Webster Financial Corp (WBS) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation's first quarter 2008 earnings results 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 conditions, results of operations and business and financial performance.

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

These forward-looking statements are subject to risks, uncertainties, and assumptions as described in Webster Financial's 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.

Thank you.

Please go ahead.

Good morning, everyone.

Welcome to Webster's first quarter 2008 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 in context for the first quarter results and Jerry will provide comments on our financial performance.

Our remarks will last about 30 minutes and then we'll invite your questions.

First, I want to report on yesterday's announcement that Bill Bromage will retire from Webster at the end of this year.

Bill will continue as President and COO until June, and will then serve as Vice Chairman of Webster Bank for the balance of 2008 and will assist me in the organizational transition.

We have several important projects we'll be working on together for the balance of the year.

As we narrowed our strategic focus in recent quarters, Bill and I looked at the job of President and COO, and agreed that it really no longer fit our operating model.

It was almost exactly eight years ago that we named Bill to this position.

He was a key leader of our transformation to a commercial bank and of our growth as a regional competitor, and he was a huge help in recruiting the senior talent that we now have onboard.

Press releases are understandably brief and to the point.

They aren't conducive to an expression of feelings, so I want to take this opportunity to express a few well-earned accolades regarding Bill.

Bill is a personal friend and he's been a real source of strength to Webster.

I'm indebted to him for his service to Webster and for his support over more than a decade.

I deeply appreciate all that Bill has contributed, and start this call by saluting him and thanking him.

The first quarter results have two distinct components -- first, is the core operating results, not including provisions and charge-offs, net expectations.

The net interest margin improved from Q4 '07, and primarily for this reason, revenues grew $2 million.

Non-interest expenses actually declined on a linked quarter and on a year-over-year basis.

Especially positive for loan growth and quality is the re-intermediation taking place in the credit markets, as high-quality customers are returning to banks from the capital markets.

And we expect this trend to last for some time.

You can see it in our commercial real estate and C&I loan portfolios in Q1.

Core deposits are growing.

And given recent market conditions, we can choose to our advantage between CDs and short-term borrowings to meet our funding goals.

Despite higher provisioning and marks against the securities portfolio, our capital ratios remain close to our published targets and well above well-capitalized requirements.

Our solid capital position is a strength during uncertain times.

The other distinct component in the first quarter results is the impact of the down leg in the credit cycle on credit quality as measured by provisions and charge-offs.

First quarter results included provision expense of $15.8 million, which matched net charge-offs in the continuing loan portfolio and resulted in credit reserves of 1.21% against the $12.2 billion continuing loan portfolio.

The $15.8 million of charge-offs wound up being higher than originally anticipated, primarily as a result of two large credits in the commercial portfolio and a single large borrower in the retail portfolio.

These three loans comprised two-thirds of the charge-offs in the quarter.

It's important to note that we don't see any systemic problems in the continuing portfolio and that an occasional blowup is expected when the cycle turns down.

One investor might look at Q4 '07 versus Q1 '08 results and see a $13 million increase in charge-offs, while another might consider Q4 to be abnormally low and focus on the two-quarter average charge-offs of less than $10 million each.

In any event, it's hard to predict a run rate.

We chose to provide for the full charge-off amount for two reasons.

First, because we anticipate that commercial and commercial real estate loan growth will continue.

And we want to think longer term in reserving against the changing loan mix.

The loan coverage ratio of about 1.2% feels about right, given our shifting loan mix.

The second reason for reserving the full amount of the charge-off -- which I might add, exceeded first call estimates by about $0.09 a share -- is because it's just too early to guess the peak in the cycle.

One real positive indicator for us, though, is that in our primary franchise -- at least statistically speaking as measured by job loss and real estate values -- we seem to have been impacted less harshly than many other regions.

Turning now to first quarter results, we reported $0.51 in diluted earnings per share from continuing operations, which includes a net reduction of $0.02 for items specific to the quarter that we spelled out in a table in the release.

This compares to continuing EPS of $0.10 in Q4, which included the impact of a special provision for discontinued indirect lending channels and other charges in the quarter, and compares to adjusted EPS of $0.68 a year ago.

Our insurance operations, which are now shown separate from continuing operations, had a loss of $0.04 in the quarter, primarily from deal-related costs in connection with the sale of Webster Insurance on February 1.

I'm going to focus for the balance of my remarks on loans and credit quality.

Webster continues to show momentum in commercial lending.

Total commercial loans and consumer loans now represent 71% of total loans compared to 70% a year ago.

Commercial loans consisting of C&I and CRE loans totaled $5.8 billion and grew by 7% combined from a year ago, and now comprise 46% of the total loan portfolio compared to 44% a year ago.

The C&I portion of the commercial portfolio totaled $3.6 billion in March 31 and grew 4% compared to a year ago, led by our equipment finance and asset-based lending businesses.

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

The portfolio yielded 6.32% in the quarter, down from 7.41% a year ago, with the decline driven by the rate cuts that began last September.

Our commercial real estate portfolio totaled $2.2 billion and grew 13% from a year ago.

Most of the growth has come in the last six months as a direct result of disruption in the capital markets.

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

We adhere to strict underwriting guidelines in CRE, including no LTVs over 80%, no 10-year interest only, and no 30-year amortizations; and this has been the case throughout the cycle.

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

The total CRE portfolio yielded 6.30% in the quarter compared to 7.13% a year ago.

Our equipment finance business had outstandings of $983 million at March 31 and grew by about 7% from a year ago.

New business originations are essentially underwritten and monitored by a management team that has been in place for over 12 years.

This unit finances non-specialized, routinely sold, commodity equipment that is revenue producing 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 of risk in the portfolio.

The top state concentrations in equipment finance are Texas at 12%; California and Florida at about 8% each; Pennsylvania at 6%; New York at 5%; and Connecticut, Massachusetts, New Jersey, Illinois, and Ohio at about 4% each.

At March 31, non-performing loans totaled $5.7 million and represented less than 0.60% of outstandings, which compares quite favorably with overall industry levels.

The deliberate granularity and the relatively small average loan size in this portfolio enhance its value in the current economic environment.

Asset-based lending outstandings totaled $831 million at March 31 and grew by 12% from a year ago.

92% of outstandings are secured by Accounts Receivable and inventory; equipment is 7%; and real estate is 1%.

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

56% of this portfolio is in the Northeast; 22% in the Southeast, 16% in the Midwest; and 6% in the West.

NPAs were 1% of the portfolio at March 31.

The consumer loan portfolio totaled $3.2 billion or $2.9 billion excluding the $326 million liquidating home equity portfolio.

We've moved completely to a direct-to-consumer retail base channel model for in-market growth.

Bank-based branch originations were $148 million or 89% of the $166 million of total production in Q1, compared to $159 million or 61% of $260 million of total production in Q1 '07, which included $98 million from the now discontinued national wholesale business.

The continuing home equity portfolio had weighted average FICO of 757 and CLTV of 68%, each at origination.

The continuing portfolio is about 50/50 split between home equity loans and lines.

The total consumer portfolio, including liquidating, yielded 6.09% in the quarter, down from 7.03% a year ago.

Residential loans totaled $3.6 billion and declined 3% from a year ago.

Resi loans now comprise 29% of the loan portfolio compared to 30% a year ago, as we have for some time now de-emphasized resi loan growth.

The resi portfolio yielded 5.70% in the quarter compared to 5.77% a year ago.

I'll comment briefly on Webster's exposure to residential construction loans, aside from the now separated national construction lending portfolio.

At March 31, Webster had $341 million in residential construction loan outstandings -- $123 million through the retail mortgage banking group, in-market, or contiguous; $8.3 million or 7.04% of that $123 million portfolio was non-accrual at March 31, compared to $7.7 million at December 31.

Note that roughly two-thirds of that is from two loans with moderate loan to value ratios.

The balance of resi construction outstandings of $218 million is in the commercial res dev group, and non-accruals are $10.9 million or 5% compared to $4.4 million or a little over 2% at year-end.

The $6.5 million increase relates to two loans -- one of which is current that we put it on non-accrual, given slowness in finding a buyer for the homes.

We believe that the other loan can be restructured and returned to performing status over time.

Total non-performing assets increased to $154 million at March 31 compared to $121 million at December 31.

NPAs in the continuing portfolio were $113 million at March 31 compared to $91 million at year-end.

CRE represented $8.3 million of the increase, largely as a result of the two res dev credits described earlier.

C&I loan NPAs increased by $7.1 million, while continuing resi and consumer NPAs increased by a combined amount of $6.8 million.

You'll note in the financial tables in our earnings release that we've recently begun to show NPA, past due loan, and charge-off data for our continuing and liquidating portfolios.

In the continuing portfolio, the allowance for credit losses was 1.21% of total loans; NPAs were 0.93% of loans plus other real estate owned; and the net charge-off rate was 52 basis points annualized in Q1, largely as a result of the two commercial credits that I mentioned toward the beginning of my remarks.

Over all, including liquidating portfolio, the credit reserve coverage ratio is 1.51%.

Credit metrics in the $2.8 billion continuing home equity portfolio performed within normalized levels, with a delinquency rate declining slightly to 0.72% at March 31 from 0.76% at year-end, while the non-accrual rate increased to 0.60% from 0.50% at year-end.

The annualized net charge-off rate was 27 basis points in Q1, excluding a charge-off of $1 million from a Webster Financial Advisor's client, and that compares to 14 basis points in Q4.

The 13 basis point increase in the charge-off rate represents about $900,000, about two-thirds of which relates to the just-under $400 million of broker-originated loans within our four-state footprint.

I will now provide some detail on the liquidating portfolios consisting of indirect, out-of-market home equity, and national construction loans.

We had $395 million of outstandings in these portfolios at March 31, compared to $424 million when the liquidating portfolios were established at year-end '07.

The total of $395 million consists of $68.5 million in construction loans and $326.5 million in home equities.

We had liquidating portfolio charge-offs of $7.8 million in the quarter, with $4.3 million against the construction loans and $3.5 million against the home equity loans.

As we've spelled out previously, charge-offs from the liquidating portfolio were taken against the special reserves established in Q4 '07.

As a result, we now have reserves at $12.9 million and $29.2 against the respective March 31 portfolio amounts, or $42.1 million in total reserves against $395 million in total balances.

Overall, the liquidating portfolio has performed close to expectations.

Delinquencies have increased somewhat faster than planned, offset to date by lower losses given default than planned.

Before I turn it over to Jerry, I must comment on the early success of our One Webster earnings optimization program.

This employee-led initiative is Webster's highest operating priority for 2008, and will touch every area of the Company, leading to sustainable, efficiency gains throughout Webster.

Early indications are enough to make me smile with confidence that we will achieve our goal of driving Webster's efficiency ratio under 60%.

I will now turn the program over to Jerry, so he can provide more detail on Q1 financial performance.

Thank you, Jim, and good morning, everyone.

Let's first cover capital and where we stand as of quarter-end.

The tangible capital ratio as of March 31 was 5.77% compared to 5.89% at the end of the fourth quarter and 6.99% a year ago.

Capital decline from the fourth quarter -- even with the contribution of net earnings in Q1 -- due to a $46.7 million increase in unrealized losses, of which $32.3 million occurred from value declines in capital trust securities in our available for sale portfolio, as credit spreads have widened in this asset class and caused the significant valuation decline.

As previously disclosed, we do not buy back stock during the quarter, and we do not intend to do so in the near-term.

Regarding dividends, we did announce today that we will maintain our current dividend at $0.30 per share.

We recognize that strong capital levels are even more critical in the current economic environment.

We want to note that Webster remains well-capitalized, as our projected leverage ratio of 7.88% at March 31 and our projected total risk ratio of 11.2% exceed the regulatory standards of 5% and 10%, respectively.

Turning now to the loan to deposit ratio, it increased to 104% from March 31.

It's in comparison to 101% at December 31 and 98% a year ago.

While we have been diligently working to improve this ratio, this was a proactive move on our part to allow for this increase.

We are working to change our deposit mix and lower the cost of deposits, and we also took the opportunity to utilize lower cost borrowings for our funding needs as well.

Regarding the deposit mix, certificates of deposits decreased by $208 million and brokered deposits decreased by $25 million, while our core deposits increased $22 million.

That resulted in an improved core deposit to total deposit ratio of 60.7% compared with 59.5% at year-end and 57.8% a year ago.

Our cost of deposits declined to 2.49% for the first quarter, compared to 2.9% for the fourth quarter, and 2.87% a year ago.

While we're discussing deposits, let me take the opportunity to give you an update on our de novo program as well as give you an update on the HSA Bank.

We've opened 29 branches since 2002 or 16% of our total retail branches.

The de novo program has total deposits of $797 million at March 31.

This compares with $781 million at year-end and $752 million a year ago; an increase of 6% over the past year.

We still plan to open a new office later this year in North Kingston, Rhode Island, and we are in the process of evaluating others.

Two planned branch relocations in Brockton, Massachusetts and Ridgefield, Connecticut are also underway.

Turning now to HSA Bank, we had $483 million in held-to-savings deposits in this division as of March 31, and that's an increase of $126 million or 35% from a year ago.

We also have $61 million in linked brokerage accounts compared to $44 million a year ago.

Our average cost of deposits in HSA were 2.46% in Q1, and that compares to 2.97% in the fourth quarter and slightly lower overall than our overall cost of deposits.

Strategically, through HSA Bank, we have expanded our reach for core deposit accounts.

We've tapped into a market that still has significant growth potential.

At the end of March, HSA Bank had 208,000 accounts and this is in comparison with 187,000 accounts at year-end and 169,000 accounts a year ago.

The average deposit balance per account is now over $2,300 and this is compared to a little over $2,100 a year ago, which we think helps to confirm the viability and acceptance of the consumer directed health care model in the United States.

Turning now to borrowings, primarily repurchase agreements, they increased $237 million as of March 31 in comparison to December 31.

Our cost of borrowings declined to 4.14% for the first quarter from 5.10% for the fourth quarter and 5.45% a year ago.

These actions lowered our cost of funds and contributed to the improvement that you see this quarter in the net interest margin as well, which rose to 3.27% in comparison with 3.26% for the fourth quarter.

Turning now to asset quality, the provision for credit losses was $15.8 million for the first quarter, compared with $45.25 million for the fourth quarter and $3 million from a year ago.

Our total allowance for credit losses to total loans was 1.51% as of March 31 in comparison with [one point five-eighth percent] at December 31 and 1.24% a year ago.

The allowance for our continuing portfolio was at 1.21% and that compares with 1.23% at year-end 2007.

As Jim indicated, we've provided a detailed breakout showing all the activity in both portfolios in the tables that accompanied the press release.

Our charge-offs for the first quarter of 2008 were $15.8 million in the continuing portfolio and $7.8 million for the liquidated portfolio.

Our fourth quarter results included $2.8 million for the continuing portfolio and charge-offs, and $8.9 million in charge-offs for the liquidating portfolio.

Let's now take a look at first quarter results.

First, please note for presentation purposes, Webster Insurance continues to be shown separate from continuing operations than our financials.

So, excluding insurance, earnings from our continuing operations were $0.51 per share.

This excludes the $0.04 per share negative impact of the discontinued operations of Webster Insurance in the quarter.

As previously reported, our decision to sell our insurance operation resulted in this activity being recorded separately from our continuing operations.

The securities portfolio totaled $2.8 billion at March 31 of 2008, and that's an increase of $105 million from December 31 of 2007.

The yield in the securities portfolio for the quarter was 5.75%, and that's down 10 basis points from 5.85% for the fourth quarter and 5.85% for the first quarter of last year.

Our decision to continue to increase the portfolio, albeit slightly, reflects a number of factors, including to offset some of the lost mortgaged warehouse balances of roughly $200 million over the course of 2008.

This can be seen in our results this quarter, as our loans held for sale declined to just $8 million compared with $222 million at year-end and over $456 million a year ago.

The securities enhance our net interest income and short-term interest rates fall, and they provide additional collateral for municipal deposits and for other businesses.

Our intent is not to substantially grow the portfolio further; we believe we are at appropriate levels, given our asset/liability mix.

Our non-interest income was $47.8 million for the first quarter, including a $709,000 loss on the write-down of a direct investment to fair value; a $544,000 write-down of equity securities to fair value; and a $1.6 million gain from the Visa IPO.

Non-interest income was $48 million in the fourth quarter, and that included a $3.5 million write-down of direct investments to fair value, and that's compared with non-interest income of $47.4 million in the period a year ago.

Deposit service fees totaled $28.4 million, and that's in comparison to $30.6 million for the fourth quarter and $25.4 million a year ago.

And the growth over the prior year resulted in the implementation of a new consumer fee structure in 2007.

The lower amount in Q1 compared to Q4 of '07 reflects a normal seasonal decline.

Loan fees were $6.9 million in comparison to $7.3 million in the fourth quarter, and $7.9 million from a year ago, while wealth management was $7 million compared to $7.5 million in the fourth quarter and $6.9 million a year ago.

Our non-interest income was $1.8 million for the quarter, and that's compared to $2.1 million in the fourth quarter and $1.9 million a year ago.

Our revenues from mortgage banking activities were $740,000 for the quarter, and that's in comparison with $1.3 million in the fourth quarter and $2.2 million in the first quarter of last year.

Reduced income in mortgage banking activities over the last year reflects the closure of our national wholesale mortgage lending operations in the fourth quarter of 2007.

Net gains from the sale of securities in the quarter were $123,000, and that compares with $195,000 in net gains in the fourth quarter of '07 and $541,000 reported a year ago.

Turning now to expenses.

Our total non-interest expenses were $116.1 million for the quarter, and that's compared with $120.3 million for the fourth quarter of '07, or $121.2 million for the first quarter of a year ago.

Our compensation expense increased $3.5 million on a linked quarter basis, and that's due to seasonal charges associated with payroll taxes in the 401(k) match.

Our first quarter results also include a $650,000 credit from a partial release of the Visa-related litigation reserve that we established in the fourth quarter of 2007.

The fourth quarter of '07 and the first quarter of '07 also included charges of $6.9 million and $4.5 million, respectively, for severance and for other costs.

Now let's look forward to the second quarter of 2008.

Let's first address the net interest margin.

We would expect this to be relatively unchanged compared to the first quarter, and as always, this is contingent upon non-performing asset levels.

26% of our loans are variable, so fed cuts have a negative short-term impact until we adjust deposit rates accordingly, particularly certificates of deposit.

We continue to be very focused on attracting other sources of deposits in commercial and retail, government finance and HSA, to ensure that we continue to effectively manage our cost of funds as we see downward pressure on loan price.

The provision -- we recorded $15.8 million provision in the first quarter for our ongoing portfolios.

We would anticipate, given the current economic environment, our quarterly provision could range between $10 million to $15 million next quarter.

And of course, that's all dependent on economic conditions and the corresponding impact on asset quality.

This also assumes that we continue to shift our loan mix more towards a 50/50 balance between the consumer loan portfolio with the commercial loan portfolio, and that risk levels in each asset class do not change substantially.

On the expense side, our second quarter expenses will increase, specifically in marketing, as we roll out initiatives related to consumer banking.

Also, as stated, when we announced our earnings optimization initiative, there will likely be severance-related job elimination and other charges as a result of the program that we're undertaking.

We expect to be in a position to provide more information on this later in the second quarter.

To reiterate a comment I made in the last quarter and Jim also reiterated today, there's a firm commitment by everyone at Webster to be in position upon completion of the earnings optimization program to consistently deliver positive operating leverage, specifically by driving our operating efficiency down to a stated target of 60% by the end of '08.

Our One Webster project is supported by the efforts of Harvest earnings.

While a relatively new firm itself, Harvest was founded by two individuals -- Jeremy Eden and Terri Long, who both have extensive experience in this space working for other firms.

This process that we're undertaking is a bottoms-up approach, and over 3,800 ideas have been generated by our employees.

To show the commitment we are making to the success of this program, over 150 Webster people are actively involved in the evaluation of these ideas.

We are very pleased with the progress we are making and we have confidence in both the process and the guidance we are receiving from Harvest Earnings.

And in closing, I'd want to note that we announced today that we have reached a definitive agreement to sell Webster risk services, and expect closing to take place by the end of the second quarter.

With that, I'll now turn the program back over to Jim for closing remarks.

Thanks, Jerry.

Webster's first quarter operating results are beginning to reflect positive results from our narrowed focus on doing well what we do best.

Our capital and human resources are focused on our commercial and retail banking businesses in our core franchise, and on our four specialty businesses -- equipment finance, asset-based lending, commercial real estate lending, and health savings accounts.

These are direct-to-customer businesses centrally operated, serving customers in-market as well as regionally or nationally, and generating relatively high returns.

The One Webster earnings optimization initiative will help us to enhance revenue and eliminate expenses as we bring our operating efficiency ratio down.

And as we've said, I guess repeatedly, this program will have a meaningful positive impact on our future operating results.

When today's challenging economic environment eventually gives way to calmer times, we are confident that our narrowed focus on core franchise activities will lead us to success as a regional commercial bank.

We are well positioned for success.

Thank you for being with us today.

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

Thank you.

(OPERATOR INSTRUCTIONS).

Ken Zerbe, Morgan Stanley.

If I understood correctly, your provision expense of $15.8 million matched your charge-offs for the continuing portfolio.

Can you just talk about how you came to the decision not to increase the reserve ratio in your continuing portfolio, given that -- I guess, given the deterioration we're seeing in the credit environment and the fact that most of your peers have been increasing their ratios?

Thanks.

Sure, Ken, I'll comments briefly that -- Webster for a long time has reserved more than its charge-offs in a quarter.

And during a period of a couple of years where a lot of our peers were not doing that, we continually, with the exception, I think, of only one or two quarters, reserved at or greater than the charge-offs.

And therefore, we build up our overall ratio to over 120, which we think compares relatively favorably with the peers.

The other reason is -- and I tried to cover this in my remarks -- that embedded in the $15.8 million of the charges are three specific loan charge-offs that accounted for over two-thirds of the total charge-offs.

So, we're saying that we want to be sure that in this environment, we cover at least what we charged off.

But we believe that looking ahead, that the $15.8 million was the right number to handle for this quarter.

We don't expect to let our ratios fall behind.

And I made the comment we expect that we'll target a range of around 120 going forward.

Okay, great.

And then the second question I have, could you just remind us quickly on the liquidating portfolio -- how fast is that running off?

And also at what point would you consider increasing your special reserves?

Like, what types of things would you be looking for that we could see?

Well, we tried to break out the numbers so you can track it pretty closely.

And one comment we made was that the overall liquidating portfolio declined at about $30 million in the quarter, from $425 million to $395 million.

The construction loan piece is dropping, as you'd expect, at a faster rate than the home equity lending piece, which frankly, is dropping at a little bit less than we originally had expected that it would.

We set up the reserves in that portfolio back in Q4 with the idea that the default rates would rise throughout 2008, particularly in the home equity portfolio, and that there would be a high loss, given default.

As we look at the actual performance of the portfolio in Q1, I made the comment that the delinquency ratio is rising a bit faster than we had anticipated, but the loss given default has been a little less than we anticipated; so, we're pretty much within range of what we originally had anticipated for that performance of that portfolio.

We also indicated that we thought that the bulk of the losses would occur in the first two years after setting up the portfolio, and that a portion of the reserve was against the tail that would run out in future years.

So, I guess the best I could respond is we'll try to give you good information, and because we're breaking out the portfolio, you can track what's happening to delinquencies and non-accrual rates and charge-offs in that portfolio directly against the reserves that we've set up for it.

Andrea Jao, Lehman Brothers.

Andrea Jao from Lehman.

I was hoping to get a little more detail on your outlook regarding loan growth.

I know you're shifting your mix to a more 50/50 mix between consumer and commercial, but what are the conditions out there?

What kind of competition and pricing are you facing?

Well, Andrea, if I talked about the segments of the portfolio, first I'd say that in that, we are discontinuing, of course, the indirect out-of-market lending that we expected the actual origination rate for consumer loans and for resi loans will be lower than it was in the past.

The in-market rate of originations, given the focus that we have, will be a little bit higher than it was.

But still it's unlikely that we'll have much growth in resi or the consumer portfolio, let's say, through the balance of 2008.

We believe there is opportunity for growth in the middle market portfolio on the commercial side and the CRE portfolio as well, in part because of what's happening with what I refer to as a re-intermediation from capital markets of high-quality credits back into banks, where we're able to do commercial real estate at relatively low loan to value ratios at significantly higher spreads than we were before.

Same effect on some of the middle market opportunities.

And what's happening too is that the paydowns that we were experiencing are less, because our existing customers aren't moving toward the capital markets.

So, we see a continuing opportunity to book high quality commercial loans in particular over the foreseeable future at expanded spreads.

So, on the one hand, we think spreads will widen to some degree.

We think there will be the opportunity for loan growth, particularly in middle market and commercial real estate lending, and those will be the areas to focus on for growth.

So we'd be talking about perhaps mid to high single digit growth rates in those portfolios, with the consumer and the resi portfolios being relatively flat.

Another driver of this is that we want to calibrate our own spreads to make sure that every dollar of additional asset that we put on the books is generating a high return on the precious capital that supports it.

Great.

How about on the profit side?

Are you seeing [thermal and capital] markets driving more of your consumers to the safety of bank deposits?

(multiple speakers) talk about your outlook there.

Hey, Andrea, it's Jerry.

I just wanted to preface that and my response is, I think if you were to reflect back on the 2000 outlook deck that we released with our fourth quarter earnings, we emphasized that we are taking -- I think we've actually stated something like the year of the deposit.

And there's just incredible focus, both in the retail, commercial, the government/finance, and obviously as we talked here today, on the HSA Bank side, on bringing in lower costs core deposit relationships.

And there's deliberate steps in our actions here to follow through.

And you can see that in the jump in our core deposits.

So when you look at everything other than certificates, we'll call, and you see the improvement in the ratio, that's a concerted effort, a planned effort, that we're undertaking.

And it's also part of the change that we want to see in our balance sheet mix.

So, on the deposit side -- and I also think this coincides with having very good products and services from a cash management standpoint that are enabling us to win over more commercial relationships and more government finance relationships.

So I think what we'll see is -- and you see spots of this or signs of this, I should say, in our first quarter, you'll see -- we expect to see more of that in the second, third, and the fourth quarter of '08 in reporting back.

I just wanted to add a comment to the earlier question, which is -- we have talked also about changing our plan mix in and around the balance between the commercial bank and the consumer bank.

And for purposes of that conversation, it's really a consumer bank of residential and consumer.

We're seeing that this is, again, a plan of we went from about 59% -- it's like a 59/41 ratio to being closer at year-end to being about 54/46% in terms of the mix; again, more consumer bank than commercial.

And what we're migrating towards is much more of a 50/50 mix.

And I think that we are at a very good time in the cycle that we're seeing some good opportunities, as Jim indicated, in the commercial markets to take advantage of bringing in some higher quality loan relationships.

And I think we're uniquely positioned to not only just get the loan relationship, but the entirety of the relationship with these commercial customers.

So, some of this is really a very thought-out, planned attack and approach from our standpoint, and just some final shifts in the way we're looking at the balance sheet, both from a loan side as well as from a deposit side.

I hope that's helpful.

That was helpful.

Thank you so much.

James Abbott, FBR Capital Markets.

I was wondering, on the home equity in your slide deck you have a really good detailed slide on some of the delinquency trends in the continuing portfolio based on loan to values.

And I don't know if you mentioned it earlier in the call, but if you did, I apologize -- but do you have any updates on that table as to how -- especially, like in the 95% to 100% combined loan to value part of the portfolio -- what the non-accrual rates in the 30 to 89 days delinquency, are we seeing a lot of migration there or fairly stable?

Yes, we do, actually, have information.

And as of March 31, breaking down the continuing portfolio and the liquidating portfolio by combined loan to value ratio -- but I need to be sure as to when these loan to value ratios were --

Yes, at origination.

Yes, at origination.

Right.

I don't have the numbers to show the updated estimated loan to values based on the ABMs, but I can tell you -- are you interested in the liquidating portfolio?

Well, it's just I'm trying to understand a little bit about how things are developing.

So, if the liquidating portfolio is a better indication of how -- of things to come, then I'd be interested in that, if you think that's --

Sure.

Let me say this.

In my remarks, I said that the 30 to 89 days past due rate in the continuing portfolio was 0.72, which was down from 0.76 at the end of the year, and the non-accrual rate was 0.60, which was up from 0.50.

In the liquidating portfolio, the 30 to 89 day past due rate is 3.21%.

And by the way, you can deduct these figures from looking at the charts that are in the deck today.

And then the non-accrual rate is 2.87%.

And I think that the charge-off rate was around --

4.17%.

4.17% annualized in Q1.

For the liquidating portfolio.

And let me also say that, Jim, we'll have these slides updated and available.

We'll put them out on the Web so you can get a look at them.

Yes.

So the short version is that you're seeing some modest improvement in the continuing portfolio's home equity, but further deterioration in the liquidating portfolio?

No, I'd say the improvement was in the 30 to 89 days past due, but it was only about 4 basis points from 76 to 72 -- but that's great to see.

But we're not going to say that makes a trend yet.

I think that could be partly because we've been managing the collections extremely well.

We've got a full group that's on that and I think have done a very, very good job.

And that's part of our loss mitigation strategy.

So, that's good development; you're right.

And the liquidating portfolio, as I mentioned in my comment, the trend toward higher default rates is consistent with what we had expected.

Okay.

I appreciate that.

And then another question and then I've got a housekeeping type of issue, I want to clarify a comment you made earlier -- but on the C&I credits that went in non-performing status or net charge-off status, were there any specific industries?

Or can you give us some color as to what was behind the default on those?

Again, we mentioned that there were two credits specifically.

I'm going to ask John Ciulla, who is our Chief Credit Officer, to comment.

Good morning.

There were -- $9.5 million were in the commercial loan group.

There were two credits -- a $6.1 million charge related to a fabric manufacturer housed in our asset-based Webster business credit.

And the $3.3 million -- $3.35 million was a middle market credit, a commercial cleaning company in our footprint in Connecticut.

It sounds like those both could be related to the housing industry?

Is that --?

I would say that that's probably not the case.

The commercial cleaning company actually had issues with respect to an acquisition and some pension liability.

And we have a personal guarantor there and we are actually confident that over time we will be able to recover a portion of that charge.

With respect to the asset-based credit, it really had to do with a dramatic devaluation in inventory.

It was a retail supplier of a retail home goods company.

So I guess there, there was a slight connection to the housing market, but not entirely related.

Okay.

I guess you would give me the opportunity to make another point that I've made before, which is, that's two credits comprising 60% of the total charge-offs for the quarter.

One is in the asset-based lending group, one is in the middle market group.

There is no systemic issue as to deterioration that we'd note.

Okay.

And the last is a real quick a housekeeping.

Just -- you mentioned that in the press release, there is some seasonal expenses I think of $5 million.

But then you mentioned in the Q&A or later in the outlook, I guess, that expenses should go up in the second quarter.

Am I interpreting that correctly?

That the seasonal expenses will be offset by some decreases elsewhere?

Yes, Jim, it's Jerry.

We have planned marketing expenses in the second quarter.

So if you just look specifically at the marketing line and that was what my comment was around -- you should see an increase just in relation to some of the campaigns that we're doing, both in deposit gathering as well as in some of the loan areas.

Okay, thanks.

Just wanted to make sure I interpreted it correctly.

Thank you.

And it's specific to that line when I make that comment.

Super.

Okay, thanks.

Collyn Gilbert, Stifel Nicolaus.

Just a follow-up, actually, while we're on the discussion of expenses.

Jerry, could you just give kind of an indication of where you think a quarterly run rate is on expenses over the next couple of quarters?

Collyn, I think when you look at the lines -- well, first, and I want to preface this, my response, by saying, we do believe there will be some charges in terms of related to our One Webster initiative.

And as such, once we've completed that process and have evaluated what we will continue to do, what we won't, we're going to have to come back out and then tell you a little bit more about what expenses look like on an ongoing basis.

So I'd have to almost -- and I don't want to sound like I'm sidestepping -- there will be some dramatic changes in expenses in terms of run rate post-One Webster.

Some will be immediate and we will see those in the third and the fourth quarters.

Others will take place over 18 to 24 months.

And we're going to do our best to spend some time, as I'd indicated, to make sure that everyone is thoroughly versed on the types of decisions that we're making and what kind of impacts that would have.

So I would have to say that for now, the guidance that I was able to provide around expense really is only for the second quarter.

And it's difficult to project forward the type of savings that you might be able to see in specific line items until we really get to the conclusion of One Webster.

So, I hope to be able to come back with Jim and others and provide an update; if not before the earnings call, certainly by the next earnings call, at an absolute latest.

Okay.

So by you mentioning dramatic changes, is that how you're going to get to that 60% efficiency ratio?

You know, the combination for One Webster is enhancing revenue and systemically reducing expenses.

So it's a combination of the two that gets you to that ratio.

Okay.

And you're sticking to that goal by year-end?

For the fourth quarter of year-end, that's what we'd like to stick to.

Okay.

And then Jim, just to talk about credit for a second.

Could you just give some color as to the life cycle of these three credits that were charged off?

Because I thought that the guidance post the fourth quarter was that the provision, or at least the core provision, was going to be fairly comparable to fourth quarter.

And I think at that time, you said too that you didn't necessarily see sort of systemic risks or significant deterioration of any outlook for credit, but yet we had a pretty sizable jump in the provision.

And I'm just trying to quantify what you mean by no systemic problems.

Yes, Collyn.

I'm going to comment -- I'm going to ask John Ciulla to comment specifically on these credits -- but the point that I'm trying to make is that in the down leg, there are going to be blowups that occur here and there.

And that's what happened.

And so that's why we decided the two commercial relationships and the one other relationship that accounted for two-thirds of the charge-offs.

And I have to acknowledge that a couple of these came up on us pretty fast in Q1, which is the reason that the charge-offs were higher.

And therefore, we elected to boost the provision as well.

And there may well be more of these that we don't see that are going to pop up, which is why we're being very careful not to predict that we've reached a peak or we'll see a diminution of the charge-offs in the immediate future.

We're in a down cycle.

We don't know how deep it's going to be, and so we just have to wait and see what's going to happen.

But I would stick to my comment that we don't see a growing systemic threat in any parts of the portfolio.

We see higher delinquency rates.

We see higher on-accrual rates.

It's what we would expect.

And then occasionally, there may be a blow -- or maybe there won't.

But I think we have to assume that in this kind of environment, it's more likely that there will be than that there would not.

As to the particular credits, I'll ask John Ciulla to comment.

Yes, I would say that there's significant volatility, so in terms of our visibility on the two credits that comprise the $9.5 million, we were well into the first quarter.

We obviously had identified the two credits but our embedded loss numbers, even halfway through the quarter, had projected a charge-off number significantly less than where we ended up.

So what we had is sort of fast-moving results.

We had anticipated a lower amount for the asset-based credit.

And as I said, some M&A activity that we were hoping would arise and a dramatic shift in inventory value led to a larger and swifter charge on that credit than we had thought.

And we actually had relative confidence that the other credit, the middle market credit, would continue to perform and survive throughout the first quarter, as some drastic changes were being made in the management of that company.

And unfortunately, some of the external factors made it impossible for the company to continue to meet its obligations.

Okay.

So were these on non-accrual status at the end of the year?

The middle market credit was not.

And I do not believe the Webster business credit was either.

Okay.

And then just finally, Jim, if you could just sort of give some color as to how the executive team is laying out now with the pending departure of Bill and with Joe having left, and just how you see the management -- the executive management team structure going forward?

Well, let me comment that Bill is still the full-fledged President and Chief Operating Officer and will be till the end of June, and then he will continue as Vice Chair until the end of the year.

And I tried to make clear that we would be in a transition period, and that he and I and others on the executive team would be working out what the new organization would be.

So I want to be careful not to be trying to lay that out at this time.

I think that there's a couple of things to say.

One is that we have narrowed our focus on core franchise activities, and that's why I made the comment that the Chief Operating Officer was not central to the operating model anymore.

Bill also has been of great value in recruiting high-quality people to run our business unit.

So we're a much stronger company than we were five or seven or ten years ago, when we first started down this path.

So we're looking at whether some of these responsibilities will be assumed by others that are currently in the organization, and that is likely.

And it may be that we need to do some recruiting, as well, to make sure that the totality of Bill's responsibilities get transferred properly throughout the organization.

There's no doubt there is a significant void that's created, particularly because of the contributions that Bill has made.

And that's what he and I are going to be working on as we lay out the organizational change here over the next couple of months.

So I'd rather not try to nail it for you right now, but say that we will provide that information later on.

Okay, great.

Thank you very much, guys.

Gerard Cassidy, RBC Capital Markets.

I apologize if you've answered some of these questions.

I've been jumping on and off of your call, so I apologize if you have to repeat them.

Okay.

Regarding the Visa gain that you reported of about $0.03 a share, did that include the reversal of any expenses that you may have taken in the fourth quarter on the Visa litigations?

Yes, it does.

There's a partial release of about $650,000 from the liability we recorded in the fourth quarter.

We reported about $1.5 million in the fourth quarter and $650,000 of that is in that $0.03.

Okay, it is in the $0.03.

Yes.

Good.

The next question is on the loan to deposit ratio, is there any target that you guys would like to be at by the end of '08?

In terms of -- we've been coveting being in and around the 100%, so that in effect we've got our full funding for loan growth coming from deposit growth.

I think in my remarks, we have seen that we are shifting away from CDs and have pushed and really made a concerted push across all lines of business in the organization on either no interest-bearing or low interest-bearing transaction accounts.

And we've seen some good success here in the first quarter.

We're going to continue that.

But that, coupled with the attractive rates that we can get in terms of borrowings -- and you can see that in what a substantial decrease we had in the cost of borrowings from quarter to quarter.

We deliberately stated that we would allow ourselves to go back up over that 100% and stay in and around where we are today.

In terms of target, I would have to tell you that we'd love to be at 100%.

But at this point in time, we just see an attractive alternative out there and think it's in our best interest as we build the low and no-cost interest-bearing accounts onto our books, that tapping the borrowings markets is a good thing to do here.

And then on the net charge-offs that you guys just addressed, the three commercial net charge-offs, I guess, were two of those in the asset-backed portfolio?

No, one of those was assets-backed, Gerard, and the other was middle market.

Okay.

And in the asset-backed portfolio, is there any degradation in the portfolio geographically?

Are you seeing a stronger part of the portfolio in the Northeast, weaker in the West or something like that?

I'd say, no, we're not.

Actually, the overall portfolio is pretty strong.

And I don't know whether you heard the portion of our comments, but we think we're in a pretty strong position there.

92% of our outstandings are secured by AR and inventory, for example.

The NPAs in the whole ABL portfolio were 1% at the end of March.

And that we also did say that close to 60% of the portfolio was in the Northeast; but pretty much the credit stats are fairly similar across the whole portfolio.

Okay.

And then finally, on the liquidating home equity portfolio that you guys mentioned, in a recent presentation you made in February, you gave a nice breakout of the loan to value, the consolidated loan to value.

The portion of 95% to 100% -- are you seeing higher charge-offs in that, when they go delinquent?

Are they showing higher charge-offs in the liquidating portfolio, that part of it, versus less than 80% or 80% to 85%?

Generally speaking, the higher the CLTV at the time of origination, the higher the charge-off given default.

And we will update that and we'll put it out so you get a look at it.

And what kind of severity are you seeing in that 95% to 100% when it does go delinquent?

Are you seeing [up with] the 100% type of charge-off?

I'm not sure we have that number right now.

No, I'd say it's a case-by-case.

Yes.

I'd say it's on a case-by-case basis.

I wouldn't want to just blanket it and say that, yes, that it is.

Okay.

But I will say that we will have that updated in our slide presentation within the next couple of weeks.

Okay.

And then just finally, some of the larger banks are alluding to the fact that the consumer is having a behavioral change, in that when the house falls below the value of their first and second mortgage, they have the capability of paying but they're choosing not to pay.

Are you seeing any of that?

Or can you dig into that at all and see if you're being affected by that, if that's happening?

Well, it's hard to determine what the psychology is on a case-by-case basis.

I mean, we know that there is a rise in non-accruals, and that may be and probably is one of the elements, particularly given all of the publicity that the downturn in the cycle has received.

So, we'll say we imagine that that's out there, but we can't point to specific cases where we think that has occurred.

We also think that the longer somebody has lived in a home, the more likely they are to want to continue to meet their obligations.

So part of this may be that people haven't been there very long or they bought it on sort of a sense of being able to flip it or whatever the particular behavioral influence was, that in those segments, that the probability of just stopping payment or trying to walk away is going to be considerably higher.

But in the core market of people that bought their homes to live in and intend to do their best to make their payments, we're not seeing that behavior.

Damon DelMonte, KBW.

Pretty much all of my questions have been answered, but just one last one regarding the tax rate.

I know that the rate this quarter was higher than yours -- it would have been 31%, but it was higher because of the FIN 48.

What are you guys forecasting for a rate going forward?

31%.

31%?

Okay.

That was it.

Thank you.

Andrea Jao, Lehman Brothers.

Just circling back on deposit service fees, I know those were seasonally weak this quarter, but if you are making an effort to bring in more deposits, are you more willing to waive fees and therefore the ramp-up in service fees should be slower going forward?

No, actually, Andrea, we're trying to systematize the collection of fees the best that we can, so that we actually have less leakage, perhaps, than we have today.

And we are making a concerted effort to bring in operating our transaction accounts.

And so we hope that actually the ability to attract new relationships will have a positive impact on fees.

And as we pointed out, we generally have a seasonal decline in Q1.

That has occurred again in 2008.

And we expect that there will be a ramp-up in those fees through the balance of the year.

Fantastic.

Now, on page 14 of the press release, you did show 30 to 90 days past dues for the continuing portfolio.

In those [mostly] pricing have gone up between year-end and March 31.

What do you think that translates into with respect to the NPA ratio on the continuing portfolio?

You mean the flow-through rate?

Yes.

It's hard to say.

Some of those cure relatively early on, depending upon which category they're in.

Others of them are more predictable to flow through, such as the consumer and the resi type.

I'm a little hesitant to try to make a prediction on that.

Okay, thank you so much.

You know, Andrea, I just -- I'll further comment that we do look at the what-if's.

Assuming that every loan that goes delinquent has a certain chance of curing; if it doesn't cure, it's going to flow through and then the loss given default would be X.

I mean, we do look at that for purposes of trying to make our own projections, but I think we're in uncharted waters here and it's hard to rely on any simple formula for that purpose.

Okay, fair enough.

Thanks again.

James Abbott, FBR Capital Markets.

Real quick question again.

On the commercial business lending, wondering if you could take us -- as we kind of get into a weak economy here -- can you take us through what you do as a company that may be better than industry practices to help prevent losses there?

What sort of policies and procedures do you have on that portfolio?

It's something that most of us have taken for granted over the last few years as being just a performing portfolio.

And maybe give us some detail on how you manage that business.

Yes, this is John Ciulla again.

You know, our philosophy is we've got a signature approval process system in the Bank.

We have credit approval officers, senior credit approval officers, that have a specific asset class expertise.

As you look at our balance sheet, we have, as you know, a fairly diverse set of commercial banking activities.

And we pair up very strong senior credit officers with the business lines to make sure that we're doing appropriate credit decisioning.

We have a culture of credit with respect to the line managers who all come from banks where their philosophy is they're the first-first line of credit, so the originators have a credit bias.

And then we have strong loan review function.

And obviously, we feel aggressively risk rate and manage our portfolios on a periodic basis and then get special assets involved, consulting on credits very early in the process so that we can appropriately react and react prospectively to credits as they migrate down the risk chain.

I don't know if I can give you any other additional granularity; I'm happy to, but I hope that gives sort of a context of our philosophy.

That helps.

Can you maybe give us sense on what the loan to values you would do on equipment and then also on asset-based -- asset lending?

And then also frequency of monitoring, how frequently you collect the financial statements of the companies?

Yes, this is Bill, and I'll deal with the equipment piece first.

On the equipment side, we would tend to finance a relatively high percentage going into the particular asset.

And then we would have an amortization schedule that would match the depreciation of the realizable value of the underlying collateral such that we are in balance and in fact, grow the equity in the equipment relatively quickly, so that we've got a good, strong position in the collateral.

And I think that when we look at our track record over time in terms of the loss in that portfolio, it's been quite good; meaning it's been relatively low and particularly relatively low versus the industry.

And I think it is the underwriting of the individual collateral, as Jim pointed out -- we're underwriting collateral that has a specific revenue generating purpose.

And we understand that purpose going in.

So early payment default is atypical of that.

So we grow into an equity position and it works out well over the life of the loan.

In ABL, the loan to value tends to vary depending -- as Jim said, it's principally receivable and inventory financing.

And other than in the retail segment, which we have a subsegment of, that has performed well over time, it tends to be skewed, even in that case, to receivables.

The receivable will be dependent upon -- the advance rate will be dependent upon the individual assessment of that underlying collateral.

It's typically in the 80%plus perhaps range in the loan to value -- the inventory would be dependent upon realizable value.

And when we're in the retail side, we're typically looking at going out of business sale value.

So you're looking at a net realizable value if you had to liquidate that inventory -- and lending a relatively high percentage of that number but a low percentage of the overall statement value, if you will, of the inventory.

So there's a very disciplined process there.

That business is very much of a cash dominion business.

So receivables are collected directly by us.

And so we're monitoring that business daily in terms of monitoring, controlling the cash for those borrowers.

And we do regular audits, when we go -- we get monthly statements in that case, and obviously receivable agings and the like.

When you get into more of our -- what John was talking about, in terms of our commercial middle market and small business lending, we get quarterly statements.

We typically have covenants on all of those and we're tracking the covenants and doing covenant compliance.

And if there are violations of covenants, that gets escalated up through the credit process.

So there's a review of what the violation may be and a determination of the wisdom of waiving or looking to secure our position more strongly, if that is the appropriate action.

So it's -- the active monitoring of the portfolio is pretty strong.

Thank you for expounding on that.

Thank you.

Thank you.

There are no further questions.

I will now turn the conference back over to management for any closing comments.

Thank you very much for being with us today.

We appreciate your interest in Webster.

Have a good day.

Thank you.

This concludes today's conference.

All parties may disconnect now.