Webster Financial Corp (WBS) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation's fourth-quarter 2008 earnings result conference call.

(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 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 fourth-quarter 2008 investor call and 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.

We have got a lot of ground to cover, say 35 minutes or so, so let me get right to it.

Normally I would lead with more strategic comments, but I think the focus today should be primarily on asset quality and capital.

I'm sure you will agree.

So I will discuss the strategy in my closing remarks.

We have taken strong steps to address credit quality and securities marks and other than temporary impairment.

And this call enables us to explain our actions and to highlight our strong capital structure and our asset quality.

I will take them in that order.

Our regulatory capital is way beyond the requirement for well capitalized, and our tangible capital is higher than it was a year ago.

In terms of regulatory ratios, bear in mind that Webster was in the 80th percentile or better at September 30 for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios compared to the Federal Reserve's peer group of Webster and 65 other bank holding companies with assets of $10 billion or more.

At 12/31 the leverage ratio at 9.6% is about double the requirement for well capitalized.

Tier 1 risk-based at 12.7% is more than double the requirement, and total risk-based at 15.2% is 50% higher than required, and all are significantly higher than our internal targets of 8%, 10% and 12% respectively.

Two ratings agencies noted as much in the recent reviews.

S&P just affirmed our ratings despite the negative outlook noting that our nonperforming asset levels are no worse than many of our regional peer banks.

I think of that as faint praise.

And noting as well that we raise $625 million of preferred equity capital via our 225 million convertible preferred and our $400 million capital purchase program allotment.

S&P's qualifier is that we have a high-level of preferred in the capital base and lower tangible common equity levels.

It is clear, and we get it that gone are the days when an efficient capital structure was a plus.

DBRS commented that Webster's investment-grade ratings are underpinned by our solid Connecticut-based franchise that provides stable and low-cost funding, solid and augmented capital and adequate liquidity, and my edit here, not to mention scarcity value.

Webster has always had a keen focus on tangible capital as a primary capital ratio.

Our ratio was 7.7% at year-end, up 189 basis points from a year ago after the Q4 charges.

This important ratio continues to compare favorably with the peer group median.

We estimate that our adjusted tangible common equity ratio as measured by Moody's was 6.07% a year-end, and our adjusted tangible equity ratio as measured by S&P was 6.65%, in both cases up significantly from a year ago.

These rating agency estimates underscore emphatically the depth and quality of Webster's capital structure.

We recognize that the playing field has changed and the tangible common equity is the ratio garnering the most attention in today's risk fraud environment.

While we want to be clear that we are comfortable with our tangible capital levels, we have a variety of leverage we can pull to build those levels, including tangible common equity.

I want to highlight some of them here.

Reducing the dividend is one such option.

We announced this morning a reduction of the quarterly cash dividend to $0.01 per common share to reflect the board's desire to preserve capital given this extended period of unprecedented economic uncertainty.

This move could preserve approximately $60 million in common equity in 2009, or said differently, it could add 33 basis points to tangible common equity by year-end and another 8 basis points per quarter thereafter at least until such time as the board deems it prudent to revisit the dividend level.

The next phase of OneWebster we announced this morning should add about 4 basis points to the tangible common equity each year primarily through lowered expenses.

We know that we have to operate more efficiently in this environment.

We can build TCE by using all the cash flows, including maturities from our securities portfolio to pay off borrowings, not an option we would be anxious to pursue but an available lever nonetheless that could produce 14 basis points of TCE growth in 2009.

Our efficient capital structure presents another option, as we would not be opposed to considering ways to move capital down the structure to tangible common should the opportunity arise to do so under favorable terms.

While we view that as moving existing tangible capital from one bucket to another, when you do the math we gain about 55 basis points in TCE per $100 million of convertible preferred stock that might convert to common.

Less assured but another possible contributor to TCE is the potential recovery of securities marks should the market turn and liquidity improved.

And speaking of securities, it should be noted that the investment portfolio contained $2.7 billion of AAA agency mortgage-backed securities at year end.

This portfolio creates very little capital risk, yet reduced our TCE ratio by almost 80 basis points.

In total, the leverage I have just described, excluding recovery of securities marks, could add over 100 basis points to TCE by the end of 2009 without any need to consider outside capital.

Our strong capital position gives us added cushion if there is further economic deterioration in 2009, as well as help protect the Company should there continue to be losses or a need to reduce our deferred tax asset.

So no, we do not feel pressured to raise common equity, even though we understand it is important to keep all of our options open in this environment.

To wrap up my comments on capital, we're pleased to let you know that between November 7, which was the date of our preliminary approval to receive $400 million of capital purchase program funding, and year end Webster extended $423 million of credit under 1900 loans.

These loans consisted of $270 million of new originations and $153 million of modifications and renewals.

We have said from the outset that we would use the new capital to provide an equal amount of credit for the communities we serve.

We're pleased to be able to utilize this funding to expand credit for our regions, consumers and businesses consistent with the intent of the TARP legislation.

We also implemented during the fourth quarter a moratorium on home foreclosures for Webster mortgages and the expansion of mortgage assistance programs aimed at keeping families in their homes.

We're also working with states in which we operate to develop programs where the state provides guarantees of interest and principal on mortgages and small-business loans.

Turning now to the provision for loan losses, I have to admit that we expected a better reception than our $100 million provision received last week.

Our intention was to prudently address current and potential credit quality issues by targeting weaker loan classes and reserving significantly more than we charged off.

In our minds one of the encouraged uses of the capital purchase program is to accelerate recognition and resolution of underperforming assets and securities for that matter with the goal of cleansing the balance sheet, and we have made a lot of progress toward that goal.

Our loan coverage now exceeds 2%, up from 1.54% at the end of the third quarter.

The ratio of allowance to nonperforming loans rose to 106%.

If you dig deeper, these strong numbers look even better because we have already taken charge-offs of $135 million or about 34% against the remaining $263 million in nonperforming assets.

I encourage you to focus on this number as we believe it is differentiating and shines a strong positive light on the quality of our credit management mainly conservative and timely loss recognition.

Overall nonperforming assets rose at the slowest quarterly rate this year in Q4 at 5%.

I believe that as we neutralized the small lot of market portfolios, the relatively good performance of our end market loans will be easier to appreciate.

For example, our commercial real estate portfolio is performing very well with delinquency at 1 basis point and nonaccruals at 6 basis points at year end.

And to the extent you are concerned that this asset class will weaken in the months ahead, Webster has significant less exposure to this asset class than do our peer group banks.

Our in-footprint home equity portfolio has a combined loan to value ratio of approximately 68%, and our first mortgage portfolio has an LTV of 53%, each on an updated basis.

The point here is that not all home equity loans are problematic, and default models just cannot be generically applied to this portfolio in our view.

Our New England footprint will be a positive as regard to asset values as we move through this tough period.

It is also worth noting at this point in the cycle that we have no indirect auto loans and virtually no unsecured debt such as credit cards or personal loans.

We took serious marks in OTTI in our securities portfolio, which you know we have broken out for you in graphic detail for several quarters.

The primary asset quality focus is the trust preferred portfolio, which has a par value of $360 million and a carrying value of $93.5 million or about 26% of par value following $118 million in OTTI charges and $66 million in OCI marks we took in Q4.

But again, let's dig deeper.

The AAA and AA securities and high-grade single name issuers, which are Bank of America, JPMorgan Chase and State Street, are marks to about 42% of par value but not impaired.

All of the other trust preferreds, about $230 million in par value, now have a carrying value of $39 million or $0.17 on the dollar and have been impaired to the full marks as of year end.

Of the $44 million of those capital notes downgraded by rating agencies in Q4, two-thirds are still investment-grade.

So let's think about that $0.17.

A sizable portion of the mark can be attributed to illiquidity since in our calculation we used today's very high spreads for the remaining life of the securities.

In fact, 63% of that $230 million par value is still cash flowing.

And for the record, we value the securities 50% based on our internal model and 50% based on dealer indication prices.

The results from both methods were virtually the same in Q4, coming within $1 million overall.

If you're thinking ahead and thinking about capital, the damage these notes could do in the future is clearly limited.

And if the liquidity portion of the marks, which we believe is significant receipt, there could be a real boost to the capital account down the line.

Regarding goodwill, while the final conclusion has not been reached regarding the retail banking segment, we took a non-cash goodwill impairment charge of $189 million in Q4 that reflects primarily declines in current indicated values for our lending units.

Jerry will provide more detail in his remarks.

This non-cash charge has no effect on our liquidity and capital positions, though it had obvious effect on the size of the reported loss.

I going to turn the call over to Jerry at this point for the financial review of the quarter, and I will have a few comments on strategy at the end.

Jerry?

Thank you, Jim.

Good morning, everyone.

I will cover several items, and we will talk through a loan composition, growth in asset quality.

We will then cover the investment portfolio.

I will briefly comment on those other than temporary impairment charges that have been taken, as well as greater detail in the goodwill impairment charge.

We will talk through deposits and borrowings and also conclude with some brief perspective on the first quarter.

So let's start first with loans and growth.

Our total loans at year-end were $12.2 billion.

That represented a 2.5% decline from the prior year's ending balance.

Excluding a $468 million securitization of residential mortgage loans in the fourth quarter, our core loan growth would have been 1.3% for the year.

Commercial loans consisting of C&I and CRE totaled $5.8 billion.

They grew by 4% combined from a year ago.

Our commercial loans now comprised 48% of the total portfolio compared to 45% a year ago.

The C&I portion of the commercial portfolio totaled $3.6 billion at December 31, and that is a decline of $108 million from September 30, primarily in asset-based lending.

The entire C&I portfolio yielded about 5.22% in the quarter compared to 5.24% in the third quarter.

Our equipment finance outstandings totaled just over $1 billion at year end.

Again, this is a very direct origination business, centralized underwriting, and the portfolio continues to be very granular.

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

As in all of our commercial lines of business, we continue to underwrite diligently our customer's current financial condition and prospects.

We are focused on higher downpayments and shorter amortizations where appropriate, and we continue to proactively evaluate the industries in which we lend.

Asset-based lending outstandings were $753 million at December 31 compared to $868 million in September 30.

The $115 million decline represents roughly $40 million from prudent portfolio management and reducing about $80 million of what we deem to be higher risk commitments, and the remaining $75 million decline represents (inaudible).

The current asset coverage is as follows.

Approximately 92% of the outstandings are secured by accounts receivable and inventory, but the remaining 8% of outstandings consists of equipment at 7% and real estate at 1%.

We have managed growth in this asset class being selective in new underwritings and with aggressive problem asset management.

Let's turn now to commercial real estate.

That portfolio totaled $2.2 billion at December 31, representing $133 million decline from September 30.

Within the $2.2 billion, the investor CRE segment totaled 1.4 billion and (inaudible) $58 million from September 30.

We strategically managed growth in this segment during the second half of 2008.

We generated approximately $280 million in loan growth from the first half of the year, taking advantage of stronger structures and better pricing giving reduced capital markets competition.

The investor CRE loans are primarily institutional quality real estate with five to 10-year loan terms that are secured by stabilized properties with solid debt service coverage and LTVs generally under 75% at origination.

As we review and monitor the investor CRE portfolio in this economic environment, we are focused on what we consider to be the highest risk property types such as retail, hotel and office.

Retail, which represents approximately 17% of the investment CRE portfolio, most of what we have is more necessity retail than discretionary retail.

We have six (inaudible) in the portfolio that represents less than 5% of the investment CRE balances.

Regarding the office, which makes up approximately 30% of the portfolio, we regularly communicate on our borrowers and sponsors' ability to gauge occupancy, cash flow and lease activity.

We stress the portfolio regularly, and we utilize established outside resources to look at quarterly loss forecasting specific portfolio.

We are proactively managing maturities, and we work to identify issues early in the cycle.

At December 31 delinquencies and nonaccruals in the investor CRE portfolio were only 1 basis point and 6 basis points respectively.

(inaudible) loans totaled $162 million, and that represents a decline of $55 million from September 30.

The $55 million reduction is comprised of $30 million of resident charge-offs in the quarter, 17 million from normal payoffs and paydown activity and approximately $8 million that we transferred into OREO.

Our owner occupied CRE totaled $651 million, and that declined by $20 million from September 30.

Our owner occupied charge-offs were nominal for entry year-to-date.

Overall the CRE portfolio yielded up 5.52% in the quarter, and that is in comparison to a 5.47% in the third quarter.

Let's turn now to our consumer and home equity loan portfolio.

That totaled $3.3 billion, and it consists of $3 billion in the continuing portfolio and $284 million in the liquidating home equity portfolio.

We had a 2% increase in the continuing (inaudible) from September 30, and that reflects originations to our core retail distribution channel.

Lines now comprise 58% of the outstandings, and utilization in the continuing portfolio is 48% compared to 46% in the third quarter.

Our branch originations were $164 million in the fourth quarter compared to $181 million in the third quarter.

The total consumer portfolio yielded 4.68% in the quarter compared to 5.24% in the third quarter, and that is reflective of the primary decreases that we all saw and the fourth quarter.

You would expect some further yield decline in the first quarter from HELOCs in connection with these primary cuts.

Through private line management, we've reduced $150 million of lines over the course of the last three quarters.

As a result, there's under $79 million of open to buy exposure or 2.5% of the total portfolio that is at CLTV of greater than 80% based on updated valuations as of December of 2008.

77% of this is in the continuing portfolio, and $2.5 million is in the liquidating portfolio.

We will continually actively look for opportunities to manage this exposure further.

Our residential loan balances as of December 31 are $3.1 billion, and that is down largely as a result of (inaudible) $468 million securitization.

The resi portfolio yielded 5.51% for the quarter, and that is compared to 5.6% last quarter.

We will turn now to asset quality.

The provision for credit losses was $100 million in the fourth quarter compared to $45.5 million in the third and $45.25 million from a year ago.

As noted previously, $75 million in the quarter related to the continuing portfolios and $25 million related to the liquidating home equity portfolio.

The increase over the third-quarter provision reflects our offsetting $30 million of resident loan charge-offs, resulting from updating valuations on nonaccruing loans in that category in the quarter, higher forecasted loan charges for the liquidating home equity portfolio given the deteriorating economic conditions, and increased reserve levels for other lines of business just given the general economic deterioration.

Our total allowance for credit losses to total loans was 2.02% at December 31, and that is compared to 1.54% at September 30 and 1.58% a year ago.

Our allowance was up to 1.63% in comparison to 1.36% in the continuing portfolio.

Net charge-offs in the fourth quarter totaled $43.2 million for the continuing portfolio, which included the $30 million in res-dev related to the appraisals, and $9.7 million for the liquidating portfolio, of which $8.8 million was specific to home equity and $900,000 to national construction compared to third-quarter net charge-offs of $20.6 million in the continuing and $20.7 million in the liquidating portfolios respectively.

In the quarter past due loans and nonperforming loans grew at a reduced rate when compared to the prior quarter.

Our total nonperforming assets increased only to $263 million at December 31 compared to $250 million at September 30.

Our nonperforming loans in the continuing portfolio were impacted by the $30 million of res-dev charge-offs and were $198 million at December 31 compared to $199 million at September 30.

Nonperforming assets were 2.16% of loans plus other real estate owned, and the net charge-offs rate was 1.73% annualized in the fourth quarter.

Credit metrics in the home equity continuing portfolio do show an uptick in the 30 plus EPD delinquency rate at 1.12% at December 31 compared to 0.78% at September 30, while the nonrental was at 1% as of December 31 compared to 0.8% at September 30 and is very reflective of the economic environment.

Regarding liquidating portfolios, we have talked about these in the past, and they consist of indirect, out of market home equity and national construction loans.

We had $320 million of outstandings in these portfolios at December 31 compared to the $337 million at September 30 and the $424 million when the portfolios were established at year-end 2007.

The total of $320 million consisted of $284 million of home equities, $19 million in remaining construction loans and $17 million in permanent loans, which going forward we will incorporate into the balance of our national wholesale loans that converted to permanent prior to 12/31/07 and remain on our balance sheet in resi loans.

Total permanent loans then from national wholesale activities totaled $58 million as of 12/31/08.

I'm going to talk more on this in a minute or two.

With the $25 million additional provision in the fourth quarter for liquidating home equity, the reserve for that portfolio now stands at $38 million against the remaining $284 million in loans or at 13.5% of total outstandings.

The $19 million liquidating national construction portfolio has a $4.9 million reserve balance as of year-end.

That reserve was established based on a trial by trial review in the third quarter of 2008, and we have been realizing losses in that segment in line with those original expectations.

$10 million of our fourth-quarter provision as previously mentioned was allocated toward the $58 million of remaining permanent national wholesale construction loans on our balance sheet.

Delinquency in this segment is approximately 34%, so you can see the $10 million that we recorded in provision represents about 50% of those delinquent balances.

It is important to note these loans are secured by completed and occupied homes.

This small loan segment accounted for about half the charge-offs in the residential portfolio in 2008.

Turning now to the investment portfolio, at December 31 the investment portfolio totaled $3.8 billion, and that is an increase of $800 million over September 30.

The increase was primarily due to a securitization of the $468 million in resi loans, which provides greater liquidity and flexibility while also improving regulatory risk adjusted capital ratios.

Otherwise, there were purchases of agency ARMs and 30-year fixed-rate agency securities.

However, that is predominantly ARM securities.

We will turn now to the OTTI charge.

Jim has already discussed this in detail.

We've recorded $129.6 million in the quarter for certain investment securities, specifically around equity securities and corporate bonds and notes.

Note again, in addition to our disclosures in our SEC filings in the investor presentations, we are very consistent with those.

We again provided today a fairly granular disclosure regarding the composition of our investment portfolio and the supplemental schedules we posted online on our website.

In addition to the OTTI charges, we recognized $4.2 million in losses on the sale of those securities to realize some capital losses in 2008 to offset capital gains for tax purposes that were going to expire.

These securities losses would likely have otherwise been in addition to the OTTI charge at year-end.

Turning to the liability side of the balance sheet, our total deposits increased $52 million in the quarter to $11.9 billion, primarily driven by growth in savings and certificates of deposit, offset by slight declines in money market and demand deposit accounts.

Our core deposit to total deposit ratio dropped slightly to 59% from just over 60% at the end of the third quarter.

Additionally our cost of deposits remained relatively flat quarter-over-quarter given the slight composition shift towards higher costing CDs.

Turning now to HSA Bank, which is a consistent source of low-cost stable deposits for us, health savings deposits at December 31 totaled $531 million compared to [$550] million in deposits at September, 30 and that is an increase of $127 million or 31% from a year ago.

We also have about $53 million in linked brokerage accounts compared to about $57 million a year ago.

The brokerage amount balance is reflective of the decline in equity values in 2008.

The HSA Bank average cost of deposits was 2.03% in the fourth quarter, and that is down slightly from the 2.09% we reported in the third quarter.

As of the end of December, we had 224,000 health savings accounts, and that is compared to 220,000 at September 30 and 187,000 a year ago.

The average deposit balance per account is now $2370 compared to $2160 a year ago.

Our borrowings decreased $138 million from September 30.

The cost of borrowings declined to 2.87 for the fourth quarter from 3.33% through the third quarter, and that is reflective of the Fed rate reductions.

With our deposit first focus in 2009 with the primary focus on operating checking account acquisitions, these initiatives should continue to reduce the need for borrowings at these levels in future periods.

As we stated in previous quarters, our intent is only to grow in the lines of business that contribute to deposit growth in the future.

Regarding the goodwill impairment as we indicated, the Company has been testing its goodwill for potential impairment based on the continued public Capital Markets disruption and the company's market capitalization deterioration compared to book value.

We have done this process as well in both the second quarter and the third quarter.

We're utilizing an independent valuation firm to assist with the testing of the carrying value of goodwill, again as we have in prior quarters.

So in light of recent market and economic events, we have reviewed goodwill to determine whether there are any further impairments.

Based on the analysis to date, we have determined that there was goodwill impairment of $188.9 million related to our commercial banking, consumer finance and other business segments.

However, as Jim indicated, we have not reached the final conclusion regarding the retail banking segment.

So, as we noted, we could incur impairment charges to further reduce the carrying amount of goodwill, which then could also have an increase in the valuation allowance against our deferred tax assets.

It is important to note, however, and to reiterate that a goodwill impairment charge is non-cash in nature and does not affect the Company's liquidity, tangible equity or its well-capitalized position at all under regulatory capital ratios.

At this point we will now turn to fourth-quarter results, and we will cover net interest income first.

The margin came in at 3.2% in the fourth quarter compared to 3.32% in the third quarter.

This was driven largely by the three Fed reserve rate reductions totaling 175 basis points in the quarter, as well as interest reversals on nonaccrual loans and pool trust preferred securities.

Our average earning assets totaled $15.9 billion, and that is up from $15.8 billion last quarter.

Regarding the provision, as we previously noted, we recorded $100 million in the quarter.

The increased provision level is where we collect charge-offs based on recent appraisals or nonaccruing residential loans, higher forecasted charge-offs in the liquidating home equity portfolio in light of deteriorating economic conditions, and increased reserve levels for other lines of business given economic deterioration.

Regarding noninterest income, key changes occurred in deposit service fees, which declined by $1.7 million from last quarter, specifically due to a decline in NSF charges, while wealth and investment service revenues declined by $590,000.

And that is primarily from the decline in the value of assets under management due to adverse market conditions.

Noninterest expense has showed a significant decrease, excluding the goodwill impairment and severance charges.

The decline from last quarter represents a significant reduction specifically in compensation and benefits.

Our base comp is down $1.6 million from OneWebster initiatives.

The incentive comp line declined $5.4 million from reversals, and declines were also experienced in group benefits and in pension expense in the fourth quarter.

I will give some perspective going forward at this time.

Clearly the NIM was impacted in the fourth quarter from the previously mentioned 175 basis points worth of Fed rate reductions, and the effects of these actions will continue to be seen in the first quarter.

While competitive deposit pricing declined in the fourth quarter, we believe that competitive pressures will limit further reductions.

We will see some lower yields on assets that are tied to prime and LIBOR, and slightly higher average nonperforming asset levels could also have some impact.

As a result, we would expect the NIM to show some moderate decline in the first quarter.

Regarding fee income, we would also expect some moderate declines seen in deposit fees and wealth management fees in Q1 consistent with the actual results we saw in the quarter.

Wealth again is a function of lower dollar levels of assets under management, so again, we would expect this to be consistent that the trends we saw in the fourth quarter to be consistent here in the first quarter.

Regarding expenses, as we continue to implement OneWebster initiatives, we continue to see corresponding benefits in future quarters.

We recognize the continuous improvements essential to keep our overall expense levels in check and to offset revenue declines.

To that end, the second phase of the OneWebster initiative we've recently undertaken should show some benefits in the second quarter and beyond.

The first quarter, however, will show some increase due to seasonal taxes and benefit expenses as we have in the past.

We will work to manage our other expenses to help minimize this impact.

I will now turn it back over to Jim for some concluding remarks.

Thanks, Jerry.

I will conclude by emphasizing the shift in our business model to focus intensely on core franchise opportunities with absolute focus on providing basic financial services in market direct to our customers, the only exceptions being our direct to customer centrally controlled equipment financing, asset-based lending and commercial real estate units and our fast-growing HSA Bank.

We will succeed as a regional commercial bank, easy to understand, easy to measure and easy to compare.

We understand the trade-off we have made.

We will not be counting on out of market businesses to make up for the slower growth market where our core franchise happens to be located.

We're banking on our ability to outperform those in our market by executing on our retail and commercial banking strategies.

There is no fallback position.

We know that, and we're highly motivated by that.

We will be focusing on five areas in 2009.

Credit administration has to top the list.

We have added resources, improved MIS and reorganized the function over the past year, and we will continue our emphasis on this critically important area.

Next is completing the centralization of all support functions, an initiative we undertook with OneWebster months ago and have accelerated in the next phase announced today.

Third is launching our Boston presence as a bankwide initiative, whereby we will deliver all of our capabilities to the region.

Fourth, we're instituting a deposit -- I should say we have instituted a deposits first mentality across Webster, including changes in marketing programs and incentives to encourage Webster people to focus on gathering deposits ahead of all else.

And finally, cross-selling to existing customers using new database marketing systems and techniques to deepen customer relationships.

I will give you a single example of the success of the deposits first and cross-sell strategies.

80% of new mortgage customers are opening up ACH relationships with us, and 40% represent new to Webster checking accounts.

I think it is fair to say that hidden beneath the challenges of the day is the considerable progress we have made in advancing our business plans and making progress toward our vision to be New England's bank.

I hope that our comments today have helped to clarify our actions and highlight our strengths, and you may concur with me that Webster's valuation currently at about 40% of tangible book value is incomprehensively low.

Thank you for being with us on the call.

We will be pleased to respond to your comments and questions.

(Operator Instructions).

Ken Zerbe, Morgan Stanley.

I understand you guys did do a great job in terms of cleaning up the balance sheet.

But just looking forward, if you were to look at what you have now in terms of whether it is the remaining TruPS or certain loan portfolios, where do you think that you could potentially see additional weakness from here?

I think that sort of taken from the comments that Jim made, the A in lower rated TruPS we feel that we have isolated what is left to fair value there is, I will call it just offhand in and around the 30 to $30-someodd million left in fair value.

So when you take that, and I will reference to specific numbers in a second when I grab the supplemental investment page, I would expect that there could be some defaults or deferrals of interest payments there, and that could create some of the collateral shortfall that drives the OTTI impairments the way that we look at it, we think that the way that a number of other external dealers look at it.

So I think that the good news is in that statement, you have got relatively a limited amount of dollars there.

As I think about the mortgage-backed securities portfolio, clearly we are actually seeing subsequent to 12/31 some real uptick in the value of the fixed-rate and agency mortgage-backed securities.

So we will actually see some positive there.

I think everyone notes from our -- also though from our investor presentations, we have about $135 million worth of CMBS in the investment portfolio, and I think in the investment schedules it is combined in total mortgage-backed securities.

We have seen some real market weakness there in those.

However, at this stage, given the collateral levels, we have not seen any cash flow issues underlying any of those.

But clearly there is an expectation of default in a number of those deals that could cause that type of fair value issue to those.

We would argue a lot of it is liquidity or lack of liquidity, but we also think that we're realistic and expect that there will be CRE deterioration in 2009, and we will see some of that potentially come through in the way of those type of values.

But I think a lot of that is taken into account when you think of the values that we show.

Our real view was, and I think we have tried to clearly articulate both on the call and then also on the schedules, is to really give people a framework of what capital is at risk.

Because between the OTTI charges we have taken, so the specific write-downs we have taken, coupled with what you can see that is left and where the OCI levels are, I think you all recognize that that is all straight deductions from tangible common equity or tangible equity, whichever ratio you want to think about.

And as such, we really don't have that much left at fair value that we think is at risk.

So I think if I am responding to your question specific around the investment portfolio, that is sort of my overarching thoughts about that.

And, John, if you have any comments on the loan portfolio.

Sure.

On the loans, you know that obviously we've got the liquidating home equity portfolio.

It is down to about $284 million.

In that portfolio there is about a 40% subsegment that really is driving the worst performance.

It is about 40% of the portfolio and 38% of the portfolio, and it is driving in excess of 60% of the losses.

I think we took some aggressive steps with respect to provisioning in the quarter, which give us some good coverage as Jerry mentioned against that portfolio.

But obviously we are aggressively trying to work that portfolio down through loss mitigation and aggressive risk management.

Jerry referenced in his comments the $58 million in permanent national wholesale loans where we put up a $10 million reserve.

The good news there is those are occupied, completed homes, and we believe that we are undertaking right now a file by file review as we did on our in construction loans to make sure that we have got adequate provision there.

But that portfolio is amortizing, and again it is relatively small, but we're watching it carefully.

Residential development you will note that we took some significant charges in the fourth quarter.

There is $162 million left in that portfolio.

There is clearly still risk in the portfolio if we continue to see deterioration in home prices and lack of activity and sales activity in the market.

The good news is, is that $48 million of that 162 net balance that we're reporting are non-accruals that have already been marked down aggressively or appropriately but taken significant marks against $48 million.

And the balance then of residential development loans are much more granular than the ones that went non-accrual, and we took losses against.

So in that remaining balance, there is only four relationships greater than $5 million in exposure, and all but one of those are performing relatively well.

So I think we have got our arms around that portfolio.

We do monthly absorption reviews, but obviously as I mentioned and you asked the question, I think we still see potential to risk in that portfolio.

And then beyond that, it is the same story as we gave in the third quarter, where our C&I book both in the middle market and business and professional banking, along with investment in commercial real estate, while we're seeing stress and some negative risk migration, the portfolios are performing very, very well.

I think we are benefited by our geography and the strength of underwriting.

So we are looking at what those asset classes, which tend to lag in terms of performance in a long economic downturn, making sure we are staying ahead of it.

But thus far, the statistics show that those portfolios are holding up quite well.

Mark Fitzgibbon, Sandler O'Neill.

I was wondering if you could share with me what you're seeing in the home equity and commercial line utilization rates.

What kind of trends you have been seeing this quarter.

It is Jerry, and John will also comment.

In our comments our general view was we -- and I think probably the most important thing for everyone to know, is we monitor all open lines on a daily basis.

So each of the business units report in to both John and myself on a daily basis with their activity.

And it is monitored not only then by from a credit and overall risk perspective, it is also monitored by each and every one of the line of business directors.

So there is a real focus on understanding the trends in that portfolio.

I would have to say that specifically to consumer, we did see a little bit of an uptick.

But when you think it is 48% versus the 46%, I believe fourth quarter versus third, but what I think it really does point out is as you are underwriting new credits given that the line assignments that we're handing out may not be at the same levels that you would have seen in prior periods.

So when you look at current period vintage, you're just not going to see us, as well as most lenders, assigning out the higher levels that you would have seen on a line.

So it is a little bit misleading, particularly given that you have seen such a shift in consumer preference, and clearly that is rate driven, and also because of the open-ended nature of them to go towards lines.

So I think as it relates to home equity, I think we would say that constant daily monitoring both within the line and also from the credit risk management standpoint, really not seeing a real surge in any one category of specific vantages, and I think that overall we're comfortable with that we saw some slight uptick overall in utilization.

John, do you want to comment on commercial?

I would agree.

I think all the data we have shows that is really not a behavioral switch in commercial.

It is relatively flat period over period if you ex out the seasonality in some of the businesses.

You know, I think we mentioned on the call last time at the end of the third quarter and beginning of the fourth quarter, we did have a handful of commercial Borrowers, some specific to our asset-base business where there was sort of a liquidity preservation draw I would like to say.

But I think once government actions were announced, those liquidity draws were quickly repaid, and we have not seen cash forwarding or any type of borrower behavior that is impacting our utilization rates in the commercial asset class as well.

Okay.

And then with respect to the provision, I know it is a giant guess at this point.

But could you give us a sense for where we should be thinking about provisioning levels for the first quarter?

Yes, and I think just generally speaking, one of the things that we have consistently shown over a very demonstrated period of time is that we will obviously record provision to the extent of anything that we charge off.

So at this point in time, I would say certainly at this point in time within the cycle and at this point in time of the way just to give you a view of our thinking, we will clearly to the extent that there was $15 million or $20 million worth of charge-offs in the quarter reflect that we would want to replace those.

I think the issue for provisioning comes down to a couple of things.

One, clearly we did not see significant loan growth.

So one of the issues -- and even though we are trying to continue to be proactive and lend into the markets -- we're seeing an equal amount of contraction going on there.

So I'm not sure that we will see as much of a provisioning based on growth need in 2009, because my expectation would be that we will see a fair bit of churn and that we will still see some very, very low numbers, single digit numbers, in terms of overall growth.

Even though again, I want to emphasize, and I think this echoes Jim's comments, we're trying to proactively be there in the small business and the commercial and in the consumer markets for the customers, not only in the local footprint but serving all of our lines of business and again very much focused on those that will grow deposits.

But specifically as it relates to the way we're thinking about provisioning going forward, it is really the risk assessment given the environmental factors that we are assigning to each category.

So it is not going to be as quad or statistically driven as it may be historically because right now, as an example, we looked at lines such as small business or CRE or C&I and elected based on our judgment more of the subjective or qualitative side, that the environment is such that we needed to boost reserves in those classifications.

Yet you would not see necessarily delinquency trends that would lead you to what I will call the statistically driven or quite driven type of approach.

A long-winded way of saying I would expect us to generally speaking to be looking at a core provisioning number that you could think about that we have said in the prior quarters, the kind of number that we have put up there before.

But I would just caution that our view is capital and liquidity are what we have got to manage and make sure that clearly we showed that this quarter we wanted to step up, make sure that we felt that we were up to a much higher level in and around provision given what we assess to be risk and loss content in the portfolio.

So I would just say generally speaking I think that we will look more towards where those core provisioning levels were in prior quarters, but not necessarily -- people do need to know I think that you could see some choppiness in provisioning just based on fact-based or other evidence that comes to our attention.

Collyn Gilbert, Stifel Nicolaus.

This is kind of a follow-up I think to what Mark was asking on the provision line, and I guess, Jim, I will take it back to your initial comment in terms of perhaps being given a little bit more credit for the $100 million provision in the fourth quarter.

And I think where credit could be given, if you guys can give us visibility that that was a onetime boost in the provision or it was -- if there is clarity to be given, that we would not expect that trend to continue going forward.

You know that we can -- and maybe that is what you're sort of saying here, Jerry.

But I think that is the moving target here.

If we try to sort of assess what you have guided to in the past, it has been considerably lower than where we are today.

I think that is -- I know that is certainly my challenge.

So if (multiple speakers) you could sort of type those together a little bit.

You are spout on, and we will readily acknowledge that as we've looked through what we felt would need to be the core, we have also been trying to break out -- and again today, even with the much larger provisioning that we did, the pieces.

So if you were to sort of think again about what we did today, $30 million of that in the context of what I was saying is really a replacement of the charge-offs that we took.

We looked at an updated forecast that we have done both an internal model and an external model looking from something as simple as roll rate analyses to just say, we believe there's more loss content given the deteriorating economic conditions that will happen through those home equity lines.

So hence while there is a boost over there.

So two big components that we put up this quarter that I would think were specific actions related to evidence we found during the course of the quarter, one of which we were pretty clear in indicating to folks in the last call that everybody knew that either projects that were on interest reserve or had already shown the default, we clearly moved everything to nonaccrual, ordered the appraisals and took the charges.

So I would say just top level the 30 and the 25 respectively were specific to actions in the quarter.

Also, the $10 million that we put up around that specific segment of the resi portfolio would be, gain, an item that we said we're looking at a specific pocket of loans that are causing a lot of delinquency.

We think that, as I think I outlined today, was half the charge-offs we experienced in the resi portfolio.

So if you sort of add up those components, I think you get back to where that core provisioning number would be.

Okay.

So then to decipher through that, we could assume that then the provision would be lower in the first quarter?

Well, we sure would hope so.

I think the way that Jerry broke out in his remarks helped to clarify.

You looked at there was 35.

It was similar to what was taken in Q3, and then there was 30 with a specific purpose against commercial real estate, and there was 10 against some permanent loans, again that was specific.

There was 25 because we decided we needed a bigger number in the liquidating home equity portfolio.

If you do the math, I think you could deduce for yourself what we think the run-rate is.

Okay, that is helpful.

And then just a question on the NSF charges, you had said that they were a lot lower this quarter.

Any thoughts on why that might be?

What kind of trends are you seeing in your checking account behavior or your consumer behavior, retail behavior?

Well, one thing that we are seeing is that people are being more careful.

I think it is a sign of the times that if you can avoid overdraft fees, you want to.

People are paying more attention to their checking accounts.

They are paying more attention to their cash needs.

As a result of that, we think they are probably managing better, which is a good thing.

We also think that some of the relationship accounts that we have introduced are attracting a lot of our customers, which is also a good thing, and we hope that it will end up meaning higher balances and ultimately more valuable relationships over the long-term.

Okay, great.

And then just one final question.

What was the exact date that you guys received the TARP money?

November 21.

December 21?

No, November.

November 21.

Okay.

Perfect.

Thank you very much.

Matthew Kelley, Sterne, Agee & Leach.

I was wondering if you could just walk us through the mechanics of shifting from preferred to tangible common, how that process would work.

You have mentioned that for every $100 million that shifts, you get 55 basis points of TCE.

Just what would that process look like?

Well, in relation to trying to get way down deep into the details, right now we've put it out there as could possibly do as a means of raising common if we chose to.

I think there are various ways to approach it.

There are certain kinds of exchanges that you could undertake, but I would not want to get steeped in the detail at this point.

I would like to leave it out there as a possibility.

It is just the use of capital that is tangible today that can be pulled down the curve if we chose to do it.

It is Jerry.

I guess my reaction would be I think just in terms of the context of Jim's comments, he was trying to give everyone I think, and he did a very good job of giving a sense of, there's a lot of levers for an organization to pull to boost TCE.

Certainly there could be the potential of asset shrink.

There could just be natural asset shrink just from the standpoint of as we grow, we may just allow cash flows out of the securities portfolio to not be reinvested.

There is clearly the expense cuts that you think about that we have just done in this second phase of OneWebster that we really not have given anyone a lot of color about.

That 200 position elimination should generate a fairly significant Q2, Q3, Q4 savings to the bottom line.

We're going to come forward as we literally we just wrapped it up as we were going through this process of getting the books closed.

But as we get a little more color to that layer to, which should be some favorable trend in the expense run-rate, I think as it relates to the equitization or the potential of doing something around that, really cannot comment specifically, but just wanted to make sure that people know.

Certainly that is something that a lot of investment bankers have called and had conversations with us about.

So there are levers for us to pull, and then obviously we did one specifically as it relates to the dividend reduction.

Because I think the prudent thing for us at this point in time and again that the board decided yesterday, was that it made sense for us to preserve capital, even though we think our overall capital strength is so deep, we just felt that we need to be very respectful of both the tangible common and the tangible equity levels that we have in the organization.

So hopefully that is helpful to give you a little --

Yes, I'm just trying to figure out if I'm the holder of that $225 million worth of the preferred you guys did in June and had a conversion price of 2771, would you guys solicit the holders of those securities for some type of exchange, or are you talking about the potential of using any freed up liquidity to actually go out and tender for those bonds that trade at a big discount?

We just cannot comment at this point.

I think what we wanted to do today was again give you the context and given any further details of that would clearly indicate whether we were or were not going to elect to do that.

We just wanted to show it as an example.

Okay.

My other question was on the -- could you just clarify on the commercial mortgage-backed securities holdings what is the amortized cost and fair value and notional value actually as well?

Yes, I think our carrying value is about $135 million.

I think the current fair value on those is $65 million, and why don't we do this, we will give you a little bit more color on that.

I just don't have it right at my fingertips right now, but I will make sure that Terry or I come back to you directly on that.

John Pancari, JPMorgan.

Just on that CMBS portfolio again, understandably there is clearly, and I know you indicated that there is not the liquidity issue there, not necessarily cash flow issues, but the mounting liquidity issue here, I just wanted to get some understanding about why we have not seen any impairment yet on that portfolio just given some of the liquidity issues you are seeing out there from the CMBS products?

Yes, specifically on that portfolio there is one bond that we will keep close track on that has got the greatest level of market challenge.

And again, when you think of that portfolio, it is all around levels of over-capitalization or over-securitization.

They are all AAA rated, and again we will give some granularity to this in some of the follow-up calls.

We have got the specific details out.

But I think that our sense is they are all cash flowing.

We're not seeing any deterioration at this point in the underlying collateral, and at this point it is more a reflection of anticipated issues in these securities as opposed to a specific credit issue that would really drive you to, hey, that is an impairment.

I would also say that if we were to just use a measure of at what point would you look to say that there is impairment, I think you've got to get behind and we are looking at the underlying collateral specifically to identify the level you should take.

I think there's probably arguments as to whether it should be based on the trade value in the market or whether there is actually still solid collateral to cash flow, the vast majority of the credit.

So I do think there is much more of a credit component that has to come into effect when you look at these bonds as opposed to just the illiquidity in the market and the decline in prices.

Most of the subordinations -- excuse me -- most of the collateral levels, the overcollateralization levels in these things, are in the 20% to 30% range.

I believe there is only one that is less than that.

And again, I think you have to look at the specific deals to really make sure that you understand where you have really got some level of other than temporary impairment.

At this point we looked at it at 12/31.

It has been looked at obviously externally, and we're comfortable where we are.

But we are being very open, and it is something that we are monitoring.

Capital at risk, we already have it against OCI.

So I think just from the standpoint of if we make a change that it is no longer OCI through OTTI, we have got the vast -- a big piece of those bonds covered at this point in terms of risk to capital.

All right, Jerry.

Thank you.

Jim, I just want to ask you a higher level question here.

I appreciate the detail you gave in terms of the leverage you can pull on the capital side, but each one of those measures appear like they could be slow in generating capital and in some things smaller than others.

Given the magnitude of this downturn, given the severity of the credit deterioration we're seeing for the group and specifically for your company and lastly where your stock is, what -- how much willingness do you have to do a dilutive deal, a dilutive common equity raise at this point?

And then if not, what are you pursuing -- would you consider looking at other options in terms of a strategic partnership or a sale of some sort?

Yes, that is a broad question.

I will just say that I mean we have taken steps already such as (inaudible) to a $0.01.

That is 33 basis points in the year.

It is 8 or 9 basis points a quarter beginning right away.

You get some benefit from the next phase of OneWebster, for example.

And I want to stress again, we said this repeatedly through the call, is that we don't feel any pressure to raise capital.

We have very strong capital levels, particularly focusing on that tangible capital at 770, which continues to compare favorably with our peer group.

So that is the perspective from which we are operating.

So to the extent that there are opportunities out there, we would look at them more opportunistically than any other way.

As far as partnerships, I will make the same comment that I always do, which is that we are interested in making combinations with like-minded partners that share our vision to New England's bank.

I would have to say that with valuations where they are, it is hard to imagine that much could happen here.

Damon DelMonte, KBW.

I was wondering if you could quantify what we can expect for expenses with the Boston initiative?

I don't recall if you had done that last quarter.

Just in terms of some of the core expenses, we're looking at probably in the neighborhood of $1.5 million or so in the current period, maybe potentially up to $2 million.

It depends on the rampup and the timing obviously.

I would just say that we have taken that into account, and clearly as you can see with some of the expansion plans we have, rest assured that there are other issues or other expenses that we are taking out, and that there are decisions we just have not -- you know, that we are in the process of evaluating or I will call it alternatives to look throughout the network is there other places where we can save money to offset those expenses.

So rest assured I would not put it as an automatic to add in that there's other things that we are doing that would be taken out to offset.

Okay.

Thank you.

Also Jim, in your opening remarks, you had made some comments about S&P's view or the rating agency's view on capital levels specific to the common equity levels.

Could you just repeat that for us please?

Are you saying what I was talking about our estimate of what the adjusted tangible common equity ratios are?

Yes.

Yes, we were saying that our estimate, the best that we can calculate it, so I need to caveat it with that, is that the adjusted to tangible common equity ratio for Moody's would be a little over 6%, say 6.07% or so.

Okay.

And what does that adjustment take into account?

How does that differ from the tangible common of 4 and a total tangible equity of 7?

Well, it takes some of what is in the tangible and gives credit for it to the as common capital, and that is how you end up in the middle.

And they have a formula.

They actually have several formulas that they use to arrive at that.

S&P does something similar that they call adjusted tangible equity.

It is a pretty complex calculation.

I think it would be better to try to handle that off-line with Bruce Wandelmaier, our Treasurer.

I would be happy to have him in touch with you.

Okay.

But I also think that it is important and worth noting because they do do the math and they then indicate what the levels are occasionally when they put out their own report.

So with S&P at 665 and Moody's at 607, we thought it was important for people to understand that that is how they look at it.

Gerard Cassidy, RBC Capital Markets.

Maybe you guys touched on this, and I just did not hear it.

In terms of the outlook for nonperforming assets, considering this was a very difficult recession and let's assume for a moment it extends into the latter part of this year, where do you guys see the nonperforming assets going considering in the recession of '90/'91, if I recall, I think they broke 5% of total loans?

Could we see that kind of number this time around?

Yes, I mean I would say it is difficult.

Obviously we lost forecast a lot looking at '09 under various scenarios, and the two sort of metrics that go into that are what we see flowing into non-accrual and then obviously how quickly we can resolve what is coming on.

And so a combination of those, obviously our goal is to minimize that growth through both prospective asset quality management and expedited asset remediation.

But, as Jerry mentioned earlier in the provision, I think it is difficult with all the scenarios we have to think about where we see non-accrual loans going over the course of the next 12 month period.

I mean there's no question about the fact that in our base case models, we continue to see negative risk rating migration increases in non-accruals modestly over the next four quarters.

But again, as we have talked about several times in the last couple of quarters, we are sort of through the first wave of asset issues with respect to residential-related asset classes, and now we are sort of in this lull where we have not yet seen a significant impact on the C&I, small business and commercial real estate, but obviously our expectations are that if we continue to see negative economic trends continue for the next 12 months that we will ultimately see some stress in those portfolios.

So I would say we expect overall net rates of non-accruals to rise, but through aggressive asset resolution and through hopefully good prospective asset identification, we will be able to moderate those increases.

On the asset resolution, can you guys give us a sense of how big that department was, let's say, a year ago versus today?

Do you expect to add more people to the department?

What are the expenses associated with that resolution?

Sure.

And I'm sure you'll hear this story in many of our other peers.

We are clearly up.

We are up four or five FTEs in the realm of our special assets group, which is more broadly defined now, and we're bifurcating some of the responsibilities from sort of pure workout to establishing some early stage asset remediation units whose sole focus is to take those assets that are not yet in hard core workout, if you will, or litigation, and try and restructure, loss mitigate, work remediate, work people out of the bank.

So I would say that we definitely have more focused resources in that area.

The good news in a difficult expense environment is that we are shifting resources rather than having to go out and add tons of incremental resources.

Still the point is in shifting the resources what we're saying is that for at least a year now, we have taken the external focus and made it an internal focus.

So even within the business lines, the focus is on understanding what our customer situation is and trying to determine as early as possible if there are issues there.

In the meantime though, through this intense centralization process, there are significantly greater resources involved in credit administration and lost mitigation and credit management than were before.

And I don't know whether you would have a number for them, but it is --

And I would just add to that, Jim, that I think that the rampup that we have had even in the depth and breadth of the loan review staff.

So we're being very proactive on the active portfolio management, independent loan review front.

But I think to both the points that have been raised, from a cost standpoint, we are literally offsetting the rampup of what we're doing or the shifts that we have done in personnel from sort of the revenue side of the house to the risk management side of the house.

So you're not going to see from a standpoint externally a significant uptick in the expenses related to this because we have taken steps internally to offset it.

So John, if you have any --

I also want to say that I did cite that number one in terms of the current focus as well.

And one final question, maybe Jim you could answer this.

With the legislation going through Congress on cram down, it appears very likely now that it is going to probably be passed.

What's your folks' view on this, and are you trying to do anything through your senators and Congressman in Congress to prevent it from happening?

Number two, if it does pass, what type of impact are you guys planning that it may have on your consumer loan portfolio?

Yes, let me say we are working on this, and we support the ABA's position, which is in opposition to the cram down.

We think it ultimately will raise the cost of homeownership to millions of Americans, and it is a bad bill.

And, as you know, the industry has tried unsuccessfully so to oppose this for a long time now.

It is less likely that we would be successful this time around, but we're definitely going to make the effort.

I think that the impact will be that it could negatively affect consumer behavior.

It could result in more non-accruals and we think also larger losses and in some cases unnecessary losses as a result of the cram down.

But I would say from our perspective that we are proactively trying to identify ahead of the curve the distressed borrowers that we have in our consumer and mortgage portfolios and reach out to them to work with them to try to set up plans for them that will enable them to make their payments if not now than down the line and keep them in their homes.

We think that is the best remediation policy that there is.

This does conclude the Q&A session.

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

Thank you, again, all of you for being with us today.

We look forward to talking with you soon.

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

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