which we expect to contribute to our deposit growth going forward.

Perfect.

Then, one more follow-up question.

If you're going to 2007 with wholesale funding making zero contribution to earnings, could you remind us what the contribution was in '05 and then, if possible, in '04?

I'll see if we have that information.

I think we actually had something in our presentation package at your conference, Andrea.

I'm actually going to, if you bear with me for a second, on a fully diluted basis, it was in '05 worth $0.46.

So if you were to look at fully diluted EPS in '05, that wholesale was worth $0.46.

And virtually this year it's zero.

Perfect.

Thank you.

Thank you.

Ladies and gentlemen, there are no further questions at this time.

I would like to turn the floor back over to management for closing comments.

Thank you very much for your time today.

We appreciate your confidence in Webster.

Good day.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.