Webster Financial Corp (WBS) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Webster Financial Corporation's second quarter earnings conference call.

At this time, all participants are in a listen-only mode.

(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 Security Litigations Reform Act of 1995 with respect to Webster's financial condition, results of operation 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, events and assumptions as described in Webster Financial public filings with the Securities and Exchange Commission which could cause future results to differ materially from historically performance or future expectations.

I would now like to introduce your host for today's conference, Mr.

James C.

Smith, Chairman and Chief Executive Officer.

Please go ahead, sir.

Welcome to Webster's second quarter investor call and web cast.

Joining me today are Bill Bromage, our President; Jerry Plush, our Chief Financial Officer; and Jim Sitro, who is filling in for Terry Mangan, who is out on medical leave.

I will provide some highlights for the second quarter results and Jerry will provide details on our financial performance.

We will also provide some perspective on the completion of our strategic and organizational reviews, the results of which are available on our web site.

Our remarks will last for about 30 minutes, then we will invite your questions.

In our earnings release, we reported $0.63 in diluted earnings per share in the second quarter compared to $0.62 in the first quarter and $0.81 in the second quarter, 2006.

The second quarter includes $0.15 of charges, including previously announced costs related to the prepayment of capital trust securities in early April, as well as severance and other costs in connection with the strategic review process.

Excluding these adjustments noted in the earnings summary, EPS would have been $0.78 per share.

We have many positives to report for the quarter.

Net interest income reached a record quarterly level, despite a balance sheet that is $1.1 billion leaner than a year ago.

Net interest margin reached 3.47%, the highest in recent memory.

Borrowings and securities levels continued to decline to 12.3% and 14.5% of assets, respectively, reflective of our emphasis on higher quality earnings from loans and deposits versus wholesale spread from securities and borrowings.

We had strong organic growth in commercial loans, an increase of over $100 million from the linked quarter.

We saw increased deposit service fees, reflecting deposit growth, seasonal strength and our recently revised consumer fee schedule.

And we completed our strategic and organizational reviews, through which we narrowed and sharpened our focus on core franchise activities with the objective of doing more and better what we do best, while improving operating margins and shareholder return.

Webster possesses strong underlying business momentum, which is evident in the year-over-year growth in both commercial and consumer lending.

Aside from the NewMil acquisition in the fourth quarter of '06, total commercial loans and consumer loans grew 8% from a year ago as we continued to place the highest emphasis on building these portfolios.

Including the loans received in the NewMil transaction, commercial loans, including commercial real estate loans, now total $5.5 billion and grew by 10% from a year ago, or 7% excluding NewMil and now comprise 44% of the total loan portfolio compared to 39% a year ago.

Our C&I portfolio is by design about twice the size of our CRE portfolio.

The portfolio yielded 7.44% in the quarter, up 21 basis points from a year ago.

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

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

Our underwriting is solid and we're not a party to recent borrower-friendly corporate lending trends regarding pricing and structures.

Another benefit of C&I growth is that these relationships drive growth in our retail business as well.

Our commercial real estate portfolio remained unchanged from the first quarter at $1.9 billion as strong originations were offset by high prepayment activity.

The portfolio consists of $1.1 billion of institutional-quality real estate with long-standing relationships, while the other $800 million represents owner-occupied and non-owner occupied loans from middle market and small-business lending.

The total CRE portfolio yielded 7.28% in the quarter, up 11 basis points from 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 loan portfolio totals $3.2 billion and grew 12% from a year ago, or 11% excluding NewMil.

Consisting primarily of home equity loans and lines, the portfolio yielded 7.02% in the quarter, up 26 basis points from a year ago.

The annualized net charge-off ratio in the portfolio was 24 basis points in the second quarter compared to 3 basis points a year ago and 21 basis points in Q1 '07.

This increased level of consumer charge-offs relates primarily to higher yielding, higher combined loan-to-value ratio of home equity loans and lines originated through our national wholesale lending group.

While the charge-off level that we've seen in the first half of this year is marginally better than the available industry performance for the period, it is nonetheless significantly higher than a year ago.

In response, we've tightened our underwriting, collateral assessment, and default management practices to reduce exposure to loss in a rapidly changing marketplace.

Also, our sub-prime exposure remains minuscule.

At the same time, consistent with the sharpened management focus I spoke of earlier, our head of consumer lending, Michelle Crecca, working with Scott McBrair, our head of retail banking, has implemented new programs that are resulting in impressive growth in home equity production from our branch system.

As a result we had branch originated home equity production of $250 million in the second quarter, or 55% of total, compared to $165 million, or 40% of total a year ago.

Michelle and her capable team stress retail and branch-oriented strategies in their quest to significantly grow our consumer portfolio.

Excluding the $300 million of residential loans received from NewMil, resi loans declined almost 30% from a year ago, primarily due to the two securitizations that took place in the Q4 '06 and Q1 '07 and our decision in July of 2006 to sell all fixed rate production.

Resi loans currently comprise only 30% of the loan portfolio compared to 38% a year ago.

We expect that further planned attrition in the resi portfolio will be more than offset by ongoing commercial and consumer loan growth.

We did transfer $96 million of loans previously held for sale into the resi portfolio during the quarter which resulted in a $948,000 valuation mark that was reflected as a reduction to mortgage banking revenue in the quarter.

The $96 million of loans related to previously disclosed residential construction loans originated by our national wholesale lending group.

Apart from this valuation mark, we had no additional charge offs in connection with residential construction loans originated by the national wholesale group.

Turning to deposits, total deposits amounted to $12.8 billion, $600 million of which came from the NewMil acquisition that closed in Q4 '06.

Excluding NewMil and the planned reduction in brokered deposits, deposits grew 4% from a year ago.

Growth over the past year has been led by CDs, which reflects the consumer preference across the industry for higher-yielding deposit products.

Nonetheless, Webster's overall cost of deposits of 2.87% in the first quarter was 29 basis points below the median for our peer group, clear proof that we're executing our strategic plan.

And our cost of deposits increased by only 1 basis point in the second quarter to 2.88%.

Our de novo banking program consists of 25 branches opened since 2002, or 14% of our total retail franchise that had total deposits of $790 million at June 30, compared to $645 million a year ago.

This performance represents a $145 million increase in deposits, or 22% from a year ago.

Our de novo branches continue to provide an improving mix of attractive demand, NOW and savings account deposits over time.

The de novo program is an essential part of our build and buy strategy, enabling us to expand our retail presence and creating opportunities for us to deliver our bank-wide products and services to consumers and businesses in new market areas.

We expect to open four new locations during the second half of this year -- two in the Springfield, Mass.

area and one each in New Rochelle, New York and Woodbridge, Connecticut.

While we have slowed the pace of the de novo openings in the past 18 months, we continue to see de novo branching as integral to our plans for longer-term organic growth.

Turning to HSA Bank, we now have $377 million of deposits in this division, an increase of $100 million, or 36% from a year ago, as well as $51 million in linked brokerage accounts.

HSA Bank's average cost of deposits for this fast-growing category was 2.95% in the second quarter, about the same as the cost of Webster's other $12.4 billion in deposits.

Strategically we have expanded our reach for core deposits to fund our above-market loan growth, and we've tapped a deposit market poised for potentially explosive growth over the next several years.

In the second quarter, HSA Bank added 5700 new accounts, and more than 175,000 total accounts now have an average balance of over $2100 each.

HSA Bank is expanding its sales force as market acceptance for health savings accounts continues to build among employers.

I will now turn the program over to Jerry so that he can provide full details on our financial performance in the second quarter.

Good morning, everyone.

We are pleased to report today that our tangible capital ratio stands at 6.32%, and that includes the impact of repurchasing nearly 2 million shares in the second quarter.

Our TCE ratio as of June 30, 2007 is a substantial improvement from the 5.47% we reported a year ago at June 30th, 2006.

It's important to note that the 6.72% that we had reported at March 31, 2007 was higher than the target range we had previously stated, and as such we felt very comfortable bringing our TCE level back within that range with the buybacks.

We'll talk more on this in a few moments.

Our loan to deposit ratio improved again, down to 97%.

This ratio improved from 98% at March 31 of '07 and 104% at June 30th, 2006.

Our deposits grew $261 million in the second quarter, and loan growth, primarily commercial, was $137 million, while borrowings declined $135 million, as did brokered deposits, which declined $59 million by quarter end.

It's important to note that brokered deposits are down over $438 million from a year ago, and excluding brokered deposits, our quarterly growth in deposits was $320 million, or 10% on an annualized basis.

Our net interest margin improved to 3.47% in the second quarter in comparison with 3.41% for the first quarter and 3.13% for the second quarter of '06.

As Jim stated, we reported recordly quarter (sic) levels of interest income and fee income.

Now let's turn to provision for credit losses.

We increased the provision from $3 million recorded in recent quarters to $4.25 million this quarter.

It's important to note that $600,000 of this increase in provision was to offset uncollected deposit overdrafts, which we had determined should be reflected as charge-offs.

Overdraft balances were previously reflected as a reduction in deposit service fees.

So fees will no longer be reduced by uncollected overdraft principal.

This will be charged to the allowance for loan losses.

Turning now to credit performance, as I just noted, our provision for the quarter was $4.25 million, and it exceeded net charge-off by $90,000 this period.

Our nonperforming assets increased by $14 million to $78.7 million from the $64.8 million at the end of the first quarter.

$11 million of this increase, however, was discussed in our first quarter earnings call where we noted that we elected to take a conservative approach to construction loans that had been on interest reserve and discontinued drawing on these reserves effective April, 2007.

Our allowance for credit losses remains strong, and the allowance for credit losses to total loans was 1.23% at June 30 in comparison with 1.24% at March 31 and 1.23% a year ago.

The $0.63 of diluted EPS for the second quarter includes onetime items, including $6.8 million of net costs related to the trust preferred securities prepayment, $3.4 million of software development cost write-offs, $1.9 million of severance costs and $1 million of write-downs of residential construction loans previously held for sale.

So, excluding these charges, net income would have been $0.78 per diluted share.

I do want to now point out that we've included a disclosure note to our financial statements.

It's attached to the release.

It's a change in previously reported information.

This change relates to reporting periods prior to 2005 and does not affect income for any of the periods that we've presented in the financials today.

Turning back to the quarter, so while our reported performance this quarter was impacted by these charges, there are many positive trends in our results.

The most significant driver of performance is the continued improvement in the net interest margin.

However, the total benefit of the higher NIM is for now, partially offset by the fact that our average earning assets are lower by almost $1.2 billion from a year ago, the result of the deleveraging steps that we took in the third and the fourth quarter.

As evidenced in the second quarter, we're building our earning asset base with higher yielding commercial and consumer loans that are funded by core deposit growth.

The yield on total loans increased to 6.81%, or up 7 basis points when compared to the first quarter, and it's up 27 basis points from the 6.54% we reported a year ago.

Commercial, including commercial real estate, and consumer loan categories in aggregate grew by 11% from a year ago, or by $869 million, and they're up $140 million from the first quarter.

The yield on securities was 5.78% compared to the 5.97% for the first quarter and 4.61% a year ago.

This reflects the positive effects of the security repositioning steps that we took in the latter part of 2006.

On the funding side, our cost of deposits increased by only a basis point to 2.88% over the cost of deposits for the first quarter, and were 45 basis point higher than the 2.43% reported a year ago.

The cost of FHLB advances was 4.72% in the second quarter, down 3 basis points from the prior quarter, and up 25 basis points from a year ago.

It's important to note here that our total FHLB borrowings are down by $1.3 billion from a year ago.

Turning now to non-interest income, we reported $64 million, including $2.1 million in gains on the Webster Capital Trust I and Trust II securities.

That's up from $57.4 million in the first quarter and $57.1 million a year ago.

Our deposit service fees totaled $28.8 million compared to $25.4 million in the first quarter and $24.2 million a year ago.

The increase reflects tiered pricing changes, and the benefit of no longer charging the uncollected overdraft balances, just the uncollected fees, to deposit service fees as I previously mentioned earlier in my presentation.

Our insurance revenue was $9.1 million in the second quarter compared to $10.1 million in the first quarter and $10 million from a year ago, while loan-related fees were $7.9 million in both the second and first quarters of '07 and $9.2 million from a year ago.

Our wealth management fees, they improved to $7.6 million compared to $6.9 million in both the first quarter of '07 and the second quarter of a year ago, while our other non-interest income was $1.4 million for the quarter compared to $1.8 million in the first quarter and $1.3 million a year ago.

Turning now to mortgage banking activities.

The results totaled $4 million for the second quarter and it reflects increased volume, and it's also inclusive of $1.2 million of write-downs from the transfer of $96 million of residential loans, which yield over 7.25% into portfolio.

These loans were previously categorized as held for sale.

Our mortgage banking activities were $2.2 million in the first quarter and $2.5 million was recorded from a year ago.

We recorded $500,000 in gains from the sale of securities in the second quarter, which is very comparable to the $541,000 that we recorded in the first quarter and the $702,000 in gains that we recorded a year ago.

Turning now to expense.

Our total non-interest expenses were $138.1 million, compared to $131.3 million in the first quarter and $117 million a year ago.

It's important to note that these second quarter results include $8.9 million of capital trust securities redemption premiums at $5.3 million of severance and other onetime charges.

Our first quarter results of 2007 also include onetime charges of $2.3 million from the closure of TMC, $2.2 million in severance-related expenses associated with insurance and other lines of business, including outsourcing at WIS.

Our first quarter results also include seasonal charges of about $4.7 million for payroll taxes and 401(k) match.

The second and first quarters of '07 also both include $3.4 million in additional run rate expenses related to the NewMil Bancorp acquisition that took place in October of 2006.

So, excluding onetime charges and normalizing for the impact to NewMil, for comparison purposes, expenses were down about $3 million from the first quarter, but up about $3 million from the second quarter of '06.

The increase year-over-year relates to the opening of de novo branches in the second half of '06, higher other expenses and additional investments in people and technology.

As we've previously announced, we called our Webster Capital Trust I and Capital Trust II securities at a call price of 104.68% and 105%, respectively.

Our second quarter results reflected a net pretax charge to income of approximately $6.8 million related to the redemption premium and write-off of unamortized issuance costs.

We replaced these legacy trust preferred securities with enhanced trust preferred securities with greater equity content for rating agency purposes, and most importantly, at a reduced cost; a net cost of 750.

A hedge reduces the net cost from 765 to 750 for the next 10 years, and enhanced our capital levels by issuing $95 million more of these enhanced trust preferred securities with no impact to earnings per share in future periods.

So let's look ahead to the balance of the year.

As we've previously stated, we expect the net interest margin will be in the 3.45% range.

We would expect our provision for credit losses to be around $4 million a quarter to maintain our reserve levels.

We would expect our mortgage banking activities to normalize.

Turning to expenses, our first half results, both quarters reflect a number of onetime charges.

Exclusive of these charges, we know our efficiency ratio has room to improve.

So while we've talked about our plans to prudently invest in certain areas such as de novo branching, additional business development officers and to continue to invest in new technology, we will reduce expenses from low contribution lines of business.

And with the organization review completed, we're starting the process of centralizing all of our shared services functions with the objective of improved effectiveness and efficiency.

Said bluntly, we will drive our operating costs down.

In summary, we're focused on consistent, profitable growth and improved operating efficiency.

Our focus for the balance of '07 is on doing just that, and with now the organization and strategic reviews completed, which Jim will discuss in greater detail in a few minutes, we're determined to demonstrate this in our performance.

I'll now turn it back to Jim.

In addition to the comments we've made today in our Q2 results, I'd like to cover the highlights of our organizational and strategic reviews which we posted on our web site and referenced in our earnings release.

I'll try to keep this brief to ensure we have time for questions.

Regarding the organizational review, in February we announced we had initiated an organizational review, and as a result we've made several changes toward making Webster a more efficient and effective organization.

We created an office of the Chief Executive Officer, which consists of Bill Bromage, Jerry Plush and myself, to set strategic direction and performance goals for the Company and to ensure faster decision-making, clearer strategies, better communication and better utilization of resources.

We created an executive management committee to guide strategies and resource allocations.

In addition to the three OTC members, the chief administrative officer, the chief marketing officer and the heads of commercial and retail banking will serve on this primary committee.

Jeff Brown will take on the newly created Chief Administrative Officer position.

Jeff will oversee shared services, including operations, technology, human resources and facilities, as well as strategic planning and communications.

Previously, most of these areas reported directly to me, so I'll have more time for customer, strategic and corporate development issues.

Risk functions will also report to me.

During the review, we reorganized our oversight and committee structure to streamline decision-making while restructuring our approach to risk management.

One positive result, fewer officers will serve on fewer committees, meeting less frequently and with narrowed agendas.

More time will be spent in the market and on customer issues with less time spent on administration.

We believe that these new operational and governance structures are better aligned with our strategies, and will enable us to execute our business plan more effectively and efficiently.

Regarding the strategic review, last September, we announced that we had begun a comprehensive review of the Bank and our lines of business.

Our goal was to intensify focus on our core competencies, identify operational efficiencies and better position Webster for sustainable growth.

Earlier, we reported progress on the strategic review, including these actions.

We closed Peoples Mortgage Company, terminated mezzanine lending, discontinued construction lending outside of New England, reduced costs by consolidating and streamlining insurance operations, reduced costs by outsourcing the backoffice operations of our broker-dealer.

Today, we announce these additional strategic review outcomes.

We will focus on in-market and contiguous franchise growth.

Lending relationships outside the Northeast will be direct.

In mortgage banking, we will concentrate our management and sales focus on the New England and mid-Atlantic states, while reducing our national focus.

We're exploring strategic alternatives for Webster Insurance, including a possible sale, ideally with a continuing partnership to sell insurance products throughout New England.

This will free up management, operational and capital resources that can be focused on retail and commercial banking.

We're committed to and intensely focused on growing our retail and commercial bank franchise.

We will pursue our vision to become New England's bank as we continue to expand into new markets, with four new branch locations planned for the second half of '07 and six to eight locations planned for '08.

We will expand our lending presence in greater Boston, and plan to open a flagship commercial and retail banking facility as a next step to strengthening our presence there.

We see significant growth opportunities in consumer lending, government finance, and small-business banking.

We recently launched a business deposit officer initiative and enhanced our cash management product offerings, which will serve as catalysts for continued growth in business deposits and fee income.

Our HSA Bank has demonstrated strong growth in low-cost health savings deposits.

We're evaluating alliances as well as additional investments that may provide opportunities to capture a greater share of a rapidly growing market.

Regarding infrastructure investment, during 2007, we have invested in many technology-oriented projects to improve efficiency and customer service, such as enhanced cash management systems, automated lending solutions, Internet development, document imaging and upgrades to our ATM network.

We've also initiated a facilities strategy that will provide for strong regional presence in our major markets while addressing capacity issues and reducing operating costs through greater centralization of operations.

We're adopting a regional hub approach with a plan to consolidate facilities into Hartford, Connecticut; Providence, Rhode Island; Waterbury, Connecticut and Stamford, Connecticut.

Finally, recapping balance sheet and capital management actions, over the last 12 months, we've significantly improved the structure of our balance sheet, including the capital structure.

We reduced the holdings of mortgage-backed securities and residential loans over $2 billion while reducing short-term wholesale borrowings.

While this reduced interest earning assets, it reduced Webster's exposure to interest rate volatility from both an earnings and market value perspective.

Securitization of $1 billion of residential loans improved risk-weighted assets for regulatory purposes.

The call of $105 million in capital securities with a yield of 9.57% and subsequent issue of $200 million in capital securities at 7.5% strengthened our capital base while lowering our overall cost of capital.

Historically, we've targeted a tangible common equity ratio in excess of 6%.

In the future, we'll focus our benchmarks on the regulatory capital ratios for well capitalized as well as how we're positioned against our peers.

With a stronger capital base, we have added flexibility to pursue growth opportunities or to selectively buy back shares.

We also continued our trend of increasing dividends and raised the quarterly dividend 11% to $0.30 per quarter.

The dividend payout is currently 40% with an annual yield of about 2.9%.

Looking forward, Webster possesses a strong core balance sheet and capital structure with an infrastructure that can be leveraged through acquisition and de novo growth in our core businesses.

The organization is well aligned structurally and we've increased management focus on core franchise businesses in our markets.

In the near-term, we expect the net interest margin to be stable, and we see continued improvement and operating efficiency.

We're very interested in combining with like-minded partners who share a vision of being a strong regional bank, and believe in the community banking model.

As you can see, many good things are happening at Webster.

We've posted solid second quarter results in a challenging operating environment.

Our balance sheet is strong, we've got capital management flexibility, we're growing organically and we're beginning to show positive operating leverage.

Today, Webster sells at a 13.6 multiple of 2007 consensus EPS, 2.1 times tangible book value and at a tangible deposit premium of less than 10%, all among the lowest in our peer group.

Yet, our results are improving, our progress undeniable, and our prospects for creating shareholder value compelling.

And we've backed up that perspective by buying back 1.9 million shares in Q2 as our Board believes our shares represent extraordinary value.

Completion of our strategic and organizational reviews provides us with a narrowed focus and heightened intensity on the businesses that we're most capable in.

All of our efforts are designed to generate shareholder value as we fulfill our mission to help individuals, families and businesses achieve their financial goals.

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

We will now be pleased to respond to your questions.

Jerry and I also will make ourselves available through the remainder of the day for follow-up conversations.

(OPERATOR INSTRUCTIONS).

James Abbott, FBR.

Good morning.

I have to say thank you for the detail on the initiatives, strategic initiatives.

It looks like a good initiative.

Question on the fee income line items on two categories.

The mortgage banking, you mentioned it would normalize, and I was wondering if you could give us a sense as to why the strong performance at roughly $5 million, and historically it has been around the $3 million mark -- if you would normalize for the charge that was taken during the quarter.

It's a combination, it's predominantly much stronger volume that's gone through.

Our folks have been very successful in terms of generating greater volume, and it's also from being strong on the pricing side.

So you've got a combination of both factors.

So that results in the $2 million higher than, as you referenced, we're in and around $2.5 million to $3 million on a more normalized basis.

Is that -- I've heard this from a couple of other companies, but I'm wondering if this is -- is this sustainable, or is it likely to return back towards the $3 million level?

As I stated, our expectation is that it will normalize.

So, this is kind of a refi burn-out type of effect, maybe.

The other question is on the wealth and investment services.

That did jump up fairly substantially over the prior four quarters for the trend.

Was that due to increased assets under management or a change in the fee structure?

And if it was a change in the fee structure, what was the tweaking that you were able to do there?

It wasn't a change in the fee structure.

We had an exceptionally strong quarter in Webster Investment Services, which is our broker-dealer operation embedded in our branch system.

And they had very strong results for the quarter, so the assets under administration, if you will, went up significantly and that drove the fee income increase.

And that's a sustainable level then?

We believe over time, we have increased -- that area has increased fairly consistently its penetration in the customer base and its ability to sell through product to the customer base.

Last question that I had is on the credit -- if I can find it, was the commercial nonperforming assets, not including the construction loan, obviously, but the other line item, the commercial was up about $6.5 million linked quarter.

I don't know, maybe I was writing fast during the call there, but maybe I missed it.

But did you talk about that, and if not, what was that, and is there some resolution on that?

Just dealing with the nonperformers on the commercial, if I may, I'll comment on both the C&I and the commercial real estate.

The C&I had a net increase of about $6.4 million.

There was a $10 million-plus dollar local company here in Waterbury, a manufacturing company that went non-accrual.

We believe we're protected by the assets.

We're working actively with the management and they are aggressively looking for a resolution.

And we had a $4 million credit that was in the non-accrual category that paid off with a modest charge-off.

Then on the commercial real estate side, where we had about a $6 million -- a little over a $6 million reduction, we had two credits; one for 4.5 and one nearly 2, both of which paid off in full in the quarter with no loss.

So the flow, as you know, there are flows here in and out, and that's the flow when you saw the spike in one, drop in the other.

Just for a sense as to why that commercial, the C&I loan deteriorated, is there something in that individual's business that would be more indicative of a broader trend?

Not necessarily --

We don't see it as a trend in our portfolio.

I think that a specialized manufacturer that probably is feeling market conditions shifting on them, and now there's been a good deal of that in the manufacturing sector and I think this is just another case of that.

Okay.

That's what I was ---

It's not an underwriting aspect, if you will, it's more a factor of the position of that company in the industry it's serving.

That's what I was asking.

Okay.

Thank you very much for your time.

Andrea Jao, Lehman Brothers.

Good morning, everyone.

You earlier mentioned that you're moving away from tangible equity to regulatory ratios to help manage capital, or as benchmarks to help manage capital.

Could you give us a bit more detail with respect to that?

Are there specific numbers for the benchmark that you can share with us?

Just want to reference, if you would, if you have an opportunity on the Web site, we reference the Transformation of Webster deck.

It's the update on the strategic review and the organizational review.

We've sort of laid out on pages 16, 17 and 18 our capital -- sort of the historic perspective on each of the ratios in addition to some of our thoughts about capital management going forward.

The real sense is that we would like to try and target to a TCE of around 6, our leverage of about 8 and our total risk of about 12.

If you were to look at the ratios as of June 30th and not take into account growth that will naturally occur in the third quarter, which obviously is just going to give us more flexibility, we were at about 6.32% intangible.

We were at a leverage of about 8.31% and we're right at 12%, 11.99, 12% on the total risk base.

So our view is, we want to try and always keep in the forefront the importance of the regulatory ratios and optimize our tangible position.

And again, as Jim had stated I think in several places in his comments, as did I, we think, and I think we speak on behalf of the Board, we felt that the buybacks were just a very attractive investment opportunity.

And I think it -- certainly, you could go right to the conclusion of, we believe that we'll manage down to that 6%.

So the continuation of buybacks as we go forward is certainly something that we will consistently evaluate.

How quickly do you expect to manage down to the 6% level?

And also, do you have elbow room or do you have the propensity to use more hybrid capital to kind of free up more regular or more common capital?

We have issued what we believe is the appropriate amount of hybrid at this point in time.

As we continue to grow and expand both organically and through acquisition, we'll always evaluate the use of hybrid or the enhanced trust preferred securities.

In terms of answering your earlier question on how quickly will we look to go to 6%, I would just like to state that it's a target to be at 6%.

And certainly, we will be evaluating, again, as conditions permit, to continue some buybacks here in the third quarter.

Great.

Then if I may move on to expenses, and kind of get a sense on how aggressively you'll be driving down operating costs, and if you have efficiency ratios or other metrics that you're looking at, you could share those with us.

I'll take a first crack at that, and certainly open it up to the others that are here to also respond.

But we have stated all along that our operating efficiency ratio is too high for an organization such as ourselves.

We're running, when you take out all of the charges, around 64%.

We'd like to be driving that ratio down certainly much closer to where the peer group is.

And if you've noted, we've spent a great bit of time talking about where we stack up in peer ratios for tangible, for all our equity or capital ratios, for our loan to deposit, for our net interest margin, etc.

We're doing that same thing around our operating efficiency, and we will report a lot more about that on a go-forward basis.

In terms of an ideal target, certainly, I think we've got to take it step-by-step.

I think we made a huge step in the centralization of our shared services function, which will give us the ability to take out where we do things in different places and centralize those and get some economies of scale from doing it in one place as opposed to several.

In addition, that's really what the facility strategy is all about.

Today, we operate in a number of operations centers, small operations centers, spread throughout Connecticut and also in Mass.

and Rhode Island.

We're looking more at that regional hub strategy, where we would go from multiple locations into more centralized locations, which will be a much more efficient operation.

So hopefully, that gives a flavor to -- we do believe there's plenty of opportunity.

I would also like to comment that by having Jeff Brown focused on these shared services strategies, it's a huge positive for our organization.

Great.

Thank you very much.

Jared Shaw, KBW.

Good morning, and congratulations on what looks like a good quarter.

Just a few questions.

On the fee side, on the noninterest income side, it looks like the customer service charges were able to really see some good recovery this quarter.

Is that sustainable, or is there anything there that may not be sustainable going forward?

Yes, we believe that the tiered pricing structure that we've put in place is sustainable, and that our expectation is that you would see comparable results on a forward basis.

So that structure was in place for basically the whole quarter?

Yes, for the majority of the quarter.

Although, we did say that those are seasonally high numbers.

And then on the expense side, how much did you reduce headcount by through these charges?

Those headcount reductions were the summary of more senior levels.

So it really wasn't a widespread headcount reduction per se.

It was more the more senior manager levels in the organization.

And obviously, if you do sell, or move insurance off the books, then that could be further reduction there?

Yes.

When you talk about the facilities, does that include -- would you be looking to close like your New Britain facility then if you consolidated into these four hubs, or is that a separate type of a facility?

No, there is -- very specifically, there's no plan.

New Britain is a strong center, it is -- we consider it a very critical part of the organization.

And if anything at this stage, we're looking at opportunities and/or alternatives to expand.

Great.

Finally, you speak about government financing as a target.

Do you have any municipal deposits now?

Is that an area you've been going after?

And if you do, how much -- do you happen to know how much municipal deposits you have?

In terms of government finance, we really -- we're pleased to say that we have enhanced our capabilities there with the addition of several folks who have worked for competitors in our Mass/Rhode Island markets.

And as such, we believe that that's fairly new ground for us to be -- to grow.

In terms of Connecticut, we've always had a strong presence in the business and we're going to come back to you here in a second on the deposit numbers.

Great, thank you.

Michael Cohen, SuNOVA Capital.

Thanks for taking my question.

Could you provide an outlook for credit quality in your home equity book?

I saw that on an NPA basis, it was kind of -- you had kind of doubled, but if you exclude obviously the $11 million construction loan on the residential piece, or rather -- let me back up.

The home equity in the consumer piece was flat -- yet the REO had doubled.

Could you kind of reconcile these two things?

Let me talk about equity, home equity lending.

First of all, let's deal with the residential construction.

The residential construction numbers came out of our national construction group, which we talked to you extensively about last quarter.

We moved $11 million in, in April, as we discussed in last quarter's earnings call.

There's about $10 million of that still in the nonaccrual, and there's a little other movement which we see from time to time, a couple million dollars.

When you turn to the equity side, on the equity side, we've had charge-offs in the low to mid 20 basis points over the past couple of quarters.

When we look at the flow of delinquencies and nonaccruals there, I think our expectation would be that that may continue for a couple more quarters.

We've looked at that book, we monitor it obviously very closely because it's a sizable book for us and the performance that we have seen has been fairly strong in relation to industry numbers that we look at.

We're not, as Jim reported, we're not a sub-prime lender.

So from that perspective, we feel good about that aspect of the portfolio and we would expect the performance we've seen in the past couple of quarters to be the most likely performance over the next couple of quarters.

How has -- what's the delinquency trend as opposed to kind of the MPA trend within the home equity book?

I don't know if you're aware, Countrywide this morning announced their results and took significant write-downs to their prime home equity residuals, largely on credit.

Which is why we asked.

I was aware of that.

The delinquency credits in the second quarter went up about -- on the 30-day delinquency, which is what we're monitoring, went up about $10 million, which is a 40%-50% increase.

We had a relatively low number.

When we looked at that increase, half of it was attributable to three credits that are here in the Fairfield -- large credits that are here in the Fairfield-Westchester market, which is our home market.

As you know, it's expensive homes down there.

So we had some large equity lines down there, three went -- so, half of that increase, if you will, is attributable to those three.

Frankly, since quarter end, one of those has paid current.

So we're monitoring it, we had an increase, but when we look at the portfolio in total, we're still comfortable where we are.

Do you have the ratio?

The ratio is -- 17 -- 70 basis points?

(multiple speakers).

70 basis points?

Yes.

Yes, 70 basis points.

Compared to what in the first quarter?

Compared to about 30 in the first quarter (multiple speakers) 69 to 30.

Thank you so much for taking my question.

Collyn Gilbert, Stifel Nicolaus.

Good morning, gentlemen.

Just a follow-up on Jared's question on the customer service fees, the increase from the first quarter.

What was the percent -- or actually, the dollar amount -- that was tied to just backing out the uncollected overdrafts?

Was there a big portion of that that's causing the increase in the first quarter?

Yes, there's the $600,000 that you would look at that would have normally been put through in overdraft principle that you can assume is part of the increase quarter-over-quarter.

In terms of looking at each quarter and the numbers, in terms of what runs in overdraft, that number varies by quarter.

But I think for purposes of part of the increase, it's very clear it was driven by that reclassification.

I'd like to also note that we feel very strongly what we've done is the appropriate way, when an account overdraft's in effect, it's a loan, and should be -- accordingly, when it's uncollectible, should be charged off.

And the same (inaudible) for fees [purified] back against deposit service fees.

And then, Jerry, could you just reconcile again -- I'm sorry to ask this again -- but reconcile the mortgage banking revenues, how that breaks down in the quarter?

Yes.

In terms of -- we believe, just for the quarter, because you have to take into account we took an almost $1 million valuation charge there, that we would have been at about $5 million.

If you look at our normalized quarters, it would probably be in and around the $2.5 million to $3 million range, because again, that all depends on the LOCOM adjustments on the pipe at any given point in time.

So if you would say $3 million, than you've got a $2 million increase to be looking at to understand.

And of that, there's higher volume, which is a huge driver of this particular quarter, as well as that official pricing that flowed through.

And I would just want to comment again, we really do believe that it will normalize going forward.

What was the valuation charge in the first quarter?

We took a charge in the first quarter for a specific loan.

We had one loan that was $700,000 that we took -- I believe the loan had a value of about $800,000 on our books, and we wrote down $700,000 of it, basically to the value of the land.

It was one of those construction loans, if you remember our disclosures, from the first quarter.

That was that one credit, specifically.

Great.

And then, just as you look forward, do you guys anticipate any additional charges in the third and fourth quarters?

By the way, that was Jim.

Don't laugh, Jim.

We anticipate there will be charges against loan charge-offs, as is the ordinary course.

But we're not looking at anything extraordinary.

No, I meant purely extraordinary.

Like more severances, more write-downs -- could we assume that maybe the third quarter outside of the normal course of business, there will be no noise, planned noise?

I would say that our intent, clearly, as we've said that we've completed the reviews, I would say separate from the potential of severance, depending on what happens, and as we move forward with some of these initiatives, there certainly is the potential.

But I don't believe at this stage that we've got the bigger numbers.

The numbers we've been reporting here in the first and the second quarter we think were specific actions that we can tell you that we took charges on.

At this stage, I really can't say much more than that.

But I don't believe that you'll see -- it's not our intent to be recording charges in the third and fourth quarter, and I know that's exactly what you wanted me to say.

Yes.

That's the intent.

Very good.

Thanks, guys.

I just want to add to that.

Again, I do believe, as part of our ongoing business, there's always going to be some level of severance charges because of just what happens in personnel decisions and changes.

I just want to be clear -- that our intention is to make clear that we have completed the review, and that most of the primary actions have been recognized, and that whatever you see going forward is going to be more in the ordinary course.

Thank you very much.

If I could before there's other questions, jumping back to respond to Jared's question.

Our municipal deposit business was about $750 million at quarter end.

Matthew Kelley, Sterne Agee.

Just as it pertains to the strategic review and the exiting or potential exiting of the insurance business, maybe you could talk about this for a little bit.

You've had eight acquisitions there over the last ten years, it's 38, $40 million worth of revenue.

Maybe just talk about kind of profitability, expense levels, capital requirements that are leading this to be considered for an exit.

You're correct, it's about 38 to $40 million.

On profitability, it's -- on revenue.

On profitability, it's running less than what we would have wanted in terms of operating margin.

That was one of the considerations.

We have put up reasonably -- we would call it significant capital against the operation, in part as a result of the acquisitions that we've made, and also to capitalize the ongoing operations.

Of course, that capital would be freed up in the event of a sale for redeployment in other ways, either to support the core businesses, or for other uses, whether it be buybacks or other opportunities for capital.

Would you care to quantify the expense levels, or that capital commitment that the business is currently requiring?

I think what I would say on the expense levels is that it's running a very high efficiency ratio, well over 80%.

As far as the capital --?

On the capital side, we're holding dollar-for dollar against the intangibles.

So in terms of what we maintain and look at as a hurdle for that business is the result of all those acquisitions, which is in excess of -- basically it's about the revenue number, a little bit higher than that of $40 million to $45 million worth of capital that we've got to hold dollar for dollar for the intangible that's out there.

Again, from the eight deals that you referenced.

Do you think that this was a business that could be sold at a premium going forward?

I think it's premature to give any indication on that.

I think it's really important to note, we're evaluating all alternatives.

Our real intent is, we believe that the business has been very successful in cross-selling both ways; has provided business leads for our other products and services, and on the flip side, has also been one where it's been a successful cross-sell, particularly in the commercial business area.

So we're really looking for partners in that space, and that would be the ideal situation.

I just want to say, I think you're looking at it exactly right, which is -- what does the revenue give up?

What is the efficiency ratio; solve for contribution; and look at the amount of the capital that comes back to us for forecasting purposes.

You can understand that we're reticent to be making projections as to what the valuation is.

But, we also want to say that we have a very strong ongoing interest in a relationship with the strategic partner, because so many of our Webster commercial customers take their insurance through Webster Insurance, and many of our insurance customers have banking services through Webster because we've done a very good job of cross-selling one through the other.

So the idea of having the continuing opportunity to generate insurance revenue through Webster relationships and sell banking products through the strategic partner would be highly desirable to us.

And then any more detail on the significant opportunities in the consumer lending segment that you outline on page 10 of the strategic review, what that might entail?

We have made a considerable progress with -- as Jim mentioned, Michelle Crecca joined us to run the consumer lending group, and we've built a strong team there.

We're investing in technology to enhance our underwriting service levels, speed and quality.

We've invested in the MIS so we can understand the portfolio and the risk parameters better.

So a good deal of progress on that side.

When you look in terms of growth opportunities, the increase that we had in our branch sell rate this year versus last year, which was nearly 40% or 50% year-over-year, and yet when we look at the level of pull-through rate we get per branch versus what our industry statistics tell us top-quality performers get, we think there's ample room for improvement to distribute more equity product through the branch system.

We also have expertise in terms of retail, direct lending, whether that's using the Internet which we're building functionality for, direct mail campaigns that cover the broader footprint that we cover, we think there's opportunity to do more direct lending and consumer lending, particularly in equity lending.

So we're enthused with where we're going and what the focus is there and with the progress we're making and the support systems to enable us to realize that growth.

Is the auto lending business being considered as part of that growth plan?

It is not at this moment considered.

Jim, just a final question.

Page 18, looking to pursue combinations with like-minded partners.

Is there any change in your thinking from a big picture perspective on how far you might be willing to go to find one of those like-minded partners geographically?

There has been some consolidation obviously more recently with Peoples and their transaction with Chittenden and the merger-of-equals candidates list is not as large as it once was.

Maybe just talk a little bit more about your vision of the future in terms of what those types of combinations could look like.

Sure.

I think, Matt, that we are looking longer-term and appreciating what the possibilities are.

We know also the landscape has changed, and when we talk about looking for partners that share our vision, we've broadened that vision little bit.

You could probably take a compass and then draw a big circle around where we are now, and we would be looking for potential partners that would be either operating partially within, or at least contiguous to our markets because you need to have some value and some potential synergies from the combination that you would make.

And it ranges anywhere from several potential partners in New England that range in size anywhere from, say, $1 billion or so, up into the $5 billion to $7 billion asset range.

And then in looking at strategic partnerships, we would look beyond that and we would consider potential partners that are at least up to our size if we thought that there was a compelling opportunity to combine the organizations to achieve a vision of being a very strong regional player.

And any change in willingness to give up management roles and locations and headquarters, and those types of issues, the social issues going forward, that may have prevented those types of transactions from occurring in the past?

I guess what I would say is that the things that you have cited have not prevented that kind of transaction from occurring in the past.

We always have looked at the possibility of a high-level strategic partnership when we're dealing with somebody at our size or even somewhat larger, that the management roles and the headquarters and all become secondary considerations as to whether we can build that powerful franchise that we always have believed we can do.

So I want to say that, in the future, as has been the case in the past, those issues would not be impediments to making a strong partnership.

Thank you very much.

James Abbott, FBR.

Thanks again, a quick follow-up question.

And this is a fairly detailed question, so I will understand if you don't have it all available.

But on the home equity business, if you could detail for us what the percentage of those loans are first lien versus second liens.

And then also on a related note, what the FICO scores are for the first and the seconds, and the loan to values or combined loan to values for the first and seconds.

How much time do you have?

I'm not sure I have that information available here.

We can slice and dice the portfolio and look at the portfolio by first and seconds and by loan to values and FICOs and all, but if I may, I'll have -- I'll get the information to Jim Sitro and we'll have him give you a call.

But I would like to say this, that you'll find that well into the 20% level of our HELOCs are first liens.

You'll also find that we have relatively low CLTVs across the entire portfolio, and that we have relatively high credit scores.

We'll try to get you -- if you're comparing us to the market, that's why I'm saying relatively.

We'll try to get you more detailed information if we can.

I think primarily what I'm driving at -- and I appreciate -- I do appreciate that, I also understand that you don't have that available in the meeting right now.

But I guess what I'm looking for is, I think that obviously the bigger risk is on the seconds, where (inaudible) more difficult to collect those balances.

And so trying to understand or quantify what the risk might be there would be helpful for myself and maybe others as we go into a pretty ugly -- potentially ugly time frame for home equity lending.

Thank you very much for your time.

There are no further questions at this time.

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

Thank you all for being with us today, we appreciate your interest in Webster.

Talk to you soon.

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

You may disconnect your lines at this time.

Thank you for your participation.