Webster Financial Corp (WBS) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation's 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 third quarter 2008 investor call-in webcast.

Joining me today are Jerry Plush, our Chief Financial Officer and Chief Risk Officer; John Ciulla, our Chief Credit Risk Officer; and Terry Mangan, Investor Relations.

I will provide some overview and context for third quarter results and Jerry will provide specifics on our financial performance.

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

We are living in interesting times, to be sure, and that is reflected in our results for the quarter.

While we reported a Q3 loss of $0.42 per fully diluted share after securities impairments of $0.55 and $0.04 of other charges, core operating results were $0.17 per share, including loan loss provisions of $0.61 per share as indicated in the EPS reconciliation in the earnings release.

The difference to the consensus estimate of $0.22 per share was attributable to the $5 million provision to the liquidating home equity portfolio.

In today's extraordinary operating environment, it's easy to lose sight of progress in operating performance that might be celebrated in a different time.

Let me call attention to some of our progress in Q3 as compared to Q2.

We reported higher net interest margin than last quarter, higher net interest income, higher fee-based revenues, and seriously lower operating expenses as our cost containment and efficiency efforts under the One Webster initiative begin to take hold.

When the storm subsides and we acknowledge that it has not, and it could take awhile, the true quality of our improving operating earnings will shine through and that will be a bright day for Webster.

One of the strong points for Webster is that our primary market of southern New England is holding up reasonably well to this point in the down leg of this economic cycle.

In Connecticut and Massachusetts, for example, job loss has been below the national average.

Real estate values did not generally escalate to the extent seen elsewhere in the country and new home construction also lagged -- a former negative becoming a current positive for real estate values.

A recent Case-Shiller valuation update suggests that property value declines in our footprint remain low relative to other geographies.

The economic outlook, while not robust, is generally for slow growth.

Economists we respect believe that while the regional economy is in, or on the verge of, recession, economic growth is likely by the second half of 2009.

We say in some of our ads that we're from here.

And right now, southern New England is a good place to be from.

The banks in our markets are generally strong, so we don't have quite the degree of heightened anxiety over the safety of local banks that other areas of the country have experienced.

Still, we're seeing very aggressive pricing of deposits as the biggest players look to attract deposit funding even at relatively high cost as an alternative to the very high priced wholesale funding in the severely stressed capital markets.

We're defending our deposit base and will continue to do so.

We believe that the higher FDIC deposit insurance to $250,000 on all deposit accounts and unlimited insurance on non-interest bearing deposits should help to broadly allay fears, if not inspire confidence, as regards banks in general.

And that may positively influence deposit pricing and stability as we move forward.

Still, the bigger bank's liquidity hunt will continue to pressure the net interest margin until wholesale rates recede.

I'm going to focus my remarks this morning on Webster's strong capital position, our decision to pay the regularly quarterly cash dividend to $0.30 a share and our perspective on the Treasury's TARP program.

Let's start with capital.

You've heard us talk incessantly in recent quarters about our strong capital position.

For example, our estimated Tier 1 capital ratio of 8.65% at September 30 well exceeds the peer group median ratio from 6/30 and is well in excess of our high internal standards.

Our estimated total capital to risk weighted assets ratio is 13.1% -- also well above the peer group June 30 median ratio.

Our tangible capital ratio on September 30 is 6.34%.

Again, well above regulatory requirements and above our internal standard of 6%, though down from 6.79% at June 30.

$96 million worth, or 37 basis points of the 45 basis point decline, was attributable to FAS 115 or other than temporary impairment marks against the carrying value of our preferred securities and capital notes or to losses on the sale of those securities.

Excluding Fannie Mae or Freddie preferreds, which have a ready market, the carrying value of those securities, including preferreds, pooled or single issuer trust-preferreds and capital notes, is now only 52% of their PAR value, and that includes over $76 million PAR value of AAA and AA securities.

$11 million in remaining capital notes have been written down to about 40% of cost.

The point is that we don't expect that these marks will continue at the hyperrate experienced in the last two quarters, especially when considering the potentially positive effect of Treasury's capital infusion program on the ability of many of the capital notes issuers to meet their payment obligations.

Clearly, Webster's opportunistic capital raise in June has put us in a strong position to weather the current financial and economic storm.

And we are entirely confident that our capital levels and the strength of our underlying operating results are more than sufficient to see us through to the opportunities for growth which await on the other side of the downturn.

Our continuing strong capital position and our improving underlying operating results give us the flexibility to continue our cash dividend at $0.30 a share this quarter.

We indicated last quarter that we would balance the desire to pay dividends against our capital needs and operating performance in the quarters ahead.

And while we need to reassess each quarter going forward, the advisability of paying that rate, our board is pleased to announce the full dividend for this quarter.

Year-to-date, the dividend is more than covered by our operating earnings.

Our ability to cover the dividend with future operating earnings will be the key determinant of the dividend payout in the quarters ahead.

Over the next couple of weeks, we'll be considering whether or not to participate in the Treasury TARP program, under which we are eligible to apply through our primary regulator for preferred capital in an amount equal to between 1% and 3% of our risk-weighed assets.

That would amount to a range of about $135 million to $400 million for us.

Let me be clear, we've made no decision to participate.

With over $1 billion of tangible equity and continued strong regulatory capital ratios and operating in a fairly sound region of the country, we do not see a need for additional capital.

But when the rest of the world, beginning with the Big 9, is lining up for that remarkably low-cost capital, and we imagine ourselves in a hotly competitive world competing without it, we must think both defensively and opportunistically about the benefits of participation.

If we do participate, we'll honor the Treasury's objective to try to put the funds into the market in the form of additional credit availability to our customers and communities.

Before I turn it over to Jerry, I want to make a couple of observations.

I believe that Webster may well be the most transparent reporter of financial information in its peer group and that is not a coincidence.

We're proud of it and we've worked hard to attain that distinction.

We've always said we believe in full, timely, and transparent disclosure and we've proven that to be the case in these tumultuous times.

Consider the granularity of our loan portfolio reporting, in detail, by asset category, C&I, commercial real estate, equipment finance, asset-based lending, mortgage portfolio, consumer loan portfolio, the liquidating portfolio, and even the granularity in reporting in the securities portfolio.

You simply can't get more granular information than we provide to you.

Frankly, I sometimes wonder whether our style of reporting, particularly in times of stress, might actually be hurting our valuation.

We plan to continue to report in just that way because openness is a core principle with us.

You will hear from Jerry this morning that loans grew in several categories during the quarter, even though originations were down in most cases.

Originations are down because underwriting standards are tighter, pricing is higher, and credit quality generally has deteriorated to some degree.

We're more focused on knowing everything about our existing relationships than in courting new ones right now.

The fact that balances are up reflects changing customer behaviors in a difficult time, including defensive draws by businesses as well as consumers and sharply reduced prepayment activities.

You will hear about an increase in non-accrual assets in delinquencies.

In the continuing portfolio, res/dev was the biggest reason, accounting for about 85% of the net increase in non-accrual assets and for 48% of all commercial non-accrual assets, even though it represents over 3.5% of the $6 billion portfolio.

Reflecting the dearth of demand for new housing, 35% of res/dev loans are now non-accrual.

Since a small portfolio can skew results for the whole portfolio, which if you look closely may actually be performing quite well, we decided to break out the res/dev loans in the tables at the end of the press release.

Most of the res/dev loans are well-secured loans we made to builders we know well -- all of whom we are working with in hopes of completing and marketing their product.

While non-accrual assets outside of res/dev held their ground in the quarter, delinquencies rose by $35 million to $102 million or about 28 basis points across their continuing portfolios.

About half of the increase came from the [resi] and consumer portfolios which overall are performing pretty well.

The continuing migration influenced our decision to increase the available reserves in the quarter to absorb potential future loan losses.

By reserving $9.5 million more than we charged off, we boosted our loan loss coverage ratio by 6 basis points to 1.36%.

We also stepped up to the liquidating portfolios, attacking the national construction lending portfolio with a $10.6 million provision and writing off Florida, Arizona, and every loan less than 75% complete and then reserving on a case-by-case basis against the few loans that remain.

With regard to the liquidating home equity portfolio, we added $5 million in provision, recognizing that the default rate has exceeded our original projections and pay-downs have been at a slower rate than expected.

Even though losses given default have been less than we estimated, the overall performance, including the likelihood that losses will exceed our original expectations for 2008, compel us to add additional reserves.

This action brings Q3 reserve levels to 7.5% of loans in that portfolio.

We're not suggesting by our action that we'll need to provide $5 million every quarter, but we will provide reserves in future quarters as needed.

Now I will turn it over to Jerry for his comments on Q3 financial results.

Thank you.

Good morning, everyone.

I'm going to cover several items first, an overview of our loan composition and growth.

And we'll talk through the investment portfolio and the other than temporary impairment charges that have been taken this quarter.

My remarks will also cover deposits, borrowings and then asset quality.

I will provide some commentary on the third quarter and in closing, some brief perspective on the fourth quarter.

Let's start first with loans and growth.

Commercial loans, consisting of C&I and CRE loans, totaled $6 billion and grew by 11% combined from a year ago.

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

Total loan portfolio growth was 4% compared to a year ago, offset somewhat by a planned reduction of 3% in residential loans.

It's important to note that we're in the process of evaluating the securitization of part of our residential loan portfolio in the fourth quarter for approximately $500 million, and assuming we complete the process before quarter ends, it will further reduce our total loans and increase securities by the end of the year.

The C&I portion of the commercial portfolio totaled $3.7 billion at September 30 and that grew $39.7 million from June 30, primarily in asset-based lending.

The entire C&I portfolio yielded 5.24% in the quarter compared to 5.52% in the second quarter.

Equipment finance outstandings remained flat at $1 billion in comparison with June 30.

This portfolio continues to stay very granular.

No single credit represents 1% of the portfolio and the average deal size is less than $100,000.

Asset-based lending outstandings were $868 million at September 30, in comparison to the $842 million at June 30.

The current asset coverage is as follows -- approximately 92% of the outstandings are secured by receivables and inventory.

The remaining 8% consists of equipment at 7%, real estate at 1%.

The commercial real estate portfolio totaled $2.4 billion at September 30 and that grew $51 million from June 30.

These loans are primarily institutional quality real estate with 5 to 10 year loan terms.

They represent stabilized properties with good debt service coverage and LTDs under 75% -- generally well under 75% in many cases.

The charge-offs in the CRE portfolio were $0 for the quarter and $378,000 year-to-date.

This portfolio yielded 5.47% in the quarter, compared to 5.61% in the second quarter of 2008.

The consumer loan portfolio totaled $3.2 billion and that consists of $2.9 billion in the continuing portfolio and $296 million in the liquidating home equity portfolio.

We had a modest increase in the continuing portfolio from June 30 and this is all direct to consumer, retail-based in market growth and lines now comprise 57% of total outstandings.

Branch originations were $181 million in Q3 in comparison with $344 million in the second quarter.

The total consumer portfolio yielded 5.24% in the quarter compared to 5.23% in the second quarter.

We would expect a decline in yields in the fourth quarter, as HELOCs given on the HELOC portfolio, given the recent prime rate reduction of 50 basis points in October.

Turning now to residential loans, they remain relatively flat at $3.6 billion.

The portfolio represented 28% of total loans at September 30, similar to June 30.

As you know, we have now for some time de-emphasized residential loan growth.

The residential portfolio yielded 5.6% in the quarter compared to 5.67% in the second quarter.

Let's turn now to the investment portfolio.

Webster recorded OTTI writedowns of investments to fair value for certain investment securities classified as available for sale of $33.5 million during the quarter.

Please note that we have again provided some granular disclosure regarding the composition of our investment portfolio, consistent with our SEC filings and our investor presentations again today and the supplemental schedules posted on our website.

These schedules include significant detail about the corporate bonds and notes and the equity securities holdings, particularly in light of the other than temporary impairment charges we've taken in Q3 and Q2.

It's important to note that all the securities where we have taken impairment charges are classified as available for sale.

You will also see in the supplemental slides the unrealized loss position across the specific investments in the portfolio at both September 30 and June 30.

The underlying positions are marked down through other comprehensive income adjustment to equity.

As were any securities classified as AFS, where market values are lower than costs, the difference is already reflected in tangible capital.

So similar to the second quarter, we have done a significant amount of analysis on the available for sale securities portfolio and we concluded that we should impair certain BBB rated and unrated pooled trust preferred securities.

In addition, we also recognize OTTI charges of $8 million, related to the $9 million we have in Fannie Mae and Freddie Mac preferred stock.

We also recognize $2 million in losses on the sales of $5 million in Fannie and Freddie preferred stock during the quarter.

We also elected to recognize loss positions related to four common stock positions and recognize $1 million in impairment charges on certain lots within the prescribed 12 month consecutive months at a loss timeline we have been following, and that's consistent with prior quarters.

At our press release today, we noted that the OTTI related to Fannie and Freddie preferred was treated as a capital loss, and that limited the tax benefit to the company.

Subsequently on October 3rd of '08, the Emergency Economic Stabilization Act was enacted, which includes a provision permitting banks to recognize OTTI charges related to Fannie and Freddie preferred stock as an ordinary loss, which increases the tax benefits of the company.

Had the Company recognized the OTTIs in ordinary loss for the quarters ended September 30, 2008, the OTTI recorded would have been $3.5 million or $0.07 per diluted share.

The Company will recognize this additional tax benefit in the fourth quarter of '08 for a total of approximately $3.8 million or $0.07 per diluted share.

Next, let's provide an update on deposits.

Our loan-to-deposit ratio increased to 109% at September 30 in comparison with 106% for June and 99% a year ago.

This ratio has increased throughout 2008 as our intent was to reduce our reliance on CDs due to higher costs, focus on growing core accounts, while also minimizing the use of brokered CDs as a funding source.

We have been diligently working to improve this ratio as evidenced in the recent past.

But as we reduced our utilization of broker deposits, a rise in the loan to deposit ratio would be expected as a result.

Broker's CDs totaled $897 million as of September 30, 2006, and they have declined since then including over $107 million from a year ago and now total $180 million as of September 30.

We previously stated our intent was to continue to evaluate further reductions over the next quarter to two quarters as over $100 million in brokered CDs mature.

Given the low level we currently hold, and in order to continue to utilize multiple sources of liquidity, we intend to at least maintain the current levels in the fourth quarter.

We continue to make concerted efforts to change our deposit mix and lower the cost of deposits, with increased emphasis on growing checking relationships across our retail, commercial, and municipal lines of business.

Our core deposits to total deposit ratio dropped slightly to 60% from the 62% we reported at the end of the second quarter, but remains above the 59% in the year-ago period.

Additionally, our cost to total deposits declined to 1.9%, and that's compared to 2.01% for the second quarter and 2.96% a year ago.

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

We opened a new office in North Kingston, Rhode Island during the month of August of this year.

We already have garnered $7.1 million in deposits.

We've just finalized negotiations and plan on opening a downtown Boston, Massachusetts branch office in the spring of 2009.

This will be located in the old Boston Stock Exchange Building and our intent for this office, and for any new offices that we would open in the future, is simple.

It's no longer primarily a retailer-consumer reliant strategy as it has been in the past, but a total bank strategy.

We will only open locations where we're confident we can have broad company-wide opportunities for profitable growth.

We believe that this Boston location is an excellent example of the strategy in a quality market.

HSA Bank, which provides us with low cost stable deposits, had $550 million in health savings deposits at September 30, in comparison with $504 million at June 30 and an increase of $131 million or 34% from a year ago.

We also have $61 million in linked brokerage accounts compared to $55 million a year ago.

HSA's average cost of deposits for this fast-growing category was 2.09%, comparable to the 2.10% we reported in Q2.

This contributes to lowering our overall cost of interest bearing deposits.

HSA continues to provide us opportunity to attract core deposits nationally and allows us to tap into a deposit market that's got significant growth potential.

As of the end of September, we had 220,000 accounts in comparison with 214,000 accounts at June 30 and 181,000 a year ago.

The average deposit balance per account is now over $2,380 in comparison with $2,163 a year ago.

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

Borrowings increased by $353 million from June 30 and that is primarily an increase in the use of other borrowings.

We continue to rely on borrowings to offset declines and retail deposits and brokered CDs.

Our cost of borrowings declined to 3.33% for the third quarter, down from 3.38% for the second quarter and 5.4% a year ago.

Note again that our focus is on organic deposit growth.

The primary focus is on operating and checking account growth, and this will help reduce usage of borrowings in a future period.

Our intent is also to grow only in the lines of business that continue to contribute to deposit growth in the future.

Turning now to asset quality, the provision for credit losses was $45.5 million for the third quarter in comparison with $25 million for the second quarter and $15.25 million from a year ago.

The increased provision for credit losses in the third quarter is a result of increased levels of non-performing assets, higher delinquent loan levels, and management's decision to expedite the resolution of the liquidating NCLC portfolio.

We also recognize the need to augment the reserve for the liquidating home equity portfolio and have looked this portfolio using both internally and externally-generated roll rate analytics to determine a forward review on projected chargeoffs over the next several quarters.

Our total allowance for credit losses to total loans was 1.54% at September 30th in comparison with 1.52% in June and 1.32% a year ago.

The allowance for the continuing portfolio only was 1.36%, and that's up from 1.30% in the second quarter.

Net chargeoffs in the third quarter of '08 total $20.5 million for the continuing portfolio and $20.8 million for the liquidating portfolio, of which $14 million is related to NCLC and $6.8 million is related to home equity.

That compares to second quarter net chargeoffs of $11.2 million for the continuing portfolio and $9.2 million for the liquidating portfolio.

Our total non-performing assets increased to $250 million at September 30, in comparison with $224 million at June 30.

The MPAs [in] the continuing portfolio were $219 million at September 30 in comparison to $182 million at June 30.

Six input res/dev credit relationships aggregating approximately $27 million represented the majority of the increase.

Significant credits included in the $27 million of new res/dev non-accruals were a $9.3 million project located in western Connecticut and $9.3 million exposure related to three developments located across Massachusetts and a $3.7 million project also in Connecticut.

The MPAs were 1.94% of loans plus other real estate owned, and the net chargeoff rate was 1.29% annualized in Q3.

Credit metrics and the $2.9 million continuing home equity portfolio show an uptick as the 30 plus delinquency rate is at 1.58% at September 30, up from the 1.35% at June 30, while non-accruals were at 0.8% in comparison to 0.72% at June 30.

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

We had $337 million in outstandings in these portfolios at September 30, compared to $[373] million at June 30 and $424 million when the liquidating portfolios were established at year end 2007.

The total of the $337 consists of $25 million in remaining construction loans, $16 million in permanent loans, and $296 million in home equities.

The reduction in the quarter reflects the expedited resolution approach that management took regarding the NCLC portfolio during the quarter.

Chargeoffs from the continuing portfolios continue to be taken against the reserves established, which were increased by $15.5 million in the quarter to offset chargeoffs.

Remaining reserves are $5.8 million and $22 million against the respective September 30 portfolio amounts, which are $25 million in construction and process and $296 million in home equity respectively.

Let's turn now to third quarter results.

As Jim indicated, net interest income totaled $129.2 million in the quarter, and that's an increase of $3.5 million from the second quarter, as average earning assets grew by $98.7 million from the second quarter, and the net interest margin grew 6 basis points to 3.32%, and that's up from 3.26% at the end of the second quarter.

Our securities portfolio totaled $3 million at September 30th, comparable to second quarter, and above the $2.5 million a year ago.

The yield and securities portfolio for the quarter was 5.54%, in comparison to 5.43% in the second quarter and 5.79% for the third quarter of last year.

Our non-interest income was $15.7 million in the quarter, compared to a loss of $5.7 million in the second quarter.

The third quarter includes $33.5 million in OTTI charges and $2 million in losses on sales of Fannie and Freddie preferred stock.

While the second quarter included $54.9 million in previously discussed writedowns on certain investment securities, while non-interest income for the third quarter of last year didn't reflect any such charges.

Deposit service fees totaled $31.7 million, and that's up from $29.9 million in the second quarter and $29.9 million in the year-ago period.

Our loan-related fees were $7.2 million in comparison with $7.9 million in the second quarter and $7.7 million a year ago, while wealth management was $7.1 million, and that's in comparison with $7.6 million in the second quarter and $7.1 million a year ago.

Our other non-interest income was $2.7 million for the quarter, and that compares with $854,000 in the second quarter and $1.7 million a year ago.

Other income in the third quarter benefited from an increase in direct investment income.

Our revenues from mortgage banking activities were only $50,000 for the quarter, compared to $100,000 for the second quarter and $1.8 million for the third quarter of last year.

The reduced income in mortgage banking over the last year continues to reflect the closure of the national wholesale mortgage lending activities in the fourth quarter of 2007.

Net losses from the sales of securities in the quarter were $2.1 million, and that's inclusive of the $2 million in losses on the sale of $5 million in Fannie and Freddie preferred stock, compared to $104,000 in net gains for the second quarter and $482,000 recorded a year ago.

Our total non-interest expenses were $117.5 million in the quarter, compared to $137.7 million in the second quarter and $113.5 million in the third quarter of '07.

Our core expenses, exclusive of $2.5 million in charges, were down to $115 million for the quarter compared to $120 million for the second quarter and $113 million a year ago.

Total non-interest expense for the third quarter included $2.5 million in charges related to One Webster optimization and an additional subsidiary goodwill impairment in the quarter, and over $21 million in severance and other charges were recorded in Q2.

And marketing expense was down to $2.5 million in the third quarter, in comparison with $4.9 million in the second and $4.1 million in the third quarter of '07.

Our foreclosure expenses were $3.5 million in the quarter, and that is up from the $1.6 million we recorded in the second quarter and only $231,000 from a year ago.

Other expense amounted to $14.8 million in comparison with $16.6 million in the second and $15.1 million a year ago period.

At this point, let me provide a little perspective on the fourth quarter.

The NIM has seen some positive benefits so far this quarter from LIBOR based loan pricing.

However, this is showing signs of normalizing and is well from lower overnight borrowing costs.

However, we believe there will be even more pressure this quarter from competitive deposit pricing, in addition to some lower yields and assets that are tied to prime and higher average non-performing asset levels.

Deposit pricing pressures have increased as many competitors have and continue to aggressively price CDs for liquidity purposes.

In addition, Q4 will see the impact of higher average non-performing asset levels and that is assuming we do not expedite the resolution of a significant number of credits.

My comment here references the indications we gave in our presentations at the Lehman conference, but will continue to explore alternatives regarding our liquidating home equity portfolio, our res/dev portfolio, and certain investment securities in the coming months.

Overall, we would expect the NIM would be flat.

Provision, we continue to believe it's prudent to maintain reserves and to cover the chargeoffs, given economic uncertainty and its effect on the MPA and delinquency levels.

We would expect a core provisioning -- and let's exclude what we did for NCLC in Q3 in the term of core provisioning.

We would think our core provisioning would be comparable, if not slightly higher to the levels we posted in Q3.

On the expense side, we will continue to implement One Webster initiatives and see corresponding benefits that will occur in the fourth quarter and in future quarters.

We could see marketing expense up slightly in Q4 because of our marketing and deposits right now.

We also believe that we'll continue to see some rising foreclosure and workout costs that we have previously discussed.

As we indicated in today's release, we're very, very focused on cost containment and we'll absolutely need to do so to offset expected rising costs in FDIC insurance premiums and other expenses in the future periods.

At this point, I'm now going to turn it back over to Jim and he'll have some concluding remarks.

Thanks, Jerry.

Webster's third quarter operating results reflect the positive results from our narrowed focus on direct to customer core franchise activities.

The One Webster initiative will have a meaningful positive impact on our future operating results and we believe can drive the efficiency ratio well below 60%.

We know that today's challenging economic environment will one day give way to calmer times.

Webster is a sound capable regional commercial bank with a strong diversified balance sheet and a capital structure that gives us maximum flexibility to address any issues which may arise as we go forward.

By helping our customers achieve their financial goals, we have every confidence that we will achieve our vision to be New England's bank while increasing shareholder value.

Thanks for being with us today.

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

(OPERATOR INSTRUCTIONS) Our first question is coming from Ken Zerbe with Morgan Stanley.

Please state your question.

Morning, Ken.

When you guys originally set up the liquidating portfolio, I was under the impression that you set up the reserve to absorb the losses, so then we could all just push this over to the side and focus on the continuing portfolio.

It just doesn't seem like that's worked out to be the case, given the additional provision that we saw this quarter.

Is there any reason to believe that we won't just see several more quarters of small or ongoing reserve build or additional provision expenses liquidating portfolio from here?

Ken, it's Jerry.

I would say that if you go back and take a listen again through the comments that I made, we've really looked at using a roll rate model -- and this will be specific to the liquidating home equity portfolio -- that put us in a range -- again, an external view, an internal view, of modeling.

Where the reserve sits at this point in time is a good forecast we think of the difference between those two, as we can see and what we will refer to as -- over the next several quarters and those several quarters will be over the next 12 months.

I think that just given where the portfolio has performed, we -- and I think this echoes with Jim's comments is that, yes, we could suddenly see that we would add to that over quarters and we would take that into account as we do our provisioning.

Understood.

Okay.

The second question I had was have the recent Treasury actions had any noticeable impact on the value of your CEO portfolio during October?

Ken, again, it's Jerry.

I think it's a great question.

I think it's too early to tell just given the -- once we see the folks that get the capital injections, I absolutely would have believed that we would see some improvement or some stability certain in this -- in decline.

But I think we have to take a wait and see through November 14 to understand specifically who has actually received the capital and then evaluate those particular issuers within these pools.

All right.

Great.

Thank you very much.

Ken, I would like to just make a comment on the first question, which is you know that we set that liquidating portfolio up about a year ago And we did at the time make the assessment as to what we thought that the losses might be and did our best to reserve against them based on what we knew at the time.

I think we all realized the markets have deteriorated very significantly since then and as a result, it's appropriate to take a look.

And in the construction portfolio, you can see that we have tried to resolve the issues there, and in the home equity portfolio, with the best information that we have to put up an incremental reserve in this quarter.

I was clear in my remarks to say we're not suggesting by our action that we'll need to provide $5 million every quarter, but we will provide reserves in future quarters as needed against that portfolio.

Okay, great.

Thanks.

And, Ken, this is John Ciulla to pile on.

The original assessment with respect to the provision in the portfolio that was done, obviously coming into a benign credit environment around on the beginning of what is obviously the worst credit environment was done based on certain just assumptions of default frequency, loss given default and attrition in the portfolio, assuming certain paydowns.

Now we have the benefit of nine to 12 months of actual performance in the portfolio, and relative performance to the core hasn't changed as much as the fact that the economic environment has accelerated loss and also blocked the acceleration of the attrition in the portfolio.

So, now as Jerry said, where we have the benefit of being able to look at 12 months of actual activity in the various segments in the liquidating portfolio and try to use that roll rate analysis to have a more accurate forward-looking loss forecast.

Thank you.

Our next question is coming from Andrea Jao with Barclays Capital.

Please state your question.

Good morning.

Good morning.

I, for one, appreciate your detailed disclosure.

Thank you.

One area I do need help thinking about is -- given your outlook on the economy weakness until the first half of '09 and you already talked about increasing nonperformance in fourth quarter, how should we think about the different asset classes in the continuing portfolio, given your specific outlook?

Should we expect this to hang in?

Should we expect modest deterioration?

What would it take to see a more substantial ramp-up in the credit metrics in the continuing portfolio?

Andrea, it's Jerry.

You are going to hear probably again from all three of us on this one, but, let me take a crack at the first reaction.

I think as you think about the non-performing portfolio, it's clear that the majority or the increase is around the res/dev credits.

And I think as many would expect, the housing market's been hit the hardest and we're seeing the impact of that flow through to that very specific piece.

And again, it's a $217 million portfolio that we're seeing a significant amount of stress, particularly in that portfolio.

I would say that kind of tells you what we see line of sight, we think and we're -- John can talk a little bit about the proactive manner in which he and all the lines of business leaders are on the phones and constantly talking through on a weekly basis to get the most updated information in each of these projects.

So, I think we're assessing those appropriately as we go and also, forecasting ahead.

As it relates to the past dues, I guess my comment would be that there is a little bit of an anomaly here that from a reporting standpoint, you see a rather dramatic increase of $40 million.

$13.7 million of that in the commercial real estate side actually cured subsequent to quarter end and it was really just a documentation issue in terms of just not being able to get that completed by quarter end.

So I can tell you as we sit here today, you can take a $13.7 million reduction off of those past due numbers that you see there.

I'm going to turn it over to John, because he can probably give you some perspective on the balance of the past dues and the continuing portfolio.

Andrea, we're at an interesting inflection point because we have seen the residential development portfolio obviously evidence the non-performers.

I'll tell you, when those loans go substandard non-accrual --- and I think we take a pretty aggressive approach at our risk rating -- we either have or are in the update -- in the process of updating valuations.

And you will note that we only had $160,000 in charges related to that portfolio.

So, thus far, with respect to updated valuations, the $75 million in non-accrual residential development loans have retained value from an updated appraisal standpoint.

With respect to the other asset categories, it's interesting.

We see signs of negative risk rating migration trends, but we have yet to see significant delinquency or non-accruals in the traditional C&I and investment commercial real estate -- material change in business and professional banking.

As Jerry said, our laser focus right now is working with the business line leaders to have early identification of problems and try and avoid, obviously, migrations to non-accrual and resolve issues before they manifest into non-accrual or loss.

But obviously, we look very carefully at what the impact of a sustained recession could have on the other asset classes that have not yet evidenced significant stress into the portfolio -- into the credit metrics.

And, Andrea, I want to add that I think when you look at the continuing portfolio and the past dues, and again, take into account that $[137] million in CRE, really what you see in the jump in the quarters is clearly in the residential book and I would ask John to make an observation on that as well.

I think with respect to delinquencies and non-accrual increases in the continuing residential and consumer portfolio, there is not a magic bullet story there.

It is -- I think the stress generally in our portfolio and in the economy that is driving those increases, albeit -- even after the quarter over quarter increases our loss and non-accrual levels in our continuing res/dev and consumer portfolios remain very, very low relative to the other national players and peers in the mortgage and home equity business.

We feel pretty good about where we are, given the point in the cycle which we're operating.

Just a quick comment from me.

When people look at how well some of our asset categories are performing and I will cite investment commercial real estate and asset-based lending and equipment finance, for example, there are two ways they can react to it.

One is to say, well, not much has happened there, that means it's going to get worse and the other way is to say, they must really know what they're doing.

I think in the end, it boils down to a large degree to the people who are managing those categories and we take our [Mitch Weiss] from Center Capital who has done a great job over the years -- that is the equipment finance group -- and Warren Mino in our asset based lending group and Bill Wrang in our commercial real estate group -- and we have no doubt that they will perform extremely well in this environment.

Very helpful.

Thank you.

Our next question is coming from Damon DelMonte with Keefe, Bruyette & Woods.

Please state your question.

Hi, good morning.

Morning.

Could you go over again what the growth in home equity loans were this quarter were?

On the continuing home equity in the funded loans, we were up $50 million on a base of $2.9 billion.

Okay.

And with respect to the outer market, are those lines still open or have you limited or capped those lines?

Damon, the lines -- where appropriate, the lines have been limited.

When John was referring to the, I apologize whether it was Jim or John, but the [prepay] speeds in that portfolio are naturally going to be down given the fact that half that portfolio's a line portfolio and accordingly, as every time you see these prime drops, you are seeing that payment pressure on each of those borrowers is reducing as a result.

So in terms of prepaid speeds slowing up, plus all the economic pressure, you would expect that.

We're not seeing large declines in utilization from where they were.

But we certainly have gone through and proactively taken steps to cap where appropriate.

Okay.

I'll give you some more granularity on the line management program.

We have -- we were, I think, an early adopter, and that was validated by outside counsel and discussions with regulators.

We have a pretty robust line management program we apply not only to the liquidating portfolio but to our in-market home equity portfolio open to buy a home equity exposure.

It's been fully vetted and it's typical.

It's based on payment default, based on material change and financial performance which is a combination of a reduction in FICO score to below a certain threshold level and also a collateral valuation where we identify on a risk-based approach those lines that either have large availability or we identify as being significantly higher risk.

And we move to freeze those lines through a systemic line management program.

And to date, we've frozen over $150 million in unused home equity lines across liquidating and [continuing].

Okay.

Thank you.

And Jerry, with respect to your comment about the provision for next quarter, you said the core provision similar to this quarter.

That would be basically $35 million?

I think you have got to look at $30 million to $35 million as a range.

Okay.

And lastly, just to clarify your position on the TARP.

You don't feel you need to tap it for capital purposes, but if you see others doing it and you think you may be put at a competitive disadvantage, then you would enter the program?

Correct.

And I think it's not just what other people do.

We have to look at it on its merits and the fact is that it's extremely low-cost capital.

When you take that combined with the fact that there is a competitive consideration as well, we'll take a good, hard look at it.

Okay, thank you very much.

Damon, if I could, I want to add -- in terms of all the perspective on TARP.

Every day brings new information and I think that the application process was just announced yesterday as an example.

We're learning a lot more as the days go on, and we certainly will see in conversations with the regulators how that whole process works through.

We'll keep everyone posted in terms of what decisions we make there.

Okay, thank you very much.

Our next question is coming from James Abbott with Friedman, Billings, Ramsey.

Please state your question.

Hi, good morning.

Morning.

I wonder if you could touch base on the commercial net chargeoffs.

Obviously, they went a little bit higher this quarter than what it had in the prior quarters as far as run rate goes.

Large credits within that portfolio that may have charged off and if you can give detail on the industry type?

With respect to the continuing [back] commercial chargeoffs in the quarter, really driven by two larger credits.

One, a $6.8 million charge on a $15 million to $20 million asset-based relationship Pennsylvania manufacturer and I would say sort of a niche manufacturer where we saw a precipitous decline in inventory values, some problems with receivables, some poor management judgment, and so that was the first large one.

The second one was a newspaper publisher where we took a partial charge of roughly $4 million -- a regional newspaper publisher, and you are well aware of the struggles in that industry and the paradigm shift in the advertising environment.

Yes, and I think -- James, you have to look at those as one-offs specifically.

We can't say when you look at those two credits in particular, that there's similar credits within our portfolio.

Is that fair?

Absolutely.

I think they are -- we continue to watch the newspaper publishing space, or the advertising space, but certainly those two charges are not systemic problems in the portfolio.

On the niche manufacturer, what were they manufacturing in retail goods or what?

I would rather not comment more specifically.

Okay.

And of your pool, your watch list on a C&I credits, how has that trended over the last quarter and then if you can give us a sense as to what industry types might be deteriorating within the watch list or that you're more concerned about today than you were three months ago?

It's interesting -- we certainly are seeing negative migration through the watched special mention categories.

I would say that we are not seeing specific industry stress as you can imagine.

All facets -- there are some good performers throughout all industries and others based on market presence and market share and management and capitalization and leverage are struggling in this environment.

Obviously fuel costs coming down could be a benefit to us but across transportation, retail, business services, manufacturing, we have seen an impact of the economic slowdown on all industries.

So I don't think there is a specific industry right now that we're hyperconcerned about.

We're concerned about all of them.

And the -- or the migration, can you give us a sense of the magnitude?

Was it -- because you had some pretty stable 30 to 89-day past due and non-performing asset levels in the C&I portfolio, but in fact the non-accrual loans were actually down.

Could you give us a sense as far as those criticizing classifieds, how they moved and the magnitude there?

Let me get back to you offline on that.

Okay.

We have got some good data.

Okay.

Sounds good and then my --

As I said, let me reiterate.

Broadly there is an increase in the categories.

It's material, it's not a spike over quarterly migrations in the past in this cycle, but we can talk about specific asset classes and I don't have that information at my fingertips.

Okay, then my last, this is probably just a housekeeping question, but the non-interest expense going forward, if we take the $117 million and back out the severance and goodwill charts and stuff like that, getting maybe $115 million run rate and then you talked about higher marketing expenses and so forth.

Maybe $115 million to $116 million range is a run rate that would be --?

I would expect, James, that there would be some other offsets.

I just want to make sure that as everyone looks at the details and saw that obviously, we had a significantly lower marketing number this quarter in comparison to the other periods.

We talked about that this was a little more of an anomaly and you will see some uptick in that specific category.

There are certainly some efforts underway to do additional containment in other line items.

We do believe that marketing spend in that $3 million plus range is very, very important.

Remember, for us as an institution, we have turned off -- when you think about the structural changes away from brokers, away from wholesale.

Everything's direct, it's all organic.

That requires marketing expense.

For us as an organization, I just don't want anyone coming off the call or to not be thinking that marketing will stay that low going forward.

That was very specific to just that line-item.

Generally speaking, I think our thoughts are to be trying to look at a quarter that would be a comparable number and that is the target for us.

Okay.

Thank you.

I would like to add one thing which is, as much as you're trying to find a run rate on the expenses, there is some seasonality there, particularly when you get into the first quarter and you have some higher compensation and benefits expenses.

So while we want to be reassuring as to what the run rate is, there is lumpiness in there.

I am sure you realize that.

Understood, thank you.

Our next question is coming from Collyn Gilbert with Stifel Nicolaus.

Please state your question.

Thank you.

Morning, gentlemen.

Morning.

A question on the commercial real estate side, and where your exposure lies.

Could you give us a little bit of color as to what exposure you may have in the retail arena?

Whether it would be mortgages on selling shopping centers or that type of thing?

Our -- we have $1.47 billion investment commercial real estate -- traditional investment commercial real estate portfolio.

I may need to get back to you on the specific percentages, but that is spread across office, multiuse, industrial and retail.

Retail is a relatively small category.

We obviously have sublimits and we are tracking all of our property types in that portfolio very closely.

As Jim mentioned, we have a very strong team there.

We have yet to see any migration to non-accrual and have actually not had any losses during this fiscal year in that book, although we are obviously well aware that we need to keep an eye on vacancy rates, on lease-up rates, and on rental rates and the impact on future valuations.

I would say that our retail-related investment CRE portfolio has not shown signs of weakness over and above any of the other property types to date.

Okay, and then could you remind us what the average loan size is within that portfolio?

Yes, we obviously, and we mentioned this on prior calls, take great pride in keeping a very granular loan portfolio.

In investment commercial real estate and asset-based lending are two areas where we have the majority of our higher loan exposures, those over $15 million.

I would estimate our investment commercial real estate portfolio has an average exposure rate in the $10 million to $12.5 million range.

Okay, great.

That was it.

Thank you.

Hey, I think one other comment though that is very important to make, Collyn, to think about with that portfolio is geographic dispersion.

There is not a concentration in one geography and, again, a compliment to Joe Savage, Bill Wrang and their team that they really sought to have a broader diversification than just our New England footprint.

And I think as we've disclosed previously, we have grown a fairly nice book that is in the Philadelphia/South Jersey market that we consider to have a very high quality team there as well and I think that that is also additional protection in that we just don't have the concentration within just the footprint.

There is a bit of it that's also in the mid-Atlantic market.

Okay, actually then let me just fall onto that.

What is the extension of that geographic concentration?

How far south and how far west and how far north do you go?

I think again the primary concentrations are just that geographic area.

You probably look within a 50-mile radius of the Philadelphia area and the vast majority of the balance is in footprint.

So you're looking at New York through Massachusetts.

Okay.

Okay, great.

Thank you.

And just to follow up, I got more detailed information.

The average loan size in investment CRE is slightly below $10 million.

I had said $10 million to $12 million.

So just below $10 million.

Our next question is coming from Matt Kelley with Sterne Agee.

Please state your question.

I was wondering if you might be able to provide the PAR value of the three pooled A rated names or downgraded to BBBs so we can do apples-to-apples comparisons on fair value versus Par.

I believe that -- I think you can see that, Matt, in our investment portfolio disclosure.

On the website.

On the website.

I see what it is as of September 30.

What I'm trying to figure out is what was the PAR value that we would have seen at June 30?

The PAR values weren't provided for June 30.

Okay, all right.

Same.

Same as September 30.

Okay.

So during the second quarter, you guys wrote down your amortized costs and your BBBs from, call it $87 million to $49 million, and at the end of June, you were carrying those at 57% of the amortized cost and now your BBBs are carried at 74% of your current amortized cost.

Isn't it susceptible to additional OTTIs, as that value continues to drift lower on the BBBs in particular?

It's Jerry, Matt.

I think echoing an earlier comment, there is no question that as you look at the pressure that has been placed on these institutions, particularly a lot of them that have elected to defer the underlying issuers, we think that the TARP -- I think as I had commented to Ken Zerbe's question earlier was I think there is really some positive that can come from a number of these institutions receiving the capital injections.

As we see this quarter, we'll do the same cash flow modeling updates we have done.

We'll stay on top of rating agency changes and we'll continue to mostly monitor who is getting the capital injections and take that all into account as we go towards the end of the fourth quarter.

Let me --

Let me make this comment.

I know you're looking at amortized costs.

I would think you would look at it relative to the PAR value.

We bought some of those at a discount.

Why wouldn't you look at it relative to PAR value?

That is what I wanted to figure out in terms of using that, the 2Q PAR value versus the 3Q and figure out what those carrying values are.

Looks like your fair value, which is produced from your cash flow analysis, results in a higher fair value relative to your amortized cost compared to the second quarter.

That was my only concern.

That may have to do with relative evaluation of securities that got downgraded from A.

There's a lot of factors that go in there.

I would encourage you -- it's one thing to look at it relative to amortized cost.

What matters I think for the broader analysis is what is it relative to the PAR value.

It's not 75%, it's barely over 50%.

Understood, but there is still a pretty big disconnect between those types evaluations and where we're actually seeing observable events and time will tell which is correct, but those things are trading at $0.10, $0.15 on the dollar versus carrying values from a cash flow analysis that are significantly higher.

Believe me, we want you to be able to track it and we'll try to make sure you have the information you need.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question is coming from Andrea Jao with -- looks like we lost Andrea.

Do we have any further questions at this time?

We do have a question coming from Andrea Jao with Barclays Capital.

Hello again.

Hello, Andrea.

Deposit service charges posted a nice increase over last quarter.

Could you talk about the drivers and the sustainability of that going forward?

Did you say deposit based charges?

Yes.

I think it was $31 million, $31.7 million this quarter.

Right, Andrea, part of that is the deposit mix change as you see more away from CDs and into transaction-based accounts, you will naturally see an uptick in that line.

Also, again that's why we're so focused on building out those transaction accounts, the core operating accounts.

I also think that just in terms of dollars we're also looking at spot balances.

When you compare 9/30 versus June 30, what would probably be very, very helpful and I think seasonality plays a little bit of a role as it relates to what happens in transaction accounts as a point in time at September 30.

If you go back and look at average balances, you will see those are much higher.

We would expect to see some of that build back in the fourth quarter.

So, I would say our current forecasting would tell you that deposit fees would continue to stay in and around the range that you saw here in the third quarter.

Great.

And then a hypothetical question about -- if ever you do participate in TARP and you do receive a government capital infusion, given the weaker environment, do you think it would be relatively easy or possible to lever up on the capital, i.e.

raise both deposits and loans to put that capital to work -- and if not, at least in the near-term, what happens?

Do you leave the capital in cash?

Well, Andrea, as I said in my remarks, I know that the purpose of the availability of this capital is to encourage institutions to make more credit available in their communities, sort of to unlock this freeze and also to provide some stability in the capital account.

When we look it over, our view is that we would like to deploy the capital to our customers and into the community, but we also recognize that in the downleg of the cycle that there is not going be as much origination volume as you otherwise might see.

We look at it as over a period of the life of the capital, which might be say three to five years before it would be replaced by other capital or just retired, that we think there will be the opportunity to deploy it.

And in the meantime, it has -- even if it were just invested short-term, the cost of the capital is so inexpensive that the drag will be minimal.

So when you look at what is the potential dilution on the one hand versus the value of having the capital on the other and being in a competitive position against the biggest players in the market, net-net, we think it's worth taking a good hard look at it.

So even if it sat there, it wouldn't have a very significant cost and it might be well worth the effort.

Great.

Thank you so much.

This does conclude our Q&A session.

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

Thank you very much for being with us today.

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

You may disconnect your lines at this time and we thank you for your participation.