Webster Financial Corp (WBS) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Webster Financial Corporation second-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 condition, results of operations, and business and financial performance.

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

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

Please go ahead, sir.

Good morning, everyone.

Welcome to Webster's second-quarter 2008 investor call and webcast.

Joining me today are Gerry Plush, our Chief Financial Officer who recently took on the Chief Risk Officer mantle as well -- congratulations, Gerry -- John Ciulla, our Chief Credit Risk Officer, and Terry Mangan, Investor Relations.

I will provide some overview and context for the second-quarter results, and Gerry will provide comments on our financial performance.

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

The cash and non-cash charges that are part of today's earnings release reflect the challenging environment for financial institutions.

So let me address right up front that increase since our preannouncement a couple of weeks ago and impairment charges against available-for-sale of securities.

The higher non-cash charges reflect Webster's determination, subsequent to the preannouncement, that market conditions for pooled capital trust securities rated BBB are now such that we should take a charge as of the end of Q2.

We have impaired all pooled capital trust securities rated BBB, whether the pools are deferring payments or not.

The charges had no impact on our tangible capital position, since we've already taken the mark against equity, and our strong regulatory capital ratios position us well to absorb the charges.

To the extent we can recognize potential losses in our securities portfolio in the most timely manner, we intend to do so.

I encourage you to go to our Web site at WSBT.com to see a granular view of our securities portfolio and the actions we've taken.

You'll see that the only held-to-maturity securities in the portfolio are high-grade munis and 15 and 30-year agencies.

All of the securities in AFS at quarter end have been marked to market.

Broadly speaking, you can expect us to be very conservative in our judgments as we navigate through the current financial environment.

We are focused on isolating the problems of today and improving performance tomorrow.

We aim to provide our investors with financial reporting that is the most transparent, granular and comprehensive that you will see from any company in our peer group.

Overall, the cash and non-cash charges aggregate $0.98 in diluted EPS and consist of write-down of investments to fair value totaling $0.66 per share, goodwill impairment representing $0.16 per share, and OneWebster program costs and other charges totaling $0.16 per share.

Gerry will discuss these items in more detail.

Unfortunately, the charges detract from solid improvement in Webster's core operating results turned in during the second quarter.

While we reported a loss of $0.56 per diluted share in Q2, core operating results were $0.42 as indicated in the EPS reconciliation in the earnings release.

The $0.42, which before the $10 million or $0.12 increase in the loan-loss provision would have been $0.54, was above analyst estimates as net interest income benefited from a stable margin and modest earning asset growth.

Core fee categories rebounded nicely from the first quarter, and we contained expenses.

Our narrow strategic focus on in-market direct core franchise activities is a major positive for strategy development and resource allocations.

There are no distractions from the task at hand.

The solid core operating performance in the quarter supported the Board's decision to declare the regular $0.30 quarterly cash dividend that will be paid on August 18.

This is the 84th consecutive quarterly dividend since Webster first paid a dividend in 1987.

We plan to balance the desire to maintain the current dividend against Webster's capital needs in the quarters ahead.

As indicated in our July 10 preannouncement, the provision for credit losses in the continuing portfolio is $25 million in the quarter, driven by the $68 million spike in nonperforming loans.

Since net charge-offs in the continuing portfolio declined to $11.2 million, credit reserves in the continuing portfolio increased 9 basis points from March 31 to 1.31%.

We deemed this increase essential, given the increased level of non-accrual loans and the need to build reserves given continuing economic uncertainty.

Again, as with the impairment charge against the securities portfolio and our decision to raise capital for that matter, we want to be aggressive in recognizing the current environment's potential impact on future performance.

The reason for the unusually high increase in NPAs was primarily because four residential development loans went nonaccrual in the quarter as slow sales took a toll on performance.

Most investors know that we have had an outstanding asset quality record in this business unit over the years and we remain confident that our underwriting and work-out capabilities will serve as loss mitigators.

While I don't want to make predictions in this environment, I have to think that the magnitude of the increase in nonperforming assets was more likely an aberration than a trend, a view bolstered by the sizable Q2 reduction of $33 million in 30 to 89-day past-due loans.

There's no doubt we are living in extraordinary and uncertain economic times.

To an increasing degree, those circumstances shape our priorities as a company.

While our vision, mission and values guide Webster people every day as we find a way to help our customers achieve their financial goals, our operating principles are the driving force behind the management process and are a primary focus of our report today.

We understand that, during a period when confidence in the banking system ebbs, banks must adapt their operating principles accordingly.

So we've spent considerable time and effort in recent months building capital and liquidity and bolstering our credit risk management capabilities, focusing inwardly as we prepare for the quarters ahead.

Let's start with our capital position.

In early June, we raised $225 million of tangible capital through the issuance of convertible preferred stock.

Its purpose -- to enable us to build a fortress balance sheet, to capitalize our judicious future growth, and to guard against the unforeseen.

Tough as it was to delude our shareholders, we knew it was the right thing to do in today's uncertain financial world.

We believe our shareholders will benefit ultimately from our timely move.

Tangible capital stood at 6.8% at June 30, up from 5.8% linked-quarter and after net securities marks of $67 million in the quarter.

We absolutely believe strong capital levels are critical, given the current economic environment, and we wanted the certainty of having capital ratios well in excess of the regulatory levels required to be well-capitalized, which we do.

Our tier 1 leverage ratio of 8.9% at June 30 is well above our publicly stated goal of 8% and the 7.9% we reported at March 31.

Our projected total risk-based capital ratio is 13.2% at June 30, also well above the 12% goal we publicly stated and compared with 11.4% at March 31.

We think that Webster's strong capital position is a huge asset as we pursue our vision to be New England's bank.

We are flush with equity, and more than able to meet our cash needs.

Our reduced reliance on borrowings compared to a couple years ago, our decision to [SU] brokered CDs as a source of funding, our improving core deposit ratio which now stands at 62% and was boosted by growth in demand, NOW and savings accounts in Q2 all are evidence of our exceptionally strong liquidity.

In a clear shift in emphasis from loan generation to credit quality management in recent quarters, our loan personnel are focused inwardly.

Asset quality is multiples more important than asset growth in today's environment.

The growth in loans in Q2 isn't likely to repeat in Q3, as we are demanding higher hurdle rate returns, concentrating on building out and strengthening existing relationships, rewarding early identification of credit issues, moving promptly to downgrade where deterioration is evident, moving people from line to workout to ensure timely resolution of credit problems, aggressively resolving nonaccrual assets and reducing exposure, credit by credit, where we see the need.

We are also aided on the credit-quality front by the resilience of our primary markets' real estate values and economy.

Connecticut, for example, created 3400 jobs last month -- not a big number, but it's positive.

The New England market, outside of Boston, was not built out as aggressively as many of other areas in the US, which may bode well for regional real estate values, especially our sizable in-market home equity portfolio and our modestly sized residential development portfolio as we weather the national recession.

Before I turn it over to Gerry, I will comment on the OneWebster earnings optimization initiative.

We announced the results of this comprehensive revenue enhancement and cost reduction initiative on June 24, and we posted slides on our Web site in conjunction with today's earnings release.

We expect to save $40 million annually in expenses and achieve an additional $10 million in incremental revenue growth on a run-rate basis compared with 2007 when the program is fully implemented in 24 months.

This is just great news.

We still foresee reducing the efficiency ratio to 60% in Q4 '08 with additional sustainable improvements in 2009 and beyond.

Webster people generated over 3500 ideas during the discovery phase earlier this year.

Over 2500 of these ideas were evaluated and 850 or about 35% were approved.

Ideas generating 50% of expected result will be implemented by the end of this year.

About 40% of the $40 million in expected cost saves relate to reduced personnel expenses and the other 60% relates to reduced vendor expenses.

One of the major successes of the effort was our ability to realize efficiencies equal to 10% of our cost base while 97% of our employees remain minimally impacted.

I will now turn the program over to Gerry so he can provide more detail on Q2 financial performance.

Thank you, Jim, and good morning, everyone.

I will cover several items -- first, provide an overview of lone composition and growth; next, a discussion of the investment portfolio and the other-than-temporary impairment charges that we've taken as of the end of the second quarter.

My remarks will also cover goodwill, deposits and borrowings.

I will provide some additional perspective to the OneWebster initiative.

Finally, I will comment on the second quarter and provide some perspective on Q3.

We will start today first with loans and growth in the quarter.

Commercial loans consisting of C&I and pre-loans totaled $6 million and grew by 8% combined from a year ago.

Commercial loans now comprise 47% of the total loan portfolio compared with 44% a year ago.

Total loan portfolio growth was 3% compared to a year ago, primarily the result of a planned reduction of 4% residential loans.

The C&I proportion of our commercial portfolio totaled $3.6 billion at June 30 and grew $65 million from March 31, primarily in equipment finance and asset-based lending.

The entire C&I portfolio yielded 552 for the quarter compared to 632 in the first quarter.

Equipment finance outstanding as were just over $1 billion at June 30, compared to $983 million at March 31.

The portfolio continues to stay very granular with no single credit representing 1% of the portfolio and the average deal size being less than $100,000.

Asset-based lending outstandings were $842 million at June 30, compared to $831 million at March 31.

The current asset coverage is generally solid with approximately 92% of the outstandings secured by Accounts Receivable and inventory.

The remaining 8% of outstandings consist of equipment at 7% and real estate at 1%.

The commercial real estate portfolio totaled $2.3 billion at June 30 and grew $118 million from March 31.

We closed 18 deals during the second quarter that had a combined funded amount of $127 million at June 30 against total commitments of $150 million.

This growth reflects deals that we've always sought but weren't able to compete for until the conduits went on the sidelines.

These loans are permanently institutional-quality real estate with five to ten-year loan terms representing stabilized properties with good debt service coverage and LTVs under 75%, generally well under 75% in many cases.

The total CRE portfolio yielded 561 in the quarter compared to 630 in the first quarter.

Our consumer loan portfolio totaled $3.2 billion and it consisted of $2.9 billion in the continuing portfolio and $310 billion million in the liquidating home equity portfolio.

We had an overall increase of $39 million in the continuing portfolio from March 31.

This is all direct to consumer retail-based in-market growth.

Our branch originations were $344 million in Q2, compared to $148 million in the first quarter.

Our home equity lines now represent just over 50% of the total, with home equity loans being just under 50%.

Our consumer portfolio yielded 532 in the quarter in comparison with 609 in the first quarter.

Let me make a comment on yields.

The decline in yields in certain asset classes within the loan portfolio reflects the effects of the Fed reduction to 75 basis points on March 18 and 25 basis points on April 30 have had on the floating rate home equity lines, CRE and C&I.

68% of our CRE portfolio was floating, 88% of our C&I is floating, and our equipment finance is 98% fixed rate.

Turning now to residential loans, they totaled $3.6 billion, down $41 million from March 31 or $3.5 billion when you exclude the $63 million of our liquidating portfolio which relates to the indirect residential construction loans.

Our resi loans now comprise 28% of our loan portfolio at June 30 compared to 29% at March 31, as we had now for some time deemphasized the residential loan growth.

The resi portfolio yielded 567 in the quarter compared to 570 in the first quarter.

Turning now to the investment portfolio, Webster recorded write-downs of investments to fair value for other-than-temporary impairment to certain investment securities that are classified as available-for-sale for $53.7 million or $0.67 per share and another $1.2 million or $0.01 per share for a write-down in the value of direct investments.

I want to note that, while we've been consistently providing granular disclosure regarding the composition of our investment portfolio at our SEC filings and in our investor presentations, what we've done today in the supplemental schedules that we've posted to our Web site is provide even greater detail about the corporate bonds and notes, as well as our equity securities holdings, particularly in light of the other-than-temporary impairment charges that have been taken in the second quarter.

First, it's important to note that all of the securities where we've taken impairment charges are classified as available-for-sale.

You can also see, in the supplemental slides, the unrealized loss portion across the specific investments in the portfolio at both June 30 and March 31.

These unrealized losses are recognized through the other comprehensive income adjustment to equity, so for any securities classified as AFS where market values are lower than cost, the difference would be reflected in tangible capital.

Subsequent to our pre-announcement on July 10, we've done a significant amount of additional analysis on our available-for-sale securities portfolio.

We've concluded that we should impair certain BBB-rated Pool trust preferred securities where cash flows have become in doubt, specifically where the issuers have announced they will defer payments for some period of time.

In addition, we then re-evaluated the rest of our BBB-rated pooled securities classified as available-for-sale and then determined that, based on the best estimate of cash flows that a market participant would use in determining the current fair value of the beneficial interest, i.e.

the securities we own, there's an implied adverse change in expected cash flows.

Therefore, the appropriate accounting is to impair these securities as well, as of the end of the last quarter, and write them down to fair value.

This is the primary reason our impairment charges announced today exceeded what we previously announced.

Also, given the recent uncertainty related to the GSEs, specifically Fannie Mae and Freddie Mac subsequent to quarter end, we also elected, subsequent to our preannouncement, to impair the combined $15 million of preferred stock holdings we have in Fannie and Freddie Mac and write them down to fair value also as of June 30, 2008.

Finally, we also elected to recognize a loss position specific to one New England-based common stock position we have in portfolio and recognize impairment before the proscribed 12 consecutive months at a loss timeline that we've been following.

Even though these determinations were subsequent to June 30 and subsequent to our July 10 preannouncement, we've also determined to take these charges as of the last quarter end.

We will turn now to goodwill.

We've discussed, in various contexts, that Webster has, like many other financial services entities, experienced stock declines during the first half of the year.

This creates a significant gap between book value and market value and, accordingly, subject to the results of testing, could result in a reduction in the value of goodwill and require an impairment charge.

The $8.5 million or $0.16 per share goodwill impairment charge we reported today relates solely to Webster's insurance finance premium finance subsidiary, which was acquired in 2003.

This charge is non-cash in nature; it does not affect Webster's liquidity, tangible equity or regulatory ratios.

The balance of our testing did not result in any impairment charges being required at this time.

We utilized the services of an independent national firm with expertise in valuation that we engaged in second quarter.

They've evaluated our methodology, our business-segment goodwill allocations, and arrived independently at an overall valuation.

We indicated today in our release that Webster will evaluate the goodwill associated with its reporting units again, specifically in the third quarter, as part of our regularly scheduled annual review.

Next, let me provide an update on deposits.

Our loan-to-deposit ratio increased to 106% for June, compared to 104% at March 31 and 97% a year ago.

Allowing this ratio to increase is consistent with what we've stated of late, specifically that we intended to reduce our reliance on CDs due to the higher costs, focus on growing core accounts, and reduce the use of brokered CDs as a funding source.

We've been diligently working to improve this ratio, as evidenced in the recent past, but this ratio included brokered deposits, which we've been committed to significantly reducing as a source of funds.

Therefore, a rise in the loan-to-deposit ratio would occur as a result.

Brokered CDs totaled $897 million as of September 30, 2006, and by design, we've declined them since then, including over $231 million from a year ago, and our brokered CDs now total only $170 million as of June 30.

Our intent is to continue to evaluate further reductions over the next two quarters, as over $100 million of brokered CDs mature.

We've also made concerted efforts to change our deposit mix and lower the cost of deposits with increased emphasis on growing checking accounts across our retail, commercial and municipal lines of business.

Certificates of deposit in total have declined, including brokered CDs, from a year ago, and we've been focused on increasing our core deposits, which are higher as a result by $38 million.

Our core-to-deposit total ratio is now 62%, compared with 60.7% in the first quarter and 58.1% in the year-ago period.

Additionally, our cost of deposits declined to 2.1% -- 3.01%, excuse me, for the second quarter, compared with 2.49% for the first quarter and 2.88% a year ago.

Let me now take the opportunity to also give you an update on our de novo program and then on HSA Bank.

We opened 29 branches since 2002; it represents 16% of our total retail branches.

The de novo branches had total deposits of $756 million at June 30, in comparison with $797 million at March 31 and $781 a year ago.

Although total de novo deposits have declined from a year ago in the most recent quarter, this is in large part a planned de-emphasis on higher costing CDs.

Core deposits in the de novo program have grown 2.8% over the past year and now total $115.5 million.

We will plan to open a new office in North Kingston, Rhode Island, during the month of August of this year.

We'll soon be announcing locations where we'll open two more branches in the Rhode Island market in the first six months of 2009.

Our de novo branching in the future will not be primarily a retail/consumer reliant strategy as it has been in the past.

We plan to open branches specifically where we see broader company-wide opportunities for growth and place less emphasis on just consumer.

HSA Bank, which provides us with low-cost stable deposits, had $504 million in health savings deposits at June 30, an increase of $128 million or 34% from a year ago.

We also have $66 million in linked-brokerage accounts compared to $51 million a year ago.

HSA Bank's average cost of deposits for this fast-growing category was 2.1% in Q2, which is down from the 2.46% reported Q1 and slightly lower than our overall deposit costs.

As we've indicated before, HSA Bank expands our reach for core deposits and allows us to tap into a national deposit market with significant growth potential.

At the end of June, HSA had 214,000 accounts, compared to 208,000 accounts at March 31 and 176,000 accounts a year ago.

The average deposit balance per account now is over $2,350, compared to over $2,140 a year ago.

This growth continues to show the viability and acceptance of the consumer directed healthcare model in the US.

Turning now to borrowings, they increased by $170 million from March 31, primarily an increase in the use of FHLB advances.

We've relied on borrowings to offset planned declines in retail CDs and in brokered CDs.

Our cost of borrowings declined to 3.38% into the second quarter, down from 4.14% in the first quarter and 5.23% a year ago.

Note again that our focus is on organic deposit growth, which should reduce -- result in reduced usage of both borrowings in future periods.

Turning now to asset quality, the provision for credit losses was $25 million for the second quarter, and that's in comparison with $15.8 million in the first quarter and $4.25 million from a year ago.

The increased provision in the second quarter reflects the increased levels of nonperforming loans and management's determination to build reserve levels, given continued economic uncertainty.

Our total allowance for credit losses to total loans was 1.52% as of June 30, and that's compared with 1.51% at March 31 and 1.23% a year ago.

What's important is our allowance for the continuing portfolio was up to 1.3%, in comparison with 1.21% in the second quarter and 1.23% in June of '07.

Net charge-offs in the second quarter for 2008 totaled $11.2 million for the continuing portfolio and $9.2 million for the liquidating portfolio, compared to a first-quarter charge-offs of $15.8 million for the continuing and $7.8 million for the liquidating portfolio.

We are currently updating collateral values for the liquidating portfolio, and we continue to assess reserve adequacy to ensure that coverage is appropriate.

Our total nonperforming assets increased to $224 million at June 30 in comparison with $154 million at March 31.

NPAs in the continuing portfolio were $182 million at June 30, compared with $113 million at March 31.

C&I and CRE represented $63 million of the $69 million increase as a result of the six credits mentioned in our preannouncement on July 10, reflecting the continued challenging residential housing market.

[Poor] residential development credits aggregating approximately $36 million represented all of the increase in CRE.

Within these credits, approximately $26 million is secured by properties located in New England, $7 million via property in PA, and the balance, $3 million, with a property in Arizona which is related by sponsor to $9.5 million of the New England-based exposure referenced above.

The $27 million net increase in commercial was largely driven by $24 million in two credits, a publisher and a diversified manufacturer.

NPAs were 1.47% of loans plus other real estate owned, and the net charge-off rate was 36 basis points annualized in Q2.

Credit metrics in the $2.8 billion continuing home equity portfolio performed within normalized levels with a delinquency rate declining slightly to 0.62% at June 30 from 0.72% at March 31, while the nonaccrual rate increased to 0.72% from 0.6% at March 31.

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

We had $373 million of outstanding (technical difficulty) portfolios at June 30, in comparison with $395 million at March 31 and $424 million when the liquidating portfolios were established at year end 2007.

The total of $373 million consists of $63 million in construction loans and $310 million in home equities.

Liquidating portfolio charge-offs of $9.6 million in the quarter consisted of $4.2 million in gross charges for the construction loans and $5.4 million in gross charges for the consumer home equity loans.

As with the first quarter, charge-offs from the liquidating portfolios were taken against the special reserves established in the fourth quarter of 2007.

As a result, we now have reserves of $9.1 million and $23.8 million against the respective June 30 portfolio amounts, or $32.9 million in total reserves against $373 million in total balances.

Turning now to OneWebster, we've posted slides, as Jim noted, outlining the benefits we expect by quarter and by year.

In summary, this program was very successful.

We also anticipate there will be additional benefits once we conclude on the over 100 study ideas that are now being worked on, as well as the continuous improvement in team efforts.

There are also growth opportunities that we have not highlighted here that will show benefits in 2009 and 2010.

This initiative has positively changed the culture here at Webster.

We now have a much stronger focus on teamwork than ever before.

Turning now to second-quarter results, net interest income totaled $125.7 million in the quarter, an increase of $0.8 million from the first quarter, as average earning assets grew $112 million from the first quarter and the net interest margin was relatively stable.

Our securities portfolio totaled $2.9 billion in comparison with $2.8 billion and $2.4 billion from a year ago.

The yield in the portfolio was 5.43% compared to 5.75% in the first-quarter and 5.78% in the second quarter.

Noninterest income includes the impact of the previously discussed write-downs of certain investment securities, while noninterest income in the first quarter included a $709,000 loss in 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.

Our deposit service fees totaled $29.9 million, up from $28.4 million in the first quarter and $28.8 million in the year-ago period.

Our loan-related fees were $7.9 million, in comparison with $6.9 million in the first quarter and $7.9 million a year ago, while wealth management was up to $7.6 million in comparison with the $7 million we reported in the first quarter and flat to the $7.6 million we reported a year ago.

Other noninterest income was $0.6 million for the quarter in comparison with $1.8 million in the first quarter and $2 million a year ago.

Our revenues from mortgage banking activities were only $100,000 for the quarter compared to $700,000 in the first quarter and $0.4 million in the second quarter of last year.

The reduced income in mortgage banking activities over the prior period reflects the closure of national wholesale mortgage lending in the fourth quarter of 2007.

Net gains from securities sales in the quarter were $126,000, flat to the first quarter, and reduced from $503,000 recorded a year ago.

Our total noninterest expenses were $137.7 million in the second quarter, in comparison to $116.1 million for the first quarter and $128.9 million in the second quarter.

Our second quarter of '08 results included a total of $21 million of items specific to the quarter.

That's inclusive of $8.5 million of goodwill impairment charges and $12.5 million of other costs consisting of $7.7 million of previously disclosed amounts relating to OneWebster earnings optimization, another $1.6 million in severance and other expenses related to early retirement and other executive changes, and $3.2 million of other charges.

Let's look forward now to the third quarter.

It's clear the NIM have shown the effects of increased nonperforming asset levels that ramped up in the second quarter, and in addition, we would expect deposit pricing pressures will increase as many competitors have and continue to aggressively priced CDs for liquidity purposes.

So, accordingly, we will expect pressure on the NIM in the third quarter, but we still anticipate maintaining and seeing some slight improvement in the NIM in the third quarter.

Provision for a quote in today's release, we believe it's very prudent to be building reserves and covering charge-offs, given current economic uncertainties, so therefore, you could expect that provision levels would be at least similar to levels in Q3 as well.

Otherwise, we would anticipate our core operating results would continue to show improvement in the third quarter, particularly in light of the OneWebster results that we believe will begin to show in the third quarter.

At this point, I will now turn it back over to Jim for some concluding remarks.

Thanks, Gerry.

We've been hard at work over these past three highly unusual months for the banking industry as we continue to execute our strategic plan and take aggressive and timely action to manage effectively through this economic cycle.

We raised capital for the long-term benefit of our customers, our shareholders and their employees.

We announced the results of our OneWebster earnings optimization program that will make Webster more efficient while also improving our ability to deliver top-quality customer service.

We announced important organizational changes as we look to our future as New England's bank.

Outside of the non-accruing loan increase and the special charges, our operating performance is on the upswing, and I hope that is not lost in the moment.

Webster's second-quarter operating results reflect the positive results from our narrowed focus on doing well what we do best.

The OneWebster initiative will have a meaningful positive impact on our future operating results.

We know that today's challenging economic environment will one day give way to calmer times, and we remain confident that our narrowed focus on core franchise activities will lead us to success as a regional commercial bank, helping individuals, families and businesses across New England achieve their financial goals.

Thank you for being with us today.

We will now be pleased to respond to your questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions).

Andrea Jao, Lehman Brothers.

Earlier during the call, you mentioned you were in the process of getting updated collateral values for your liquidating portfolio.

I was wondering how closely you've looked at collateral values in the continuing portfolio, and if you could give us an update.

Sure.

This is John Ciulla, the Chief Credit Risk Officer.

At the end of -- in the fourth quarter of '07, we did a complete valuation on the consumer and residential portfolios, both continuing and liquidating, using Case-Schiller.

We are in the process of updating that across the portfolio at the present time, and we expect those analytics to be back to us within the next two weeks, by the end of July.

In the interim, however, Andrea, we have been, as part of our line management process in reducing unused line commitments in the home equity portfolio, both in the continuing and in the liquidating, based on a risk-based approach, have looked at updating valuations using ABM models for those lines that we've deemed to be higher-risk lines.

So to date, in between the fourth quarter of '07 and our current update on the whole portfolio, we updated about 2000 properties representing what we identified as the higher-risk lines as part of our line management and line reduction activity.

Will you be able to share some of those details with us in a couple of weeks when you're done?

Yes.

Perfect, thank you.

Mark Fitzgibbon, Sandler O'Neill.

First, Gerry, just to clarify, you said I think you expect NIM pressure in the third quarter, but you still expect it to improve?

Yes.

Mark, specifically, you have to take into account the fact that we issued the convertible preferred, so you would see, naturally, some improvement, in terms of that funding and show up through the NIM.

So the way I look at it is we also believe that the NIM was really suppressed, given the high level of nonperforming assets we added in.

Accordingly, you can see the trends that we've got in terms of our cost of deposits or cost of borrowings.

So, given all those different factors, I think we feel comfortable saying that we think it will be stable and actually begin to show some improvement.

Okay.

Then secondly, the nonperforming and delinquency trends in the liquidating portfolio look pretty good this quarter.

Do you think we've seen the high water mark for non-performers in that liquidating portfolio, or the two liquidating portfolios?

This is John Ciulla again.

Obviously, we are hopeful.

We don't think that necessarily a month-over-month or quarter-over-quarter in this environment makes a trend, but we are obviously optimistic that the performance is stabilized.

Just with respect to the continuing portfolio as well, we are seeing strong metrics.

We are outperforming other industry home equity lenders, we think, because of underwriting relatively conservative underwriting programs as well as, Jim mentioned earlier, the geography, where we are located.

We are hopeful that the behavioral patterns of the borrowers -- that we've seen sort of early spike and weeded out some of the weaker borrowers, and that we hope that the trend continues to stabilize over time.

(multiple speakers)

Then also John, could share with us what the utilization lines -- utilization rates rather are on the in-footprint home equity portfolio?

(technical difficulty) those rising, falling or stable?

Yes, they are stable; they are actually stable in both.

Our utilization rates are a little higher in the liquidating portfolio, as you would expect, but with respect to period-over-period timing in both continuing and liquidating, we are seeing stability in utilization rates.

Thank you.

Let me just comment that those utilization rates probably are a little less than 50% in those portfolios.

Mark, I just want to say that sure the stabilization is encouraging, but the way that we are reviewing the current environment is there is credit deterioration pretty much, at least nationally speaking, across all asset classes.

We don't want to suggest that we think it's going to be any different here.

Until we see the difference as some kind of sustainable trend, we wouldn't want to be projecting that will occur, much as we hope for it.

Ken Zerbe, Morgan Stanley.

You made a comment on your dividends, both on the call ole and in your press release, that you plan to balance the desire to maintain your current dividend against your capital needs.

Now, given the fact that you've just basically reaffirmed your dividend and you just raised capital, I was a little confused by that statement.

Are you trying to indicate anything, such that you may need to raise additional capital, or what did you mean by that?

No, we are trying to be absolutely neutral, in terms of our intentions to pay the dividend, without predicting that we would absolutely continue to dividend in future periods.

So, we will base the desire to pay the dividend -- we will balance that against the capital needs for the Company.

No, we are not in any way suggesting that we had a need to raise additional capital.

Okay.

Then the other question I had, on the OneWebster initiative, I know you've gone into a lot of detail there.

I'm just still plugging the numbers into my model, but I'm still not quite getting to that 60% by year end.

I mean, even if you take 17% of the run rate which you expect to get in 2008, apply that to this quarter, so your expenses go down by, say, $7 million or so, you are still looking sort of in the low 60s but not at 60%.

I guess I would have thought maybe NIM would help that out a little bit by year end, but it doesn't seem like NIM is going to be a big benefit here.

What else are we missing?

How are you getting to that 60%?

No, I think you've got to take -- It's Gerry.

I think you've got to take into account that, with the assets that we just put on, you will have a higher earning asset base with -- and again, we are being cautious in terms of our views on the NIM, just given the uncertainty in the market and the impact obviously that we saw this quarter as it relates to some nonperforming assets and the impact that had to the NIM.

So while we think that the trajectory would be that there's improvement, we are obviously being cautious in the commentary that we are providing today.

We also believe that you see a very good trend as it relates to other fee income, and you've got to take that into account when you factor in the 60%.

Okay, great.

All right, thank you very much.

Collyn Gilbert, Stifel Nicolaus.

Just a couple of housekeeping items -- what should we be using for the diluted share count for the third quarter?

Terry is actually -- Collyn, what I'm going to do is ask him to send to you and to everyone else the absolute number that we are using.

Okay.

Then, what about on the tax rate?

You know, I think, in terms of the tax rate, we will give you some guidance on that as well.

I will be consistent in the individual calls I know that we've got lined up to provide some commentary on that.

All right.

Then in terms of you all taking the impairment on the Freddie and Fannie preferred this quarter, can -- you said it was a $15 million impairment that you took, or was the $15 million the overall exposure that you have?

Collyn, we have $10 million in Fannie I believe and $5 million in Freddie preferred stock.

They were deals, part of the issuance that both organizations issued in the fourth quarter of 2007.

The impairment was just below, I believe, $1 million when you looked at the mark as of June 30.

We believe, just given the subsequent events since that point in time, that there will be some other-than-temporary impairment in those securities, and therefore made the management judgment to recognize that.

So they are carried at fair value, given the mark as of June 30, and we will continue to monitor that.

Obviously, there's been a lot of volatility in the value of those particular stocks.

Given the uncertainty over the last couple of weeks, you would see market values up and down in those.

But our view was, as of the reporting period, it was appropriate to go back and reflect those at the carrying value, meaning -- or have the carrying value be reflective of fair value at that date.

Collyn, this is Jim.

I just want to say you raise a very interesting point and I think it's important that everybody look at their banking coverage, bank by bank, to really understand what the individual bank is doing in terms of its accounting.

It's important to note that we did take the impairment against Freddie and Fannie preferred, and we did take the impairment against the BBB Capital Trust securities that were pooled as well, for all of them, where you may find that there are significant differences among filers.

Yes, absolutely, especially on the Fannie and Freddie side, which was why I asked the question, because it was interesting because the reporting period of June 30, it wasn't a huge event, although I guess it depends on the issuance because I think there were -- if you guys had a 4Q '07 issue and I think some other banks had an earlier issue where the impairment wasn't quite as great.

So anyway, that's kind of why I asked the question.

Collyn, if I could, let me come back.

You know, we've, for planning purposes and I had said that we would send this out separately, but for the third quarter, I would use 60.3 million shares, and for a tax rate, we would estimate 30%.

Okay.

Then one final thing, Gerry, and I apologize if you said it when you were talking about the OneWebster initiative -- did you give guidance as to a normalized run rate, quarterly run rate, on the expenses?

No, I did not.

Can you?

I think, in terms of -- you'll continue to see some improvement in the third and the fourth quarter, when you sanitize our results for the charges that we've taken here.

I think, Collyn, candidly, the one area where we know that we are going to see some increase in expenses is the fact that we are working out a much more sizable nonperforming asset portfolio.

Therefore, that if there's an area that I would tell you why I put some caution to wanting to say that you will see improvement is because we believe it's really important right now to build out the balance of our credit-risk management capabilities, really work the portfolio hard.

So I think John and I and Jim are off the mindset that that is our top priority from a risk perspective.

I would expect that, to the extent that may cost some dollars in the short term, that is money very, very well spent.

I got you.

Okay, that's helpful.

Thank you.

James Abbott, FBR Capital Markets.

A couple of quick questions on the CDO portfolio -- I was wondering if you could just give us a sense of how many issues there are in the CDO portfolios in total?

James, I just want to ask, in terms of specifics, why that's an issue for you?

I'm just curious as to how diversified it was.

I've talked to several companies, and some have a small number of issues within the CDO portfolio; others have a thousand or more.

No, it's fairly diverse.

I don't think we are going to talk in the thousands, but I will give you a number in a second here; let me just dig that out.

Okay.

Then on a related note, how many of those are deferring and defaulted?

And if you don't have them right now, maybe that's something that you could get back to us on.

Yes, I want to be clear.

We don't have defaults.

No defaults.

No.

This is a question of, if you look at the accounting, which is outlined under EITF 9920, it's pretty clear that, if there's any type of expected change in the cash flows, it raises the specter of doubt around your ability to continue to hold these at the carrying value as to whether or not you should be writing them down.

So obviously we've elected to take the fair value charges accordingly.

You know, we've done it where we've seen specifically that there were deferrals in the pools, and we've done it where, when we've looked at cash coverage on pools that we felt that basically anything within the BBBs that we owned -- so there's a more likely than not concern that gets raised.

Okay, which I applaud, by the way.

Actually, James, this is Jim.

I just want to say that the significant majority of the impairment was against pooled securities that have no deferral, just to be clear.

So all pooled BBB capital securities have been impaired, whether they are deferring or not.

None of them are in default.

I think what we would encourage you to do is apply the same standard to your universe as we are applying to ourselves.

James, just to clarify, we've got several dozen issues within those CDOs.

Specifically, there's between 10 and 12 I believe in the BBB category.

So you've got several dozen issues, and each issue is pooled.

Okay, right.

Okay, that's why I was curious.

So 10 to 12 total issues within --

(multiple speakers) the BBB and several dozen overall.

Okay, and each issue has 20 or 30 issues within it?

(inaudible) it depends.

Whatever (multiple speakers)

Right, each of these securities is different.

Okay.

Does the face value of the BBBs change at all from the prior quarter?

In other words, it shows $87 million of BBBs in the prior quarter as amortized costs, and I assume there was no [OTTI] in the prior quarter and then now it's showing $49 million.

Is that --?

That's reflective of the write-down.

So there was no purchase or sale other than the write-down?

There's been no purchase of BBBs for several years.

I believe you would have to date back into the '02 through possibly maybe early '07 time frame for the last time that we purchased anything in the pooled BBBs.

Okay, so let me make sure that I understand this then.

I apologize for trying to do the analysis at the same time as the conference call; we just didn't have a lot of time.

The BBBs were impaired at about a 56% rate then, is that about right, or about a 45% haircut then, approximately?

If I'm doing that math right.

I would say you are in the relative range.

Okay.

Then looking up through the other tranches, the AAAs are sitting at about a 78% and the AAs are at 88%.

Can you give us some color behind the disconnect on that?

I'm not a bond specialist, so maybe some help on that.

No, I would say that all of the securities, in terms of valuation, have been looked at.

I think, to the extent that you look at what tranche that you're in, your coverage ratios are significantly higher.

Therefore, in terms of the question of whether there's someone in there that could potentially defer or not, doesn't become as great a risk as it does obviously as you move down through the various tranches to look at the BBBs or even the capital notes.

You know, one of the reference points that we've made is we also wrote down the income notes, which are the unrated securities, to fair value.

So when you look at the components, we've basically taken anything BBB or anything in the income note categories and written them down to fair value.

It's also important to note that, when we look at fair value, we go out for indications of value from a number of firms that are the specialists in the field, and we take all of those into account in determining fair value.

Okay, so the AAAs might have more exposure to some banks that are greater at risk or lower capital levels or whatever, that we want to use, but the AAs may have less exposure?

Is that the gist of that?

I think you would have to look at -- I think, again, you have to look at pool by pool.

And I think that's -- you know, this is much more complex, I think to your point.

I know there's not an easy way to do this.

You've got to look at it by pool, and each of these securities is valued, again, independently by three firms.

You know, we get indications of value based on their views of the market.

You know, in terms -- obviously, we also get the cash flow modeling on each of these to ensure that we've got appropriate coverage.

Okay, I appreciate it.

I apologize for all of (multiple speakers).

No problem.

Obviously, we are happy to take calls post the earnings call.

I did have one other quick question on the C&I loans that you mentioned, the publisher and the diversified manufacturer.

You have your C&I portfolio broken out in past presentations.

Where did those fall?

Were they small business, middle market, asset-based, or equipment financing?

One was the middle market and one must asset-based.

Okay.

And any of those national, or were they more in-footprint?

The asset-based, which as you know is a regional and national business for us, actually has operations in our footprint.

The publisher is in our footprint.

Matthew Kelley, Sterne Agee.

Yes, just a follow-up question on the investment portfolio and the CDOs and the trust-preferreds.

For each of the buckets from AAA on down, the fair values that are presented in the table here, are those driven by quotes from the three broker dealers in each category, or is it a cash flow modeling?

Which factor drove the process in terms of the final value that you guys are carrying these at?

The final value is a by-security or by-pool view of market values -- or indications of value from three different firms.

The cash flow modeling is to ensure that we also have the support to believe that there's no issues with the ability to recognize value in these securities, i.e.

not to impair them.

So I mean, when you put your AAA -- your $50 million in AAA out for bid, it came back saying they would purchase those for $0.80 on the dollar.

It came back indicating value.

I want to be clear.

We send this out for indications of value for each of those.

But is that where they actually trade?

You know, in terms of -- I will be -- in terms of trading or non-trading of securities, the liquidity in the marketplace, basically for all financial assets, the ability to easily trade securities at this point in time, it depends on the class.

Something is obviously readily quotable, you go look at assets like these, they don't fall into that level 1 category.

They are much more of a level 2, where there's more subjective factors that are brought into play.

But I mean are the three dealers saying to you this is where we think these pieces would actually trade?

Or are they saying to you this is where we think there is value from a cash-flow basis, which is essentially the same type analysis you guys can do on your own without getting a quote?

Of course that's what they do, Matt.

I think it's important to note, they do their own cash-flow analyses in terms of how they get to these indications of value.

They've got to use that; that's part of the view that they do.

But there's still a disconnect between that cash-flow analysis that you guys are doing or they are providing for you versus where these pieces are actually trading.

I mean, AAAs are trading lower than $0.80 on the dollar.

Yes, we agree with you.

(multiple speakers)

No question.

So at what point would the auditors make that switch to force valuation at those levels versus the cash flow?

Or could that happen?

You know, let's be clear.

We are one of the institutions that remains committed to hold this stuff in available-for-sale and recognize the fact that market values are depressed for these securities and therefore are taking up tangible capital.

So as opposed to avoiding the fluctuations in these, we believe it's appropriate, as we've classified them, to hold them as available-for-sale and continue to deal with the fact that there's going to be some volatility in terms of people's views on depressed values here.

So our view is, one way or another, whether there's truly impairment and it's recognized as other-than-temporarily, or whether there's temporary impairment due to market, we are very open.

Obviously, I think you could stack up our transparency of disclosure with anyone.

Our view is that we are holding capital against these one way or another.

Still, even with that, the ratios that we reported today, I think we are just trying to provide as much granularity to you and to others to evaluate in terms of where we are on a value basis.

Matt, this is Jim.

I will be way out over my skis on this, but I think your question about the accountants -- first, they are likely now more focused on the lower-rated tranches, and they generally would be saying that they would go with the market quote unless the filer can demonstrate that cash flows are strong enough that there is no need to impair.

They are more focused on the BBBs right now because the amount of coverage is probably closer to 1-to-1 than it is on any of the higher-rated tranches.

Okay, so for the BBB pieces, those are quotes where those would actually trade?

No, we are saying that what we have -- these are indications of interest which may or may not (multiple speakers)

(multiple speakers) where they ultimately would trade.

Okay.

The income notes -- I mean that's the lowest piece of the stack here.

It's just surprising to see those carried at 83% of amortized costs when the BBBS above those are now written down to 55% of amortized cost.

Right, but you need to look behind that and see what those income notes were purchased at, as to whether they were purchased at par or at a discount.

So you know, I think Terry can give you some color on that as it relates to -- as we produce additional information about this, which sounds like it would be helpful.

We'll add a little bit of that granularity.

Andrea Jao, Lehman Brothers.

Just broader type of questions on the balance sheet -- securities increased this quarter.

Should we expect more stability or continued growth in the securities portfolio in coming quarters?

Andrea, it's Gerry.

You should expect that we will not add to the portfolio and that you would see paydowns in the third and fourth quarters of this year.

It's not our current intent to add to the portfolio.

What (inaudible) cash flows out of the portfolio?

Yes, in terms of the proceeds, one thing to recognize, the proceeds from the issuance, some piece of that was responsible for the increase in the securities portfolio.

That was primarily in a combination of some secured ARM products and also some additions to our muni portfolio.

Okay.

Average deposits decreased this quarter.

I recognize you are running down broker deposits, but how much more would you want to rely on borrowed funds to support good loan growth?

What's the impact of that on your interest sensitivity?

Yes, in terms of our plans for borrowings, we are also, as I have commented, planning to reduce our reliance on borrowings as much as possible.

Obviously, you know, the liquidity is a key concern for everyone in the industry, so there's no absolutes to what I'm going to stay here, but we are of the mindset that as we continue to get cash flows in from loans and investments to emphasize paying down some of the short-term borrowings that we've got.

Okay.

I assume if deposits in total ramp-up, you will also pay down (multiple speakers)?

Absolutely.

You know, I think the focus -- and I just want to take on Jim's comment earlier.

Our focus is on direct lending, organic deposit growth.

We believe that diversified sources that we have between commercial, municipal, retail and HSA really are a key differentiator, and we just plan to continue to emphasize the transaction accounts across the broad spectrum of all of the lines of business that we have.

You know, that's slow going, but we believe it's incredibly critical for us as an organization when we look and think about our cost of funds.

That's been something that clearly we knew was one of the other big changes we needed to (technical difficulty) the commercial, you know, from thrift to commercial bank transition.

I think, with the cash management products and services that we have, we can effectively do that in commercial and municipal.

Our retail folks are very, very focused on building out transaction accounts.

Great.

Last but not least, what's your interest rate sensitivity at the moment?

Neutral.

Perfect.

Thank you so much.

Thank you, Andrea.

Thank you.

There are no further questions.

I'd like to hand the floor back over to management for any closing comments.

Thank you all for being with us today.

Good day.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.