Webster Financial Corp (WBS) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Webster Financial Corporation's fourth-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 operation, and business and financial performance.

Webster has based these forward-looking statements on current expectations and projections of our future events.

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

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

James C.

Smith, Chairman and Chief Executive Officer.

Please go ahead, sir.

Good morning, everyone.

Welcome to Webster's fourth-quarter 2007 investor call and webcast.

Joining me today are Bill Bromage, our President; Jerry Plush, our CFO; and Terry Mangan; Investor Relations.

I'll provide some highlights and context for fourth-quarter results.

Jerry will provide comments on our financial performance.

We will also provide comments on our outlook and focus for 2008 in conjunction with some slides that we posted on our website this morning.

And we will talk more about the special provision and establishment of the liquidating portfolio for the discontinued indirect lending channels.

Our remarks will last for about 40 minutes and then we will invite your questions.

In our fourth-quarter earnings release, we reported $0.10 in diluted earnings per share from continuing operations which includes the impact of $0.49 per share from the $40 million special provision for discontinued indirect lending channels and $0.13 per share for other charges in the quarter.

This compares to continuing EPS of $0.64 in Q3, which included $0.14 per share effect from the $11 million increased provision for home equity and compares with adjusted EPS of $0.78 a year ago.

Our insurance operations, which are now shown separate from continuing operations, had a loss of $0.26 in the quarter including the previously announced write-down of $14 million.

Let me first speak to trends in business activity in the quarter.

Webster continues to show momentum in both commercial and consumer lending.

Total commercial loans and consumer loans grew at a combined rate of 4% from a year ago and now represent 71% of total loans compared to 66% a year ago.

Our emphasis is on direct originations.

Commercial loans including commercial real estate loans totaled $5.6 billion and grew by 5% combined from a year ago and now comprise 45% of a loan portfolio, compared to 41% a year ago.

The C&I portfolio totaled $3.5 billion at year end and grew by 4% from a year ago.

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

The portfolio yielded 7.09% in the quarter, down 37 basis points from a year ago in connection with rate cuts during the second half of '07.

The C&I portfolio is balanced, diversified, and granular, and these characteristics underpin our favorable charge-off experience and overall asset quality.

Our commercial real estate portfolio totals about $2.1 billion and grew by 8% from a year ago.

Most of that growth came in the last three months as a direct result of disruption in the capital markets.

We were able to book some better loan to value deals, which until recently would not have been available to us at good pricing levels.

We saw very little payoff activity in the fourth quarter, which helped to bolster the net growth.

The total CRE portfolio yielded 6.9% in the quarter, compared to 7.21% a year ago.

The consumer loan portfolio totals $3.3 billion or $2.85 billion excluding the $340 million liquidating home equity portfolio and grew 2% from a year ago.

We have moved to a direct-to-consumer retail based channel model for in market growth.

Bank-based branch originations were $195 million or 88% of total production in Q4 compared to 62% the previous year.

The retail channel originations in the quarter had a weighted average FICO of 797 and a weighted average CLTV of 63%.

The retail footprint originating component of the continuing home equity portfolio totaled over $2 billion at December 31 and grew at an annualized rate of 4% from September 30.

So we are clearly seeing success in implementing our retail focused consumer lending strategy.

That portfolio is 50-50 home equity loans and lines and yielded 6.67% in the quarter, down 26 basis points from a year ago.

Residential loans declined 18% from a year ago, primarily due to the two securitizations that took place in Q4 '06 and Q1 '07.

Resi loans now comprise 29% of the loan portfolio, compared to 34% a year ago.

I'll now provide some more details on the special provision and liquidating portfolios.

At December 31, we had $424 million of outstandings from discontinued indirect residential construction lending and indirect home equity lending outside of our primary New England market area.

The portfolio consists of $83 million in construction loans and $341 million in home equities.

We placed the entire $424 million into a non-strategic liquidating portfolio that is being managed by a dedicated credit team.

As I said in the 8-K filed earlier this month, we have identified, segregated and reserved against estimated losses inherent in these portfolios using default rates and loss rates that reflect our view that such rates will significantly worsen from current levels.

Also by separating the liquidating portfolio from the ongoing loan portfolio, we are able to underscore the soundness of the ongoing loan portfolio and the adequacy of its reserves.

Of the $40 million special provision in the quarter, $16.5 million is against the $83 million of discontinued indirect residential construction loans including $10 million of the allowance that had been allocated in the first quarter of '07 to this portfolio.

And subtracting $2.2 million of net charge-offs in Q2 and $7.1 million of net charge-offs in Q4, we have remaining reserves of approximately $17.2 million against the $83 million balance.

The increased reserve reflects higher losses that we believe are inherent in the portfolio based on recent appraisals, housing price trends, and localized market conditions primarily for $20 million of loans in Florida.

We expect to apply actual quarterly charge-offs related to loans in this liquidating portfolio against the $17.2 million reserve.

The remaining $23.5 million of the special reserve in the quarter is for the $341 million in the discontinued indirect home equity portfolio, which includes the $90 million of higher risk loans we identified and took a special reserve against in Q3.

Including the $11 million taken in Q3 for the higher risk loans and subtracting $1.8 million of net charge-offs in the fourth quarter, we have total special reserves of $32.7 million against the $341 million liquidating balance.

Most of the losses in this liquidating portfolio are expected to occur over the course of 2008 and 2009 and are expected to diminish thereafter as loans are resolved or repaid.

Again, we expect to apply actual quarterly charge-offs in the liquidating home equity portfolio against the $32.7 million special reserve.

In keeping with our practice, we will continue to provide separately for charge-offs in the continuing home equity lending portfolio.

I want to comment briefly on Webster's exposure to residential construction loans outside of the now-separated national construction lending portfolio.

At year-end '07, Webster had outstanding about $355 million in residential construction loans, $145 million of that through the retail mortgage banking group in market or contiguous.

$7.7 million or 5.23% of that portfolio was non-accrual at year end, but note that three-quarters of that is from two loans with loan to value ratios of about 50%.

The balance of residential construction outstandings of $211 million is in the commercial resi dev group and the non-accrual asset ratio is about 2%.

Total nonperforming assets at Webster increased to $121 million at December 31, and this includes the liquidating portfolios, compared to $104 million at September 30.

We had anticipated that NPAs would rise and we increased our Q4 regular provision to $5.25 million, up from $4.25 million in Q3.

You'll note in the financial tables in our earnings release that we now show NPA past due loan and charge-offs data for our continuing and liquidating portfolios.

In the continuing portfolio, the allowance for credit losses was 1.23% of total loans at December 31; NPAs were 0.76% of loans plus other real estate owned; and the net charge-off rate was 9 basis points annualized in Q4.

The $2.85 billion continuing home equity portfolio performed within normalized provision levels with the delinquency rate rising from 0.61% at September 30 to 0.76% at December 31 and the non-accrual rate from 0.44% to 0.50%.

The annualized net charge-offs rate was 14 basis points in Q4 and 10 basis points for all of 2007.

Our equipment finance business had outstandings of $985 million at December 31 and grew by about 11% from a year ago.

This unit consists of five nationally conducted business lines, construction, transportation, environmental, general aviation, and manufacturing, generally small ticket items averaging about $200,000 or so per loan.

New business originations are centrally underwritten and monitored by a management team has been in place for at least twelve years.

This unit finances nonspecialized routinely sold commodity equipment that is revenue producing and for repayment terms that are on average significantly less than the underlying assets' useful lives.

Most contracts take the form of full payout loans.

There's only about $2 million of true residual value risk in the portfolio.

The top state concentrations are Texas at 12%; California and Florida at 8% each; New York and Pennsylvania at 5% each; in then Connecticut, Massachusetts, New Jersey, Illinois, and Ohio, each at about 4%.

At year-end, past due and nonperforming loans combined totaled $12.1 million and represented 1.23% of outstandings, which compares quite favorably with overall industry levels.

The deliberate granularity and the relatively small average loan size in this portfolio enhances credit performance in the current economic environment.

Asset-based lending outstandings totaled about $800 million at year end and grew by 3% from a year ago.

92% of outstandings are secured by accounts receivable and inventory, equipment for 7% and real estate for 1%.

As you can see, this portfolio has a solid current asset coverage position which has typically helped to keep losses low and below industry average.

57% of the portfolio was in the Northeast; 21% in the Southeast; 16% in the Midwest; and 6% in the West.

NPAs were 0.46% of this portfolio at December 31.

Now moving to talk about a couple of our deposit programs, the balance of which will be covered by Jerry, I'll talk about the de novo banking program where we have opened 29 branches since 2002 or 16% of our total retail branches.

The de novo branches had total deposits of $781 million at year end compared to $773 million at September 30 and $734 million a year ago or an increase of 6% over the last year.

We opened two new locations in Q4, one in East Longmeadow, Massachusetts and the other in Woodridge, Connecticut.

Turning to HSA Bank, we had $404 million in deposits in this division at year end, an increase of $117 million or 41% from a year ago and we have $57 million in linked brokerage accounts, compared to $38 million a year ago.

HSA Bank's average cost of deposits for this fast-growing category was 2.97% in Q4, the same as in the third quarter, and about the same as the cost of in-market deposits.

Strategically through HSA Bank, we've expanded our reached for core deposits to fund our above market loan growth.

And we've tapped the deposit market poised for significant growth over the next several years.

At the end December, HSA Bank had 187,000 accounts, up about 6000 in the quarter and 26,000 -- I should say over 30,000 from Q4 '06.

You may have seen our press release yesterday that HSA Bank now has over $500 million in deposits and balances in linked brokerage accounts, making it the first health savings account administrator in the nation to pass $500 million.

We think this achievement confirms the viability and acceptance of the consumer-directed healthcare model in the U.S.

and its bright future for HSA accounts.

I will now turn the program over to Jerry so that he can provide more detail on the financial performance in Q4.

Thank you, Jim, and good morning, everyone.

We focused in prior calls on key performance ratios first.

We're going to continue that practice and take a look at some of the key stats for the quarter ending 12/31/'07.

First regarding capital, are tangible capital ratios as of December 31 was 5.89%.

That is compared to 6.17 in the third quarter and 6.72 a year ago.

Our tangible capital ratio for the fourth quarter was slightly lower than our target ratio of 6%.

We would anticipate being back at our established target levels in early to mid 2008.

Now regarding stock buybacks, we repurchased 1.3 million shares early in the fourth quarter and over 4.3 million shares throughout 2007.

However, we do not expect to continue to buy back stock in the near term given our desire to restore our ratios at or above the target levels.

It is important to note that Webster remains well capitalized at our projected leverage ratio at 7.99% at December 31 of '07 and our projected total risk ratio of 11.5% significantly exceed regulatory standards of 5% and 10% respectively.

Next our loan to deposit ratio.

We came in at 101% for December 31 of 2007 compared to 99% at September 30 and 104% at December 31 of '06.

We've stated our goal is to fund our loan growth and total loan portfolio via deposits.

In the fourth quarter, our deposits decreased $200 million primarily in certificates of deposits; the results of our pricing decisions regarding CDs, and loans increased $22 million.

Broker deposits declined $51 million by quarter end as well as we continue to minimize the use of this source of funds.

Borrowings increased $650 million in the fourth quarter as FHLB advances represented the majority of this increase.

We found this to be a very attractively priced funding option compared to CDs in the quarter.

Securities to total assets at 12/31/'07 were 16%, well below the peer median reported at 9/30 of '07 of 17.7%.

We will talk more on the securities portfolio in a few minutes.

Borrowings to total assets at 12/31/'07 were 17%, also well below the peer median reported at 9/30 '07 of 20.1%.

Let's turn now to the margin.

Our net interest margin was 3.26% in the fourth quarter in comparison with 3.38% in the third quarter and 3.23% for the fourth quarter of last year.

The 12 basis point reduction in the net interest margin from the third quarter to the fourth is primarily due to our stock buyback activity in the quarter, higher levels of nonaccruals, and recent Fed funds rate reductions.

Although Webster is essentially neutral to shifts in interest rates over a twelve-month period, recent rate reductions have caused downward pricing pressure on loans versus deposits in the near term.

Turning now to our allowance to total loans.

Included in the provision for credit losses for the fourth quarter was $45.25 million.

There is a special provision of totaling $40 million for the discontinued indirect residential construction and home equity loan portfolios as described by Jim earlier in today's call.

Our allowance for credit losses to total loans was 1.58% as of December 31, in comparison with 1.32% at September 30 and 1.20% a year ago.

Charge-offs for the quarter were $11.7 million.

That is including $8.9 million of charge-offs in the liquidating portfolio compared with $4 million for the third quarter and $9.1 million for the fourth quarter of 2006.

Our net charge-offs for the continuing loan portfolios, which exclude the liquidating portfolios, totaled $2.8 million or 9 basis points for the quarter.

We will now take a look at fourth-quarter results.

First, please note that for presentation purposes Webster Insurance is now shown separate from continuing operations in our financials.

So excluding insurance, earnings from continuing operations were $0.10 per share.

This includes the effect of the $40 million special provision which was $0.49 per share, for the discontinued indirect residential construction and home equity portfolios, and $10.5 million or $0.13 per share of other charges particular to the quarter.

As previously indicated, our decision to explore strategic alternatives for our insurance operation resulted in this activity being reported separately from continuing operations.

Webster Insurance had a loss of $13.9 million or $0.26 per share in the quarter and it's reflective of a write-down of $14 million in carrying value of this investment in the quarter.

So taking this loss into account, diluted earnings per share would decrease 26 basis points to a loss of $0.16 overall for the fourth quarter of 2007.

Our securities portfolio totaled $2.75 billion at December 31, 2007, or 16% of assets and increased $350 million from September 30.

Our decision to increase the portfolio reflects a number of factors including slower loan growth as the economy exhibits recession-like characteristics; a higher level of securities will also help offset some of the loss mortgage warehouse balances of roughly $200 million over the course of 2008.

The securities also enhanced net interest income as LIBOR falls, and they provide additional collateral for municipal deposits and for other businesses.

Our intent is not to substantially grow this portfolio further.

The yield in the securities for the quarter was 5.85%, up modestly from 5.79% in the third quarter and 5.63% in the fourth quarter of last year.

A look at the funding side would show that our cost to deposits for the fourth quarter were flat with the year ago period at 2.86%.

The cost to deposits is down 10 basis points from the 2.96% we reported for the third quarter of 2007.

The cost of FHLB advances was 4.32% in the fourth quarter and that is down 26 basis points from the prior quarter and it is down over 60 basis points from a year ago.

Our average FHLB borrowings are now down about $646 million from a year ago.

Non-interest income was $48 million for the [fourth] quarter, including a $3.6 million loss on the write-down of a direct investment to fair value.

Non-interest income was $51.4 million in the linked quarter and $43.1 million in the year ago period.

Note that the $43.1 million on the non-interest income in the fourth quarter of last year was reduced by a $5.7 million loss on the sale of some mortgage loans.

Deposit service fees totaled $30.6 million, compared to $30 million in the third quarter and $25.5 million a year ago and the growth over the prior year results reflects the implementation of a new consumer fee structure in 2007.

Turning now to insurance, as we outlined in the results of our strategic review, we've been exploring these alternatives for our insurance operations.

We anticipate completing a sale in the first quarter and as a result, we have now are required to report this separately from continuing operations as of year-end 2007.

Webster Insurance had a loss of 13.9 in the fourth quarter reflecting the $14 million aforementioned write-down of carrying value.

Insurance income for the third quarter of '07 was $0.4 million compared to a loss of $1.4 million in the fourth quarter of '06.

Our loan fees were $7.3 million in comparison to $7.7 million in the third quarter and $9.6 million from a year ago.

While wealth management was $7.5 million compared to $7.1 million in the third quarter and $7.2 million in the third quarter a year ago.

Our non-interest income was $2.1 million for the quarter, compared to $1.7 million in the quarter and $3.8 million a year ago.

The year-ago results included a $1.4 million gain on the sale of properties.

Revenues from our mortgage banking activities were $1.3 million for the quarter, compared to $1.8 million in the third quarter and $2.9 million for the fourth quarter of last year.

The reduced income in mortgage banking activities over the last year reflects the closure of our wholesale lending offices in Chicago, Illinois; Phoenix, Arizona; and Seattle, Washington during the fourth quarter.

We reported $195,000 in net gains from the sale of securities in the quarter, compared to $482,000 in net gains for the third quarter and a $2.7 million net loss recorded a year ago.

Our total non-interest expenses were $120.3 million or $113.4 million excluding the $6.9 million of severance and other non-recurring costs compared to $113.6 million in the third quarter.

Third-quarter results included $0.5 million of severance and other costs related to the recently completed strategic review.

Our total noninterest expenses were $112.7 million a year ago, which included $2 million of acquisition costs related to NewMil.

So excluding severance and other costs from the third and fourth quarter of '07, our noninterest expenses increased only $200,000 from the linked quarter and 2% higher than a year ago.

Now looking forward to 2008, we will first address the margin.

We expect that we will see some continued pressure on the net interest margin based on recent Fed reductions, particularly from the most recent 75 basis point cut as loans reprice downward more quickly than deposits in the short-term and the impact current levels of nonperforming assets as well.

25% of our loans are variable, so you can see the cuts have a significant short-term impact until we react to adjust positive rates accordingly, particularly for certificates of deposit.

We are very focused upon other sources of deposit in commercial and retail and government finance and HSA to ensure that we continue to effectively manage our cost of funds as we see downward pressure on loan pricing.

With that said, we would anticipate the margin would stay in the current range for some time, not improving in the short term.

The provision.

We recorded $5.25 million in provision in the fourth quarter against $2.8 million in charge-offs for our ongoing portfolios.

We would anticipate the quarterly provision could range between $6 million to $8 million next quarter, which of course is dependent on economic conditions and corresponding impact on asset quality.

This also assumes that the current loan mix and risk levels do not change substantially.

Looking at our fee income, the run rate will be reduced from the sale of Webster Insurance.

Also note that mortgage banking will be reduced by our decision in the short-term here anyway to exit the national wholesale business as we reorganize to be a retail-focused mortgage banking operation.

On the expense side, our first-quarter expenses will increase based on seasonality, reflective of payroll taxes and HSA contributions, and then normalize thereafter.

Also as we stated, their could be some severance-related job elimination -- severance related to job eliminations as a result of the earnings optimization program that we are undertaking.

Our commitment post the balance sheet restructuring and the strategic and organizational reviews was to focus on how to consistently deliver positive operating leverage and to drive our operating efficiency down to a stated target of 60% by the end of 2008.

As we previously announced, we are working with a nationally recognized firm to implement an earnings optimization program.

This is unlike anything else we have undertaken in the past and it is critical for us to focus on in order to substantially reduce expenses and to improve revenue.

This is a very demanding and focused process that will take place over the next four months.

We will have more to share with you regarding the results of this initiative at the end of next quarter.

I'll turn the program back over to Jim now.

Thanks, Jerry.

Now let's look to the future.

You can see from our 8-K and from our earnings release today that we have cleanly separated the 3% or so of our loan portfolio that we now call liquidating asset portfolio from the 97% of Webster which is a pure play regional commercial bank.

We want analysts and investors to be able to compartmentalize the liquidating portfolio, understand our reserving assumptions, and then value it as you will.

Separately, we want to be as clear is possible on what you should expect from us going forward, our business model, our focus, and our outlook.

As we enter 2008, having narrowed and refined our strategy and sharpened our focus on core franchise activities, Webster is a pure play regional commercial bank.

I should reference that we posted a deck on the website this morning that I hope you'll be able to refer to for this portion of our discussion, even if you don't have it, I think it should be pretty clear.

Webster has a strong franchise across southern New England into New York State that some refer to as the Gateway to New England.

By emphasizing core operating accounts, we are acquiring, broadening, and deepening customer relationships while maintaining a very low attrition rate.

Our ability to acquire, develop, and retain customers is the primary reason we gain market share year in and year out.

Meanwhile we have learned once and for all that direct to the customer particularly on the loan side is the most sustainable and value-creating model for us.

The year 2008 will likely be characterized by continuing modest pressure on the net interest margin, as Jerry has commented, and by the natural erosion in credit quality that accompanies an economic downturn.

Such an operating environment requires special attention be devoted to operating efficiency and you heard Jerry say that we have set a goal for an efficiency ratio of 60% by year end '08.

We will achieve this goal in part through our earnings optimization program dubbed One Webster, which will involve every Webster employee and be our highest operating priority in 2008.

We remain committed to our build and buy strategy that we will build branches at a somewhat reduced rate in 2008.

We expect to grow organically and ultimately to benefit from combinations with like-minded partners, we share our vision to be New England's bank.

I want to be clear that we will continue to invest in select direct specialty businesses in which we excel that serve customers both within and outside New England.

These specialties include asset-based lending, equipment finance, commercial real estate, and HSA Bank.

One of our slides shows a snapshot of our going forward focus.

This slide if you can see it, lists our areas of priority against which you can assess our progress and performance.

Note the focus on end market direct to customer businesses which we are best at, most committed to, and most passionate about.

I will try to summarize each priority.

We will invest in our retail franchise, adding branches, remodeling existing facilities, upgrading about one-third of our 343 ATMs, as part of a three-year program, and consolidating certain facilities in market in order to fund our de novo expansion program.

We continue to see attractive de novo expansion opportunities in Massachusetts, Rhode Island, and New York, where we will locate the three de novo offices we expect to open in 2008.

The Rhode Island branch additions will bring us to 25 branches in the Providence MSA, while the Fairfield/Westchester market will grow to 41 branches.

It is only natural that New England's bank would be intent on expanding toward Boston.

Our recent branding agreement with Walgreen's is an important step in that direction.

The agreement encompasses 158 locations and increases our existing ATM network by almost 50%, taking our ATM count to over 500.

At Walgreen's locations, we will be strategically placed throughout Massachusetts, Rhode Island, and Connecticut in high traffic, high visibility, and high population areas which offer our current and potential customers extremely convenient access for cash withdrawals, balance inquiries, and fund transfers between accounts.

This is an excellent cost-efficient distribution platform for future growth throughout all of Massachusetts and Rhode Island.

We've also recently announced a new head of commercial lending in Boston who brings a wealth of talent and contacts in this new and important market for Webster.

And the downtown Boston flagship branch that we plan to open by the end of '08, will benefit from the actions that I have just reviewed as well as from our existing presence in the Boston area through our government finance, commercial real estate, and asset based lending units.

Once again, we have eliminated indirect out of footprint lending and we have discontinued all national wholesale mortgage banking activities, our remaining national credit businesses, asset based lending and equipment finance, our direct to customers, and our centrally underwritten and managed.

The heads of each business have lengthy track records in these specialty segments and have seen numerous credit cycles, including recessions.

Their focus on customers and collateral have served them well through the years.

Our commercial real estate business takes a regional approach with offices in Hartford, Stamford, Boston, Providence and Philadelphia.

This residential development portfolio that I mentioned earlier totaled $211 million at December 31, with 97% of that portfolio in New England and the other 3% in New York and Pennsylvania.

I believe we've covered the liquidating portfolio actions and rationale in sufficient detail that there's no doubt as to our effort to identify, separate, and reserve against the anticipated future losses using default rates and loss rates that reflect our view that these rates will significantly worsen from current levels.

So I won't go into further detail here except to say that by segregating these portfolios, you can see with greater clarity the strong performance of the continuing home equity portfolio in particular and the entire ongoing portfolio.

Let me say that only 12.5% of the continuing home equity portfolio had a combined loan to value ratio over 90% and the weighted average FICO was 756 at origination.

Regarding deposits, we see significant opportunity to grow deposits through the areas that you see on the next slide.

On the commercial side, enhanced cash management products will serve as a catalyst for building business deposits.

We've also invested in government finance and see a great opportunity to build on existing strong municipal relationships across the franchise and to gain market share.

Our cash management products also will help to boost small-business deposit generation in addition to our recently launched business deposit officer initiative.

In retail, our expanded footprint through the de novo program and focus on making banking easier and more convenient for our customers will be drivers for deposit growth.

At HSA Bank, we've got an entity that is on the cutting edge of healthcare change in the U.S.

and one of the national leaders in providing health savings accounts.

We continue to look at opportunities to form strategic alliances to augment HSA Bank's deposit growth potential.

We intend to more fully utilize our Internet capabilities to attract in footprint deposits as well.

Webster's earnings optimization plan is an employee-led revenue enhancement and expense elimination program that we began this week.

The purpose of the program is to reduce expenses and increase revenue growth in order to bring our operating ratios to an efficiency target of 60% or better by the end of 2008.

A full-time 11 member resource team will work with team leaders across Webster to identify ideas to save time and money as well as ideas on how that time and money could be better spent to grow revenues, improve services, and improve how we do our jobs.

The resource team and the team leaders will comprise current Webster employees.

Harvest Earnings, a nationally recognized firm, will assist us with this process.

Turning for a moment to capital, our focus on smart capital management and balance sheet repositioning over the last five quarters leaves us with a strong capital position as we enter 2008.

We remain well capitalized with a leverage ratio of about 8% and a total risk-based ratio of 11.5%.

We intend to manage those ratios to 8% and 12% respectively in 2008.

We are committed to maintaining the dividend payout at current levels of $0.30 per quarter and Jerry has already talked about our stock repurchase activity.

Finally, and I think we can safely say that this marks the end of our strategic review, we expect to complete the recently announced closure of National Wholesale Mortgage Banking and the sale of Webster Insurance to a strategic partner in Q1 '08.

We tried to identify and record costs or write-downs associated with these transactions in Q4 '07.

Exiting these businesses should contribute positively to improvement in our operating efficiency ratio and free up human and capital resources to focus on core franchise businesses.

We look ahead to 2008 with confidence that we have responsibly identified and addressed our out of market credit issues, narrowed our focus on core franchise activities, and embraced a strategy for success as a pure play regional commercial bank, which ultimately will be valued as such.

Let me be clear about this.

Underperformance is not a word that I or my Webster colleagues or the Webster Board of Directors can tolerate.

Rest assured that we will give every ounce of effort, pursue every opportunity, and make every sacrifice necessary to achieve the mantle of high-performance.

We appreciate your time and attention today and your interest in Webster.

We'd be happy to respond to your questions.

(OPERATOR INSTRUCTIONS) Andrea Jao, Lehman Brothers.

The goal of decreasing your efficiency ratio to 60% from what is currently 65 is pretty aggressive and it is a tough environment to generate revenues.

So maybe you could talk about what would drive that decrease -- should we expect a rapid decrease in expenses?

It's Jerry.

To address that, the goal is set to reach that ratio by the end of 2008.

The program in which we are undertaking and actually kicks off next week, formally kicks off next week, is approximately 100 to 120 day process.

It is an employee-led program with the assistance of Harvest Earnings, who are nationally recognized for their work in this field, to help us improve, take a look at all of our -- every area of pricing, every area -- and that is not only just on how we structure our pricing in loans and deposits -- but also all of our fee-related products and we would expect that there would be some opportunity there.

As well as to look at all of the processes and the way that we spend our money in terms of in each line of business in all of our shared services or central areas.

We expect that we as an organization will be very, very dedicated.

I think as Jim indicated, there's 11 leaders that are dedicated full-time to the program and there are a significant number of people associated with each those teams dedicated to support the program as well.

It is very intense.

I think there's a good benchmark in the market that you could take a look at.

PNC had gone through a very similar process and they generated some rather substantial results.

Our expectations given our size, are not at the level of what they generated, but we believe that there are lots of opportunities for us as an organization particularly that this process is really being driven by our employees to ferret out cost savings in 2008 and make them sustainable cost savings on a go-forward basis.

I think it's really important to note this is not an across the board cost-cutting exercise where we just reduce areas by some percentage in order to achieve a goal.

Our goal here with this program is something that is more sustainable.

It is systemic, and we think after looking at a lot of alternatives that the firm that we have selected and particularly the approach that this particular process takes will be extremely beneficial to Webster.

Okay, and --

I just want to comment that a lot of this may depend on what your revenue assumptions are and if we end up in an environment where there's a lot of pressure on revenues, then it is going to be harder to achieve that ratio.

But given what we know now and with our forward look, we think that a combination of some modest revenue growth combined with the sale of the insurance business and the shutdown of the mortgage wholesale mortgage banking business, both high efficiency ratio businesses, and this intensive review, and I think every organization benefits every four or five years even as we're trying for a continuous improvement to take a good, hard look at every dollar of expense and every way of trying to increase revenue.

And we expect therefore to have a positive impact as we go through the quarters in '08, and that is why we set the target for 60% by Q4.

Okay, great.

Now just a follow-up and this is related to revenue growth.

What kind of balance sheet growth do you expect next year?

What kind of loan growth should drive that?

And how do you think it should be funded?

On the funding side, our focus -- and clearly you can see what we started to do in the fourth quarter, was to look at more favorably priced funding sources, which is why we elected to utilize FHLB advances and not aggressively price to retain certificates of deposit, particularly where the relationship was not deep within Webster, i.e.

if there were not multiple products relationships there.

I think in terms of -- from a focus point, one of our competitive advantages is having HSA, which has already experienced very significant growth and we just released and shared some of that information yesterday.

I think that the other opportunities for us are really on the commercial and government finance side, particularly around operating account opportunities in and around the markets that we serve.

So I think from a funding perspective, hopefully that is helpful to give you some flavor that particularly in the environment, the competitive environment, we have made a very conscious decision to be very precise and surgical about how we look at pricing and it really is looking at customer relationship not on just deposits per se.

And we really want to look at the diversified sources that we have in order to provide our source of funds in 2008.

Turning to the loan growth side, I think that we would expect very modest growth.

I think we are in the process of retooling how we look at the mortgage banking business.

So with the shutdown within the quarter of the National Wholesale arm and to build up on the retail side, I would expect for us to see very, very modest growth if not more of just a maintain view on the residential side.

On the consumer side, I would think that given that we have segregated $340 million in the liquidating status, you would see that we would be looking to maintain or just a $2.8 million or so that is in footprint and by the way, we think that we showed very significant progress and really an opportunity in focusing on in footprint direct to customer, direct to consumer originations.

And we still think that there are some opportunity in the marketplace for us there.

But I would tend to think that you would see that that is relatively flat as well.

And so from a growth perspective, the real opportunities for us is more of the diversification that we have in the commercial side and in the small business sides.

And again, we would expect that overall that would be low single digit.

Very helpful, thank you.

Collyn Gilbert, Stifel Nicolaus.

Jerry, just a follow-up.

I want to make sure I caught it.

You had said that the loan loss provision, you expected the loan loss provision to be $6 million to $8 million.

That is what I said for the first quarter.

And I apologize.

(multiple speakers)

Collyn, if I could clarify, I just want to make sure that is for the continuing loan portfolios.

So as we look at -- in the piece that I think is important of what we're basing that on is we recorded a provision for the fourth of 5.25 and had charge-offs of around 2.8 from our ongoing lines of business.

So we feel that assessing where growth is coming in just given the response I gave to the earlier question, coupled with where we see the mix of business and the risk inherent in that business, that we think as saying that that range is appropriate for guidance for the quarter.

Okay, and I apologize because I missed the beginning of the call.

So that is for the ongoing business.

Did you give any color as to what your expectations are for the discontinued businesses and where we could see the provision going or related charge-off?

No, and in terms of -- that's a great question and I'm glad to have the opportunity to provide some clarity.

Our intent is that we have set aside allowance in each of those respective portfolios and that you will see charges against those allowances as we work our way through particularly whether you look at the construction loan, the indirect construction loan portfolio, or home equity.

Construction loan I would think would be a much shorter period of time given the nature of the asset and home equity, the indirect out of footprint home equity you'll see charge-offs over a period of time as we work our way through.

But really there should be at this stage charge-offs against allowance in those portfolios in the coming quarters.

Let me just say that we went into a lot of detail on that, so when you see the transcript, I think you'll get a full explanation.

Okay, thanks.

Then just quickly in terms of -- I think, Jim, you had said that you for the most part anticipate having captured most of the charges in the fourth quarter related to these discontinued businesses.

Where I'm going with this is just trying to get a sense of how clean we can expect the first quarter to be or subsequent quarters thereafter or where the risk is that maybe there are some things that pop up?

Yes, I will just say again that I keep referring to the wording that we chose very carefully in the 8-K that I mentioned again this morning, which is that we reserved against the estimated losses inherent in those portfolios using default rates and loss rates that reflect our view that those rates will significantly worsen from current levels.

So that was the approach that we took to trying to identify and reserve against what we believed given further deterioration would be the likely losses over the remaining lives of the assets in those portfolios.

So we did not put up this reserve with the contemplation that we would have to put up with additional reserves.

Who knows ultimately how the world will perform and what we've said is we want you to have the best possible information that you can so that you can assess our methodology and then draw your own conclusions about it.

We are not expecting that we are going to have any kind of impact from those portfolios in the foreseeable future.

So when Jerry is talking about the provision he is talking about for the continuing portfolio.

We've gone to great pains to separate one from the other so you can look at us as the pure play commercial bank that we are.

Great, okay.

Thank you.

Jared Shaw, KBW.

I just have a couple questions.

First on the Walgreen's ATM initiative, what is the incremental expense I guess that we should be looking for as you expand the ATM network so dramatically?

It should be less than -- it should be about 125,000 or so a quarter.

It is not -- I don't want to disclose anything further than that.

But I would say in round numbers that is just what we would see, and it is a branding expense, Jared.

So you will see that flow through marketing.

Okay, so that won't come through -- are you actually --?

Just to clarify, if you were looking at a line item where you will see that, the incremental bump it would be marketing.

The play for us in particular in this is -- this gives us a very unique opportunity from a brand awareness perspective to get our brand into a lot of markets where we don't already have the physical presence and we think that -- and Webster customers, existing customers benefit from these no fee to Webster customers machines as well.

Then will you capture the fee of non-Webster customers or is that not part --?

Are you just --?

There is no other impacts for us from a P&L perspective and I can't comment further in the details.

I apologize.

Turning to HSA, there is an article in the Banker -- American Banker today that the HSA product generally industrywide has not caught on to the extent that it was initially expected, initially hoped.

What are your thoughts just looking out over the next few years with the adoption of HSA?

And do you expect -- are you expecting your growth, your initial growth expectations to come down or do you think that is just more of a delayed implementation?

We think that it is catching on.

Our 41% growth in the deposits in HSA Bank I think attests to that.

The fact that we crossed the $500 million mark in total deposits in linked brokerage accounts last year up from a little over $100 million when we made that acquisition, which was less than three years ago, is very significant growth.

The adoption rate, it may not be as high as some people had projected, but it is increasing and we think that the corporate adoption will cause a significant ramp up over the next three to five years.

I also want to say we were always very careful not to overplay what the growth rates would be.

So I would say that our growth has been reasonably consistent with what we expected that it might be and we're pleased with that growth.

And we are especially pleased that the cost of these deposits is the same as our core deposits, so we've got about $500 million of core funding through HSA Bank.

Great.

Then just finally on the margin, Jerry, you had said that it looks like -- I think I was a little confused.

It sounded like you were saying it could stabilize in the current range or were you saying that in '08 it could stabilize near wherever it turns out to be in first quarter of '08?

No, no, it will stabilize in the current range.

You know, I think to add some color to that, that we are being very proactive in managing our cost of funds and I think it is as all of you would I think readily agree, it is very challenging given the environment particularly in light of the percentage of assets that reprice immediately with a rate cut.

But we have really poured a lot of energy and focus on looking at other sources of funds and really are being very surgical around and precise around how we look at CDs.

So you could see an impact to our deposit, loan to deposit ratio, but we're looking at this from the standpoint of we want to maintain.

Our goal right now is to maintain and ultimately where we are.

So I mean from a look into next quarter, this first quarter, that is our goal.

Okay, so even with the Fed cut, we should expect to see or hope to see margins not really taking another big hit from here?

That is what we are working on.

Great, thank you.

Mark Fitzgibbon, Sandler O'Neill.

Actually this is Alex Twerdahl from Sandler O'Neill.

My first question is have you seen home equity line utilization ratios rise at all?

No, they've stayed relatively flat.

Okay, and do you have a range of where they are right now?

They are probably around I think 60% or so would be --

Around 60%, thank you.

My second question is with respect to the sale of the insurance business, you had mentioned that there should be some additional potential consideration over a multiyear earn-out period.

Is that something that we should see immediately following the sale or is there a little bit of a lag effect?

It is something at this time we can't comment on.

What we've wanted to do is try and be as open as we could in terms of how the deal structures are in the marketplace today and provide some clarity around why there would be a change in upfront value.

But in terms of -- we would hope to be able to announce something and provide some more clarity at that point in time.

Great, thank you very much.

That's all from me.

A follow up from Andrea Jao, Lehman Brothers.

Just wanted to check in on a couple of things.

First, do you have an idea of additional FDIC insurance costs?

Do you expect a material increase?

We expect that the FDIC premiums will likely be higher in '08 than they were in '07.

And that we are likely to use up the balance of our assessment credits in '08 so that it should become a real-time event for us by either late in '08 or early in '09, depending upon what the levels are that are set by the FDIC.

Okay, then as you look at your balance sheet and I'm sure you are reviewing your capital structure, do you have any plans to issue hybrids during the course of '08?

Andrea, it's Jerry.

No, not at this time.

Our intent is I think we've stated that we would like to maintain 6% tangible, 8% leverage, 12% risk-based.

As we have reported, we are virtually at the leverage ratio and very close on the total risk-based.

On the total risk-based, we believe that there's opportunity already that we are working on regarding how our loan commitments to improve that ratio.

So we believe that -- and again with our tangible, we're at roughly 5.9% as opposed to our stated goal of 6%.

So even withstanding the quarter and the results of the quarter and then think about our loan growth where we will be for 2008, again assuming that we are in single digits on the lower end of the single digit side, we feel at this time our capital is at the appropriate levels.

Perfect, thank you so much.

(OPERATOR INSTRUCTIONS) There are no more questions in queue at this time.

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

I would like to thank you for being with us today.

Have a good day.

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

You may disconnect your lines at this time.

Thank you for your participation.