Webster Financial Corp (WBS) 2009 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Webster Financial Corporation second quarter 2009 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 turn the conference over to Mr.

Jim Smith, Chairman and Chief Executive Officer.

Please go ahead, sir.

Thank you, Melissa.

Good morning, everyone, and welcome to Webster's second quarter earnings call and webcast.

Joining me today are Jerry Plush, Chief Financial Officer, and John Ciulla, Chief Credit Risk Officer.

I hope you've all had a chance to review the earnings release that was issued earlier this morning.

Before we begin, let me outline the flow of the call and note that we've included slides on our website, websteronline.com.

I'll provide some perspective on the quarter while Jerry will provide a review of our financials.

Then I'll offer some closing remarks, figure about 30 minutes or so for the spoken remarks and then we'll reserve time for your questions at the end.

Aside from reporting net income of $16.8 million available to common shareholders in the quarter largely due to the gain on our successful exchange offer, the quarter was dominated by developments in capital and credit.

Though Webster has enjoyed capital levels well in excess of regulatory requirements, investors in recent quarters have focused intently on Tier 1 common.

This is understandable in a time of stressful market conditions.

Our response has been to exchange more than $170 million of existing preferreds into Tier 1 common equity in the quarter.

The exchange can only be described as extraordinarily successful.

We offered to exchange common shares and cash for our outstanding convertible preferred shares and to exchange common shares for trust preferred securities.

We were very pleased that the convertible referred portion of the offer was oversubscribed at 76%, and that 32% of trust preferred securities were tendered.

Gaining US Treasury approval for the part-cash exchange was key to its absolute and relative success and was a further testament to the overall strength of Webster's capital position.

Especially notable about the exchange was not just that we added a big chunk of tangible common equity, but we did it at very attractive price such that the effective issuance price of $14.68 per share was about double the Webster's share price when we announced the exchange and was actually 2.6% accretive to tangible book value which rose to $13.15 a share in Q2.

On June 30 our all-important Tier 1 common to risk-weighted assets ratio climbed to over 6.4% from about 5.25% at March 31, while our Tier 1 risk-based equity was 11.7%, which of course is about double the 6% ratio required to be considered well capitalized.

The benefits of the exchange extend beyond capital ratios and include an annualized reduction of about $17.5 million after tax in dividend expenses.

Additionally, our fortified capital position enhances our ability to compete vigorously for new business and to move forward confidently toward our goal of being New England's bank.

Webster boasts rock-solid capital ratios across the board such that we can competently withstand the impact of highly averse economic conditions and we're well positioned to capitalize future growth in what we believe will become a banking environment which will benefit community-oriented regional banks.

Turning now to credit, our active management of underperforming credits, our continuing efforts to reserve prudently against future credit losses and some credit metrics that either deteriorated less rapidly or actually improved from Q1 taken together could possibly be indicators that credit stabilization is not far off.

Whether it is or not, our increased reserves and our capital buffer will protect us against whatever may come.

In our Q2 credit numbers we continue to see the effects of the worst recession in memory, reflected in both the levels of non-performing loans and charge-offs.

As a result, we increased our coverage for credit losses during the quarter to 2.72% of total loans.

Once again our provision for loan losses significantly exceeded net charge-offs in the quarter, marking the third consecutive quarter in which we've reserved at least $35 million more than we charged off in anticipation of future potential credit losses.

While opinions are divided on when the recession might end, growth in NPAs across loan categories slowed to less than 10% in Q2, down from 32% in the first quarter and most of the increase was attributable to performing, restructured residential loans.

Excluding equipment finance where the downturn hasn't eased its grip, our commercial group saw the fewest additions of loans to non-accrual status since the fourth quarter of 2007.

In fact, over $35 million of the commercial group's NPAs are current with interest payments which we are applying to principle.

Moreover in the commercial group, notwithstanding the increase in non-accruals we saw increases in both fee income and interest income thanks largely to our repricing initiatives.

In our experience that's unprecedented, positive performance in a stressed environment and speaks to the strength of our franchise and our portfolio.

Taking a broader view of the total portfolio, we also saw some promising signs as levels of loans delinquent 30 days or longer declined slightly for the second consecutive quarter -- perhaps an encouraging sign for the future.

Time will tell.

One big positive we believe as the economic downturn and its fallout grind on is that Webster may benefit from a New England economy that seems to be faring better than other regions of the country.

NPAs and charge-offs at new England banks continue to run at a rate significantly below the nation overall.

As we look ahead, we intend to file a capital plan with our primary regulators sometime in the third quarter in anticipation of beginning repayment of the Treasury's capital purchase plan investment in Webster.

For the record, to date in 2009 Webster has funded $1.3 billion in new, modified, or renewed loans, including nearly $600 million in the second quarter alone.

Consistent with the intent of CPP as well as our heritage of helping people to build, buy, and stay in their homes, our mortgage originations are up significantly and we're proud to have helped hundreds of families facing foreclosure to stay in their homes.

While capital and credit have been the main stories recently at Webster, there are other positive developments to report.

We're pushing forward on the several key initiatives that we believe will give us a sustainable competitive advantage and make Webster the bank for New England consumers and businesses.

One of those initiatives is accelerating deposit growth.

The success of our deposits' first efforts continued to build momentum during the quarter.

Deposits again grew at a healthy pace, rising $480 million or 3.8% in Q2.

Year to date we've grown deposits $1.3 billion or nearly 11% and we've lowered deposit costs at the same time.

This should make it clear that we're not at tracking deposit growth via rates but by our intense focus on deposits first.

Our growth spanned all five business categories -- retail, commercial, small business, HSA and government finance.

And this growth is coming in savings accounts, over $200 million in this quarter alone, and DDA and NOW accounts, over $700 million in this quarter.

Our loan to deposit ratio and core to total deposit ratio have dramatically improved as a result of our deposit initiatives.

Another key initiative is our well-developed OneWebster program to optimize earnings.

I'm pleased to report that we are on track to deliver the promised cost savings, the productivity improvements, and the revenue enhancements that we originally outlined.

To date we've realized about $49 million of annualized benefits from this effort, representing 80% of the amount we've identified in previous calls.

And we're on track to realize the balance of $12 million or so by mid-2010, as promised.

Thanks to OneWebster, our non-interest expenses in the second quarter declined by 6% from a year ago excluding foreclosed property expenses, FDIC fees, goodwill impairment and severance and other special costs.

Our focus on efficiency is an embedded, continuing process.

The final initiative I'll touch on this morning is employee engagement.

The centerpiece of this effort is a program we call, We in Webster.

With this initiative we're building a corporate culture embraced by all employees that will differentiate us positively in the eyes of customers.

During the quarter we began a series of sessions across our footprint to introduce all employees to such concepts as purpose versus task; and standards of excellence using field-tested tools developed by the Disney Institute.

We in Webster is a concerted, continuous process to instill in every Webster banker the values and behaviors that will give us positive differentiation as we seek to be the preferred banking partner for new England.

I'll now turn the call over to Jerry.

Thank you, Jim, and good morning, everyone.

We've provided a view of core earnings for the quarter, outlining several items to take into consideration when looking to see what the pre-tax, pre-provision earnings of the Company were in Q2.

Here on slide six, we're pleased to report an increase to $51 million in Q2, primarily from higher revenue.

However, as you can see on this slide, there are substantial number of material items that impacted the quarter and resulted in a net pre-tax loss.

Here, we've excluded a gain [to] $24 million in connection with the $64 million of trust preferred securities that were tendered in June.

We've also backed out $13.6 million in net losses from sales of securities and a nearly $2 million gain on the sale of our VISA shares.

We'll talk more about these transactions in a few minutes.

In addition, we've excluded investment write-downs from OTTI charges related to credit deterioration in the quarter.

They totaled about $27 million.

We've also backed out the $8 million in special assessment from the FDIC, $1.3 million in OneWebster related charges and $2.8 million in OREO and repossessed equipment write-downs; again, just given the nature of these particular charges.

Our results also included a provision for credit losses for $85 million.

About $74 million relates to the continuing portfolio and nearly $11 million relating to the liquidating portfolio.

So as I stated earlier, a lot of gains and a lot of charges taken in the quarter that have impacted results, but exclusive of these, our underlying operating performance in the quarter remains solid.

We anticipate results going forward should be much more straightforward.

Turning now to slide seven, here's a view of our income statement.

You can see here on a summary level what the key drivers for each line item are.

First, the increase in net interest income reflects an improved net interest margin which rose to 3.04% as our cost of interest-bearing liabilities declined faster than the yield on our interest-earning assets during the quarter.

Our non-interest expense increased as deposit service fees and mortgage banking activities increased by $2 million and $3 million, respectively, in Q2.

Additionally, wealth and investment services revenue increased by $331,000, primarily from the increased value of assets under management, while loan-related fees remained comparable to Q1 results.

Our non-interest expenses increased by $3 million primarily from a $2.7 million increase in comp and benefits.

While higher than Q1 results, it's in line with our plan and our OneWebster results for the quarter.

Q1 also benefited from some nonrecurring items.

Q2 expenses overall also included higher than expected outside services-related expenses very specific to the quarter.

The non-core items for the quarter included previously mentioned gains on the exchange of the trust preferreds, the losses on sales of securities, the gain on the sale of the VISA stock; foreclosed property expense and writedowns; the special FDIC assessment charges; OneWebster-related costs; and credit-related OTTI charges, as we previously discussed on the prior slide.

You can also see here, though, that the preferred dividend impact of $10.4 million in Q2 and Q1 -- that's what we're paying in the convertible preferred shares as well as the preferred shared issued pursuant to the CPP.

This will be significantly reduced in the coming quarters given the recent exchange offer.

We turn next to the margin.

As we previously noted, the margin improved to 3.04% in the second quarter compared to 2.99% in the first quarter.

As we mentioned in the first quarter call, we had a significant number of CDs that matured in Q2 that rolled at lower rates.

In addition, we made disciplined pricing decisions in all other deposit categories and as a result, our total cost of deposits decreased by 22 basis points.

The cost of borrowings increased reflects paydowns of short-term, low-cost money and these paydowns were funded by strong deposit inflows.

If we turn now to the next slide we'll give a little more detail in and around non-interest income.

Our deposit service fees increased about $2 million from last quarter and they're marginally up from a year ago.

The increase is primarily related to seasonal customer behavior.

Our loan-related fees declined primarily due to lower pre-payment penalties and loan origination volumes in Q2 of '09 compared to a year-ago period, fairly comparable to the linked quarter.

Our wealth and investment services revenues increased primarily due to an increase in the average value of assets under management while our mortgage banking-related revenue increased $2.8 million from Q1 due to increased mortgage lending activity.

The net loss from sales of securities totaled $13.6 million.

That's primarily from a net loss of $11.9 million on the sale of $12.3 million in book value of pooled trust preferred securities and a $1.7 million loss on sales of $7 million in common equities.

In the case of these transactions we would have taken OTTI charges versus a loss on sale.

And while our intent is to reduce concentration and exposure to other financial services entities, we executed these trades.

We recorded a gain in connection with the early extinguishment of approximately $64 million of trust preferred securities under the exchange offers we previously discussed, and we also reported a loss of $27.1 million on the write-down of certain pooled trust preferred securities and the preferred stock to fair value.

This is based on credit deterioration in the underlying issuers.

We update our credit assessment on each of the underlying issuers in these pools quarterly and determined that impairment was warranted based on our review.

And again, additionally we recorded a $1.9 million on the sale of our VISA shares during the quarter.

We'll turn now to slide 10 and take a look at our non-interest expense in greater detail.

So excluding the FDIC's special assessment and the foreclosed and repossessed property expenses and the severance-related charges, our non-interest expense increased about $1.6 million, and that's primarily from increased comp and benefits for the reasons we previously outlined.

Year over year, which shows the impact of the OneWebster initiatives, you can see that comp benefits decreased by $3.7 million as headcount's down 204 positions year-over-year.

Our occupancy expense declined by $700,000 and that's primarily related to lower utilities expense and lower repair and maintenance expense.

Our FDIC insurance assessment increased $1.4 million and that's primarily due to the increased deposit balances.

We also reported an $8 million special FDIC assessment during the second quarter.

Our foreclosed and repossessed property expenses remained flat on a linked-quarter basis but the charges taken this quarter are primarily related to reassessing carrying value of all repossessed assets.

Inventory values for both real estate owned and repossessed equipment reflect value declines that are taking place in the market as supply continues to exceed demand.

Severance and other costs primarily reflect OneWebster-related charges recorded in the quarter, specifically $1.2 million of write-downs to fair value on certain corporate properties that will not be utilized in the future and that we have now classified such assets as held for sale.

Speaking of OneWebster-related, let's talk about our initiative and the progress we've made to date.

Here on slide 11 you can see, again, that our optimization program, which was started in Q1 of '08, and our intent here is to show our expectations versus progress to date through June 30 of '09.

Again, we originally identified about $50 million worth of run rate improvement, about 80% expense side, 20% revenue side and our expectations were to have this fully implemented by the middle of 2010.

At that time we said about 20% of the benefits would come by year end 2008; about 75% by the end of '09; and the balance in 2010 by midyear.

And then, again, in December of '08, we added another $16.5 million worth of expected benefits as part of a 60-day review where we centralized support functions and tightened spans of control.

And clearly on this chart, you can see that we're making considerable progress towards these goals.

We turn now to the selected balances slide.

You can see our total assets increased slightly in the quarter as compared to last quarter.

Loans declined in all categories in Q2 and primarily in residential loans which declined by $302 million.

Of that decline, $203 million was related to a securitization that was completed in June.

Our securities portfolio increased by $647 million.

Of course, $203 million was related to the securitization we just talked about and the balance was from purchases of agency mortgage-backed securities.

Deposits increased to $480 million.

And here, you can see that the increased focus of our deposit-first strategy, which as Jim noted, occurred across all channels, but especially in retail and government finance.

Given this strong deposit growth we utilized some of the inflows to repay certain borrowings which declined by $211 million and utilized the remainder to fund asset growth in Q2.

We'll now and turn and take a more detailed look at the investment portfolio on slide 13.

Here you can see the components of our $4.2 billion investment portfolio.

There are no significant changes from the prior quarter when it comes to taking a look at mix.

You can note here that there's $33 million in unrealized gains in the HTM portfolio at June 30 and that compares to $50 million at March 31.

We also had $49 million in unrealized losses in the AFS portfolio, a substantial improvement at June 30 over the $110 million in net real unrealized losses that we had at 3/31 of '09.

I'd like to note at this point as in prior quarters we've provided additional details on our website regarding the portfolio and some supplemental schedules for your review.

On the next slide, on page 14 we'd like to go through some of these significant actions that we took in Q2 regarding the investment portfolio.

So here we'll provide some more detail regarding the fact that we purchased $618 million in agency-backed securities; we securitized $203 million in conforming loans.

We also sold $7 million in common stock at a net loss of $1.7 million and $12.3 million in book value, but with a par value of $104.1 million of pooled trust preferred securities at a net loss of $11.9 million.

These actions generated a tax loss of $75 million, which helped to significantly reduce the deferred tax asset account on our balance sheet from the nearly $200 million at March 31 of 2009 down to $154 million at June 30 of '09.

We also recognized OTTI charges of $23.6 million on pooled trust preferred securities and $3.5 million on our preferred stock.

Again, all of these charges related to our assessment of creditworthiness of the underlying issuers based on updated information that we had in the quarter.

Turning now to loans receivable, they totaled $11.6 billion at June 30 of '09, and that compares to $12.1 billion at March 31.

In the second quarter residential mortgage loans, commercial loans, commercial real estate and consumer loans declined by $302 million, $81 million, $14 million, and $87 million respectively.

Again over $200 million of the decline in residential loans relates to the aforementioned securitization.

The discontinued liquidating portfolio of indirect home equity and national construction loans declined by $24 million in the quarter.

Turning now to a slide on our loan mix and yields, you can see the yields on the portfolio declined slightly during the quarter.

Residential yields declined from refinancing activity and higher interest reversals.

There was really no change in commercial and an immaterial change in CRE, but our consumer yields declined because of the changing mix and portfolio composition.

Here we have a shift from the higher-yielding fixed rate home equity loans to lower-yielding HELOCS based on consumer preference rate and portfolio mix changed from 38% and 62% at March 31 to 36% and 64%, respectively, at June 30.

We'll now give some detail on each of the loan segments.

Turning to slide 17, you can see a look at our residential portfolio.

Approximately 80% is in footprint, 47% of the portfolio is in jumbos, and about 51% is in conforming loans.

Again, we've got no option ARMs and we've got minimal all-day exposure of which is under $40 million.

The majority of the $26.8 million decrease in residential non-accrual loans is related to loans modified and placed on non-accrual status.

However, these loans are paying interest and principal per the modification terms.

We record interest when it's received.

Also worthy of note is the permanent NCLC segment within residential, and that declined to $44.7 million at June 30 of '09, and that's down from the $49.5 million we recorded at March 31, the result of about $1.6 million in payoffs, $1.2 million in transfers to REO, and about $2 million in write-downs during the quarter.

Turning now to slide 18 to take a look at our commercial non-mortgage portfolio, this consists of our middle market, small business, insurance premium, finance and segment banking areas.

Contained in this portfolio are our core in-market small business and middle market customer relationships.

Our non-accruals increased modestly.

They were up about $3.9 million in the period.

And overall, our view is that middle market and small business have been relatively stable from a credit performance perspective thus far in the cycle.

We'll take a look now at our equipment finance portfolio.

This is a national portfolio that consists of five industry segments -- transportation, construction, environmental, manufacturing, and aviation.

The overall portfolio declined slightly from last quarter and again it's important to note that aviation lending was discontinued as of year end 2008.

When we look at the asset quality stats specific to this business we have seen some increases clearly in non-performing loans across all segments and we expected this given the challenging economic environment and impact that this has had on small businesses.

Charge-offs increased as well in the quarter to approximately $6 million of which half is related to the aviation portfolio.

The aviation outstandings total about $145 million and about $10 million of the NPL as of quarter end, June 30.

Looking now at asset-based lending in the next slide, you can see there were significant reductions in commitments and outstanding balances in both Q1 and Q2 of '09.

The portfolio continues to have a strong collateral base and the team here proactively monitors collateral values and advance rates.

The decrease in non-performing loans in the quarter was related to paydown activity and approximately $5 million in charge-offs, as you can see on this slide.

On slide 21, you can see our commercial real estate portfolio continues to perform well with modest delinquency, non-performing, and charge-off levels.

This portfolio consists of investor CRE and owner-occupied.

It's well diversified by product, by geography and by property type.

We've got modest retail exposure.

Our team continues to actively monitor maturities, vacancy trends, and leasing activity.

This portfolio decreased slightly in the quarter, and it's important to note of the $19 million in delinquencies at June 30, $13.7 million was associated with one loan that was a contractual maturity which did not refinance by June 30 and just subsequent to quarter end, this past-due account cured and it's really not representative of the borrower's ability to repay.

Turning now to slide 22, you can see the res/dev portfolio and that declined to $144 million as of June 30, a reduction of $11 million, driven by $9.7 million of payoff activity, $3 million in note sales and about $2.3 million in charge-offs.

And this is offset by some loan disbursements on performing projects.

Note that absorption remained slow although we continue to see sales activity in Q2.

About 90%, or $130 million of this portfolio was in Connecticut and Massachusetts and just a little over $32 million consisting of 17 projects are located in Fairfield County.

During the quarter non-performers decreased about $7 million driven by payoff activity and note sale activity.

In the performing portfolio there were only three remaining res/dev relationships that have an aggregate exposure greater than $5 million.

We'll now turn to take a look at our consumer portfolio on the next slide.

This portfolio is about 99% home equity loans and lines.

Utilization was about 51% at June 30 compared with 50% last quarter.

About 82% of this portfolio is in footprint and 19% of the portfolio is in a first lien position.

We've also included the updated weighted average FICO's and CLTV scores.

There's no change in the average FICO scores from last quarter and the changes in CLTV reflect updated Case-Shiller values which showed declines from the prior period.

On slide 24 we can now take a look at our discontinued liquidated portfolio which consists of about $249 million of home equity and $6.5 million of national construction loans.

We saw a $24 million decline in the second quarter, including about $8.5 million worth of net payoff activity, approximately $10.5 million in charge-offs specific to the home equity segment and about $2.6 million in charge-offs were related to the NCLC segment.

We have reserves for these discontinued portfolios at about $41 million of which $40 million is related to the home equity portfolio and $1 million is for the national construction portfolio.

The liquidating reserves for home equity are based on a forward look of projected charge-off coverage and the reserves for the NCLC portfolio are based on a credit-by-credit assessment, both of which are updated quarterly.

On our next slide we provide a view of asset quality and some key ratios for the portfolio and the discontinued liquidating portfolio as well.

Here you can see the impact this discontinued segment has had on our totals.

Also, I think it's important here to reference certain asset quality statistics that were included in our press release tables.

Our total non-performing loans were about $350 million or 3.02% of total loans at June 30 compared to $316 million or 2.6% of the total loans at March 31.

The increase in non-performers was primarily attributed to increased levels of performing non-accrual residential loans as we've discussed earlier and increases in equipment finance and commercial real estate loans, which were offset by declines that we saw in commercial and asset-based and residential development and in consumer.

Note that our past-due loans for the continuing portfolios declined slightly to about $112.5 million at June 30 compared to $113 million at March 31.

And as previously noted, $13 million-plus of the CRE past due is related to a contractual maturity that cured after quarter end.

We'll turn now to slide 26 and take a look at deposits.

As Jim noted, everyone in the Company is focused on having a deposit-first focus, since we believe our primary role as a regional bank is to gather deposits directly for the purpose of self-funding all of our loan activities.

And, in the second quarter 2009, we generated over $480 million in deposit growth, significantly in demand, NOW and savings, which increased $65 million, $655 million, and $203 million respectively.

They were offset by some declines in money market, CDs, and brokered deposits of $176 million, $217 million and $51 million, respectively.

And you can see on the next slide that while growing deposits during the quarter, we saw a 22-basis-point decline in the cost of these deposits.

So this, again, reflects that we did not achieve growth through aggressive pricing.

Here you can see again that costs are lower across the board.

With $1.7 billion in CD maturities in Q3 we've got a great opportunity to lower the cost of deposits even further.

Our core deposit ratio improved to 65%, which is up from 62% last quarter, and our loan-to-deposit ratio also improved to 88% compared to 95% last quarter.

Turning now to slide 28, you can see here that we outlined the diverse sources of liquidity that we have.

And again, during the quarter deposits grew in each channel and we've provided the second quarter growth that totals up to the $480 million.

We've got strong cash management services that continue to be well received in the market and we continue to see a lot of progress as we compete with any players in the market as the local entry.

Additionally, you can see here that we've got availability from wholesale sources of about $4.9 billion in capacity.

And, it's important to note from a holding company perspective, we have about seven years' worth of cash needs available at the holding company.

At this point, I'll turn it now back over to Jim and he'll provide some closing remarks.

Thanks, Jerry.

I'll conclude by reiterating the key points of the quarter.

First and foremost, we bolstered our capital levels through a successful exchange offer that significantly increased our tangible common equity.

Second, we're maintaining our hawkish stance on credit quality even when credits are current but the underlying fundamentals suggests weakness.

Third, we continue to grow deposits rapidly and wisely, relying on our strong customer relationships and brand rather than rates to build core deposits.

Our ability to gather deposits cost effectively represents a key element in our ability to widen our spreads in the quarters ahead.

Fourth, so far we've realized nearly $50 million of the $66 million in annualized revenue enhancements and cost savings envisioned by our OneWebster initiative.

And my final point is that Webster is building a sustainable, competitive advantage through our We in Webster initiative to foster employee engagement and ensure that we reach our goal of being New England's bank.

In the end, our most important point of differentiation in the marketplace is our people, every one of whom I thank for their dedication to our mission to help people achieve their financial goals.

Thank you for participating in our call.

Now, Jerry and I would be pleased to take your questions.

(Operator Instructions).

Mark Fitzgibbon, Sandler O'Neill.

Jim, you had mentioned earlier in the call that you intend to file a plan with the Treasury Department to repay TARP in the third quarter.

I'm wondering, does that plan incorporate raising additional capital?

Not necessarily, no.

I would cite the very successful exchange that we have undergone.

The Tier 1 common ratio of 6.4%.

But at the same time I would say we are in a very strong position to take advantage of opportunities that may appear, including the announced dividend reinvestment program with the discretionary stock purchase plan.

And so we're in a good position to make whatever moves we might, we believe, on the capital side.

To the extent that we decide that as part of the -- not just the capital plan, but specifically the decision to begin to repay the TARP, we might want to raise incremental additional capital.

Okay.

And then secondly, based on what you're seeing out there in your consumer books, do you think we're getting close to the consumer side of non-performers peaking?

I'm really going to be careful not to give an opinion on that, Mark.

I guess all I can say is that, you did see some reasonably positive metrics in the second quarter where you had a deceleration in the rate of deterioration and in some areas, actually saw some modest improvement.

So I don't think we want to say that that's a trend, but it's better than what we had seen in previous quarters.

So it could possibly be a hopeful sign.

But at this point I think we shouldn't be counting on it.

And then last question -- I wondered if you could share with us in the commercial real estate portfolio, how much of that is non-footprint?

This is John.

You know that we define our real estate footprint as sort of northeast Philadelphia, up to Boston.

92% of our portfolio is in our real estate footprint, in the Northeast.

And then one last question, if I may.

Can you help us think about the loan loss provision over the next couple of quarters?

I recognize there's a lot of unknowns, but it's been pretty volatile in recent quarters and just wondered -- any guidance you could share with us on the outlook for the provision would be great.

It's Jerry.

I think, as Jim included in his remarks, we believe that it's been very prudent to continue to reserve well in excess of the charge-offs based on our assessment of a number of factors, including the fact that we too have been taking a look at consumer statistics as well as the updated information that we understand about our commercial real estate and all of our commercial customers.

And we believe, again, we've just been taking very prudent steps to provision well in excess, and again, as Jim noted, for the last three quarters significantly over charge-offs.

I'd like to be able to think that on a go-forward basis you'd start to see us have a narrower band between our provisioning and our charge-offs numbers.

I think that we feel that we'll see some acceleration like we did to get charge-offs through.

And to give you some sense, if you're going to ask, do we think that the numbers are going to be as big or as up and down as they been?

I think you'll see that -- our anticipation, again, I'm going to touch wood on this comment, it all depends on performance.

But right now, based on what we know, we would think that we would have a tighter band between what we'd provision and what we charge off.

But that's going to be based on how we assess things quarter to quarter.

I will say this.

I think I speak for both of us and for John, that we feel a lot better about where we are from a tangible equity position, and that the depth and breadth of the reserves that we have associated at this point, at June 30, we're certainly in a much, much stronger position as an organization to weather where we're headed.

Ken Zerbe, Morgan Stanley.

Just a couple of questions on the trust portfolio.

First, just want to make sure I understand this correctly.

It looks like, if you took an $11.9 million loss on a $12.3 million book value, that essentially you sold the trust close to zero.

So why don't we start off with that question first.

Yes, Ken, it's Jerry -- absolutely.

And those were pretty much where the fair value is, if you were to go back and look at -- the OCI would have been in the prior quarter.

This, again, is just our assessment of creditworthiness of the underlying issuer.

So when we looked at what we were going to sell versus what we were going to write down, and again this is a living, breathing process; literally daily, we're getting updated financial information that either provides additional information, we make a credit decision on an underlying issuer or solidifies the decisions that we've already made.

My sense is that you have to take into account what we really were doing on that $12 million or so of sales, was to generate the tax loss to take advantage of wanting to reduce the exposure on that deferred tax asset account.

Then the $27 million loss on the trust, I noticed that you guys stopped providing the detail of AAA tranche and AA tranche and the rest.

Where do you stand -- what was the $27 million write-down on -- like, which tranche?

And what is the carrying value currently of your remaining exposure?

Ken, I would like to point out that we actually have provided it again.

The issue is, when you look at those supplemental schedules, it tells you a lot about how the rating agencies are viewing these pooled trust preferred securities.

We only have several that still have held up their AA rating.

Virtually everything else has been downgraded below investment grade.

So if you want, after the call we can take a little bit of time and go through those specifically, but -- if you have any further questions upon review.

But it's out there on the website if you get a chance.

Regarding the OTTI, and again, of the $27 million, $23.6 million related to the TRUPs; $3.5 million related to a preferred stock that we had in portfolio, both of which we took the impairments on.

The key on the TRUPs is again, updated financial information on an issue or by issuer -- meaning that we've gone through and looked at every bank and made a credit assessment.

It's very similar to the way you would think the rating agencies -- sort of like a shadow view of how Moody's would do it.

Or, I know some other competitor, other institutions that got these portfolios, these use LACE ratings, etc.

These are our views on credit.

You're also going to see when you look at those supplemental schedules that there's actually, I think, net, about $69 million worth of portfolio left as of June 30.

So hopefully, that's helpful.

Damon DelMonte, KBW.

Jerry, could you just go over again the details on the deferred tax asset balance with the $12 million loss that you recognized this quarter?

Sure.

I believe that if you go back, Damon, and look at the par face on those trust preferreds were over $100 million worth of securities that were sold.

And we did that sale, as you can see, to generate off of that difference because of all the writedowns that had been taken previously on those specific securities.

We obviously recognize those for book purposes.

By triggering the sale, we recognized those for tax purposes and that took, to the extent of -- I think again, we had a DTA of about $199 million, nearly $200 million at quarter end, March 31.

We were able to take a big piece of that tax loss and take it against that deferred tax asset account.

Okay.

And, you said that there is a supplement on the website that shows the trust preferred exposure?

I'm sorry?

Did you say to Ken's question that there is a supplement on the website?

Yes.

Okay.

And then, with the investment portfolio, any update on the CMBS investments that you have?

Yes, actually, great question.

They improved in value during the quarter.

I think that the market value on the CMBS was approximately -- somewhere between $51.5 million, $52 million.

So that's an improvement over where we sat.

We're actually doing extensive credit work on those.

We're continuously monitoring those seven individual investments.

So, I apologize.

We'll probably actually post out a slide maybe later on to provide some details on that.

Gerard Cassidy, RBC Capital Markets.

Can you guys give us a little more detail on that construction loan portfolio?

I think you mentioned there's three or four developers in Fairfield County with greater than $5 million exposure.

How big is it for those three developers or four developers?

Give me one second and I will get you that.

As Jerry said, I think we have about 17 projects left in Fairfield County totaling $32.6 million.

One of the three projects over $5 million that Jerry referenced, is actually in Fairfield County, and that's just under $10 million in total exposure.

And the other two that are in Fairfield County greater -- or is that only one that (multiple speakers) --?

The other two greater $5 million are in Massachusetts and New Hampshire.

And how big are they?

They are -- bear with me for one second -- actually, two in Massachusetts.

One is $12 million, and the other one is $7 million.

Okay, and are they single-family or condominium-type projects?

Those three are single-family projects, and they are right now performing.

Obviously, absorption is slow, but they are accruing and being supported by sponsors, and there is activity.

Okay.

Circling back to the commercial real estate question, earlier in the call about -- I think you guys said 92% of your commercial estate exposure is in your footprint defined from Philadelphia up to Massachusetts, I guess.

What percentage of the commercial real estate is in your footprint where your branches are located?

It's got to be 75%, 75% or 80%.

Yes, Gerard.

I think we have approximately $300 million or so in the greater Philadelphia, South Jersey market.

Right, out of a Philadelphia loan production office.

Everything though, Gerard, is centrally underwritten and approved here in Connecticut.

So it's a --.

Very good.

Also, in the upcoming third quarter, can you guys tell us what the preferred dividend is going to be based upon what's outstanding right now?

And also, if you could break it out between the TARP payment and what you're paying to your own preferred shareholders.

It's Jerry.

I think the dividend to the government would remain at the $5 million, and the dividend remaining on what's left of the convertible preferreds would be about $400,000 a month, so $1.2 million a quarter.

Very good.

In terms of the equipment financing business, any further color commentary on -- are there any parts of the country that are weaker or softer in that business?

Or, is it all just across the board?

Gerard, it's generally across the board, both geographically and by business unit.

Jerry referenced aviation, but we're really seeing, with respect to non-accruals and delinquencies a pretty even distribution of performance across geographies and our various business segments.

Classically, I think 20-plus years worth of experience, the folks in that business -- really the biggest challenge has been asset values have always been one of the ways we've referred to as out of the room in order to have full recoveries.

The biggest challenge has just been declining values when there has been the cases of having to repossess the equipment.

And as you note, in the quarter we took a couple million dollars worth of write downs on not only existing inventory to get it to where it can move and represent fair value.

And again, these values are being updated continuously.

That's really the biggest challenge right now, because historically, that business, it has been very, very strong to be able to get full recoveries.

And that's really worthy to note that we continue to pursue on each and every one of the obligations there.

So there's probably some potential upside down the road as you think about what's happened in performance there for recoveries in the future.

Great unit, and a really dedicated unit of people over there, working hard on all of those credits.

Okay.

And when you guys look at your discontinued liquidating portfolio and you go back to when you established it and you think back to what your assumptions were back then versus what has actually played out, what can you glean from that as we go forward from here on your regular portfolio?

Obviously you guys have learned a lot about the credit issues in that portfolio.

What can you take from that, in terms of your approach now in attacking problems that are showing up, just in your footprint?

Gerard, I think -- a little apples and oranges, and I'll tell you why.

I think that the history around the -- in sort of the vast majority of the loans that were related to the discontinued out-of-footprint were really part of a purchase financing transaction.

And predominately, what we've got in our in-footprint portfolio is what I would refer to as someone who's got a fair bit of equity in their home, come in, be it our branch network or through one of our mortgage originators or from some other business development contact, that basically want a line of credit or want a loan for a specific purpose.

Much more of what we've got, obviously, and an extraordinary percentage are customers of the bank in and around the footprint.

So very different purpose for the use of the proceeds.

The out-of-footprint stuff that has been designated as the discontinued liquidating began -- the predominant number of those loans and the dollars were associated with actually financing a home purchase, and therefore, much, much higher CLTVs associated with those.

And there was also a fair bit of those that were no income verification.

One of the big challenges that we've got and I think that we've talked about on a number of these quarterly calls, is the specific piece within that liquidating or discontinued portfolio that has been no income verification.

That's down to around $104 million at this point.

And that's the predominant part -- as we sit with our credit risk committee and with the executive team to assess reserve adequacy, that's the vast majority of where the reserves are needed, are just for that particular segment within the discontinued or liquidating home equity.

Thank you.

And then finally, any guidance or direction on the net interest margin as you go forward?

Obviously, you had a small increase this quarter.

Is that something we could expect on a regular basis going forward with the steep yield curve and the wider spreads that many banks are able to garner these days from their customers?

I have to thank you for that question.

And I'm remiss for not giving some perspective on that.

Our expectations are for a fairly sizable improvement in the net interest margin in Q3 and Q4.

And clearly that's a function of the significant amount of deposits, CDs that we've got maturing and that will be priced and also, just the expansion that we think we'll see from all the pricing efforts on the loan side from all the various line of business leaders and their respective teams.

So our expectations are that we should be seeing a much more sizable increase, I would say 10 basis points or greater than where we've just reported.

And that's assuming we stay within a reasonable range of where we are in non-performing assets overall.

And we'd expect even further in improvement from that when you think about Q4.

So I think it's just natural to see that what has really happened to us over the course of 2009 is, we have the immediate impact in Q1 of all of that 175 basis points of downward Fed repricing that affected a lot of the segments in our loan portfolio.

We had all of that impact flow through in Q1.

You're now starting to see that with the deposits lagging in the repricing and the borrowings lagging in the repricing, that now we sort of -- we're starting to catch up.

We turned the corner on that in Q2, and you'll see a much wider opportunities for Webster in Q3 and Q4.

So, I would expect mid-teens in terms of a range of expectation.

And, obviously, we're going to be working hard to do that, and hopefully even better.

Bob Ramsey, FBR Capital Markets.

I was a little surprised by the rate of increase in the net charge-offs, particularly in the continuing portfolio.

I know you all mentioned that there was a $2.8 million single credit in the commercial lending book.

Is there anything else lumpy to note, or is this 1.25% level for the continuing portfolio a fair base?

A fair base is an interesting question because it's tough to predict roll on the commercial assets.

But I can answer that the charge-offs -- that was the largest single point charge-off in the commercial bank, and obviously in the residential bank as well.

So there was no lumpiness this quarter.

As we talked about, while delinquencies we're down in resi and consumer, we had sort of a peak in terms of charge-offs in the quarter.

But that was expected based on our peak delinquencies of about six months ago, the way we recognize loss under FFIEC.

But throughout the rest of the portfolio and center cap -- our ABL and other commercial lines, they were smaller impairments and charge-offs.

There was not a lot of lumpiness.

Okay.

And then as I looked at you all break out the core earnings that you all have of approximately pre-provision, pre-tax, $51 million.

And you've got, even if we don't think about provision build, you've got about $15 million in charge-offs this quarter which kind of offsets that, particularly once you factor in the preferred dividend expense.

If losses do stay at this level in the near term, can you all make money here?

Are there any subs you can take?

Good question, and our expectation is that you will continue to see expansion in pre-tax, pre-provision in Q3 and Q4.

There will be additional revenue expansion as the margin improves even further as we get more growth based on now having a stronger capital base and one that we think will continue to -- that we have some opportunities there as well.

And I think that also just seasonally where we think we'll see fee income and then also some of the opportunities that both Jim and I referenced that we'll continue to see coming from OneWebster on the expense side.

So I would expect opportunity both in Q3 and to build off what we are going to report in Q3, to see even more opportunity again in Q4.

Okay.

And I know we've already talked some about the capital plan you all plan to submit to repay TARP.

Was that, you're submitting the plan in the third quarter, or you hope to start repaying TARP in the third quarter?

The first thing is to submit the plan.

And it's possible that it could be third quarter, but I wouldn't want to be suggesting that until after the plan has been filed.

And then, I don't want to try to put a date on it, but it's a priority.

And when you do go to repay it, do you plan to repay it in pieces, or hopefully all at once?

Most likely, I think it would be in pieces, but that call has not been made.

And I think part of that will depend upon the capital plan process and discussion with the Treasury and our primary regulators.

I think it's just premature to make any prediction there.

And then the last question I have for you, if we could jump to the trust preferred portfolios, which I know we've also spoken about at some length.

You all break out what the carrying value of both the pooled and the single-issuer books.

What is the face value or book value of those portfolios?

Give us a second and we'll come up with that.

Did you have any other questions?

I think that's the last one I've got.

I think of what's left -- and again, I'm just going to reference you to go to the supplemental schedules on the site, our pools have value of about $184 million associated with those, and the single issuers around $71.9 million.

So, there are some details, again, if you get a chance to get to the supplemental schedules that we've provided.

There's about five pages worth of details on the investment portfolio available on the site.

And then subsequent to your review, if you have any questions, happy to take some time and talk to you about it.

[Mark] Shafir, Sterne, Agee & Leach, Inc.

It is actually Mike Shafir.

I just have a question about the preferred stock dividend and the accretion extinguishment gain that -- the $48.4 million.

So I just wanted to make sure I'm thinking about this correctly.

This number's going to go to around $6.9 million in terms of preferred dividends next quarter -- or $6.2 million?

The number is going to go to $6.2 million.

Thank you.

There are no further questions at this time.

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

Thank you very much for being with us today.

Have a good day.

This concludes today's teleconference.

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Thank you for your participation.