Webster Financial Corp (WBS) 2010 Q1 法說會逐字稿

Good morning.

Welcome to the Webster Financial Corporation first quarter 2010 results conference call.

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.

Actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission including our Form 8-K containing our earnings release for the first quarter of 2010.

I will now introduce your host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Good morning and welcome to Webster's first quarter earnings call and webcast.

You can find our earnings release that was issued earlier this morning along with the slides and in-depth supplemental information that accompany this presentation in the Investor Relations section of our website www.websterbank.com.

I'll provide an overview of the quarter and talk about the regional bank strategy and then turn it over to Jerry Plush, our Chief Financial Officer and Chief Risk Officer, to walk through the balance of today's earnings presentation.

Then we will open it up for your questions.

I'm pleased to say that the first quarter was marked by many positive developments including Webster's return to profitability from continuing operations.

A small profit to be sure, but a large step in the right direction.

A lower provision for loan losses coupled with an improved margin, growth in core deposits and a higher level of earning assets were the primary drivers.

Pretax pre-provision earnings of $57.3 million held steady from the previous quarter and increased $10 million from a year ago.

The lower loan loss provision, down by a third from Q4 '09 was driven by improving credit quality trends, some strongly so including nonperforming loans down 6.5% from Q4 to their lowest level in a year and chargeoffs down 22% from Q4.

Since the provision continued to exceed net chargeoffs in the quarter, though by less than in previous quarters, loan coverage increased to 3.16% and NPL coverage reached 99%.

The reduction in NPL's were driven primarily by continued declines in nonaccrual loans and a greater number of cures and exits.

Commercial real estate, residential, consumer lending and the discontinued liquidating portfolio all saw declines in NPLs while in C&I asset based lending NPLs rose and the other categories in aggregate declined.

Delinquencies remained stable at the Q4 '09 level, which was the lowest level since Q4 '08.

Jerry will provide more detail in his comments.

These improvements in asset quality are largely a reflection of a some what stronger economy which continues to improve in our region.

Retailers cited sales increases and manufacturers say demand continues to grow.

Home prices are now rising along with sales in most of the region's residential markets while commercial real estate appears to be stabilizing even as potential defaults remain a concern.

According to the beige book, most New England employers are no longer shedding workers and many are restoring induced cuts and wages and benefits.

Connecticut for example has added jobs the last two months.

Should the economy continue to strengthen we expect that our credit metrics will likely improve as well.

We are doing our part to contribute to the economic recovery with an initiative to nearly double business lending to $850 million in 2010 and add 150 bankers.

In market business lending increased nearly 60% in Q1 to $115 million from Q4 and our pipeline has grown dramatically while new business checking accounts rose 18%.

Full implementation of the initiative including hiring additional business bankers will boost originations and result in growth in the loan portfolio which has been in controlled decline for some time as we have reduced our out of market loan exposures.

Turning to Slide four, you can see that our capital levels are strong across the board.

The increasingly important tier one common risk to asset ratio crept up 4 basis points to 7.9%.

The leverage ratio is 8.73% and our total risk based ratio though was 14.37%.

These ratios which declined from Q4 due to partial repayment of CPP are well above regulatory requirements and well above our internal capital targets as well.

The most notable development regarding capital during the quarter was the repayment of 25% or $100 million of the capital purchase program to the US Treasury, which is noted on Slide five.

That there was no accompanying requirement for raising additional capital is a testament to our capital strength.

We are doing our best to repay CPP in an orderly responsible manner that produces the best outcome for shareholders.

We intend to pursue further repayment as our credit metrics and profitability improve always with the objective of producing the best outcome for shareholders.

We also downstreamed capital to the bank to bolster capital levels there.

As credit repairs I expect we will have more time to discuss strategy on these calls, a welcome change and we will report on our progress toward achieving our published 2010 initiatives which are listed on Slide six.

These initiatives are the areas we are investing considerable capital and organizational resources.

It is worth noting a significant portion of the variable compensation for our senior executive officers is tied to successful execution of these initiatives.

On Slide 7 you can see the specific action steps that we tied to each of the initiatives in order to achieve our objectives.

The major steps we have taken so far are shown on Slide eight and will be updated each quarter.

Since the initiatives are an expression of the strategy let me spend a minute describing our regional bank strategies and our plans for the future.

Our strategy is simple, we'll build wallet share and market share among businesses and consumers in our markets by continually improving on service quality to achieve best in class status and offering products and services that meet their financial needs.

We will do better what we do best.

Our overarching commitment to maximizing the growth of economic profit over time will drive our strategic decisions and our allocation of capital and other resources.

For example giving our customers accelerating preference for the online channel we recently redesigned our website to improve its look and feel and transitioned this site from primarily transactional to a marketing engine with improved online acquisition capability.

We are setting records each month for new customer enrollment online.

Next up is mobile banking and alerts.

These are examples of how we are giving priority to investments which can generate a positive return on investments.

As we get into the initiatives, it is clear that our focus on business banking has complemented very effectively our geographic expansion.

In Boston we are making meaningful progress and penetrating small and middle market businesses.

As in the first quarter our Boston book of business loans stands at $32 million, $7 million ahead of plan and we continue to add key personnel.

In Westchester we have filled key positions in retail, small business and middle market banking and we intend to open a new regional office there in the fourth quarter.

In the interim, deposits are growing briskly and in the Providence MSA we are enjoying similar success.

Behind the numbers are the stories of why we are winning in these new markets.

In January, we won the primarily banking relationship of CapCo Steel, the largest privately owned steel fabricator in the Northeast.

This was a competitive situation.

So competitive in fact that Joe Savage, our head of commercial banking, drove to Providence on Super Bowl Sunday to help his team close the deal.

The financing which involves the State and will allow CapCo to hire additional employees drew praise from the Rhode Island Governor Carcieri at a press conference.

More recently, US Senator Sheldon Whitehouse together with the local SBA director and Rhode Island officials praised Webster for our support of another customer.

Stories like these two clearly demonstrate that Webster is there for its customers and are the reasons we are having success with the geographic expansion.

To wit, we were recently awarded Rhode Island's primary operating account for tax collections.

Similarly we are focused on winning the hearts and minds of retail customers through optimization of delivery channels which in coming months will include mobile banking and e-mail alerts on balances and overdrafts I mentioned earlier.

At the end of March we began rolling out extended service hours at key branches across the four state footprint.

Effective this week we have completed implementation of extended hours at a total of 89 branches including nine o'clock to seven o'clock on Thursday and Friday and nine o'clock to three o'clock on Saturday.

We conducted a thorough analysis to determine which branches should implement extended hours such that we maximize our return on this investment of staff time and support services.

The primary factor that we took into consideration was whether extended hours would enable us to capture new business and a greater share of our existing customers' business.

We picked branches that exhibited the highest overall customer usage and meet the convenience threshold of the service quality model.

The 89 offices we selected which is about half of our total were used by 84% of our customers over the past year indicating that extended hours in those offices make Webster more convenient for the vast majority of our customers.

So far our pilot offices have demonstrated that we can recoup the cost of extended hours by deepening our level of engagement with existing customers, cross selling products and acquiring new customers.

Next will come 7 days extended hours in the customer care center and 24/7 online support.

Our business model emphasizes superior service quality which in addition to convenient hours combines Webster's highly rated service attitude with continually improving daily delivery for transaction and processing services across all channels with the measured goal being the achievement of near flawless delivery.

We have identified the key improvements that are required and so far the metrics for service improvements are tracking close to plan.

Specifically, we are reducing error rates, shortening the account opening process, simplifying product offerings, increasing speed of transactions, expediting work flows and improving the reliability of our remote systems including our ATM's.

Eliminating mistakes and speeding service will improve the customer experience, save money and make us more competitive.

We are serious about improving these service mechanics and we tend to be best in class.

By measuring our success at every turn we will learn what works and what we need to do better.

Another prong of our service quality strategy is to proactively identify and meet our customers' needs.

We are improving our bankers' product knowledge, upgrading our sales skills and engaging our customers at every opportunity in an effort to help them achieve their financial goals.

Our significantly improved marketing capabilities including investing in our recently installed market data mart give us improved prospecting and cross selling tools.

Once again, we've chosen to invest in initiatives which we believe will generate economic profit.

Our commitment to measuring service quality permeates Webster.

Front office or back office, liner staff, customer facing or support services the only designation that matters is that we are all responsible for the customer experience no matter where we are in the company and we are measuring our results.

We have sharpened our competitive edge and vowed to win in every market every banking office against every competitor, every day.

During the first quarter we also unveiled the next phase in the branding campaign.

About a year ago we launched a new branding platform that is designed to evolve as we raise our game and our interaction with customers.

The first expression was focused on our promise we take your banking personally.

In this next generation our brand promise raises the stakes so to speak in our customers mind.

The promise is Expect It.

Expect It is a simple versatile expression of the Webster service model.

When customers interact with Webster through any channel they will get the products that fit their needs and excellent service.

Customers can expect it because Webster is ready, willing and able to deliver it.

Expect It is a customer facing idea that provides the messaging flexibility to all business lines and in all modes of communication.

An example of Expect It is how we are implementing changes under the new Reg E rules.

Without yet divulging our strategy to use these changes as a customer acquisition and retention tool, I'll say that our solution gives customers choices that work best for them and clear explanations of what those choices are.

It also recognizes that customers use debit cards differently from how they use checks or credit cards.

While our revenue hit could be up to $15 million in the second half if the opt-in rate ware zero we expect to achieve a favorable opt-in rate, possibly generate higher usage rates and attract new customers.

Our billboards, radio and print ads for the expected campaign are already in the market and our TV ads begin airing next week.

In another branding development during the quarter we changed the name of our equipment finance arm Center Capital to Webster Capital Finance.

This name change is designed to signal the integration of equipment finance more closely into Webster's portfolio of financial products for businesses and more formally align the equipment finance team as part of the Webster family.

Branding it with the Webster name demonstrates our continued commitment to our equipment finance customers.

By design we shrunk the equipment finance footings by about $100 million and see that portfolio settling in around the $750 million mark.

By using higher spreads to reduce the asset size of the business will drive the economic profitability of the business higher.

I will leave the other initiatives for discussion at another time except for one which is crucial to our strategic and financial plans.

We've refined our methodology to assign and measure return on risk adjusted capital for each of our lines of business.

We will be implementing this program in the quarters ahead as part of our capital and risk management initiative.

We'll also be setting targets for returns on capital as part of the internal discipline and using our planning process to identify gaps and opportunities for improving returns and to allocate capital most efficiently.

In Summary, we are very confident in our ability to implement our regional bank strategies in markets and businesses we know well with the goal of generating improving economic returns.

We are committed to earning a return in excess of our cost of capital in each of our business segments and overall.

With that I will turn the call over to Jerry.

Thank you, Jim.

And good morning, everyone.

Turning to Slide nine.

Here we provide a view of core earnings for the first quarter.

We are clearly pleased to show a return to positive pretax results for Q1 and to show pretax pre-provision earnings of $57.3 million essentially equal to the fourth quarter of 2009.

We also note on the slide that the $57.3 million includes the impact of the Freddie Mac buy backs of about $1.4 million.

We'll provide some more detail on that in a minute.

So again, we outlined certain items to take into account to get from the pretax pre-provision results.

We adjust for noncore items such as the $4.3 million in gains on the sale of investment securities.

The loss of $3.7 million on the write-down of pool trust preferred securities and this reflects a change in our credit valuation methodology for insurance companies and we see this adjustment as exclusive to the quarter only given it was a methodology change and how we access the underlying issuers.

We also exclude $2 million in REO and repossessed equipment write-downs and $11 million of the previously announced fraud related costs as well as the $43 million in provision expense for the quarter.

Overall, adjusting for these items you can see that the continued strength of our underlying operating performance is apparent in the quarter.

And more detail will be provided in our core performances as we review the next slide.

Here on Slide 10, here is a look at the drivers of core pretax, pre-provision earnings.

You can see the strength from a year ago in growth of almost $10 million in earnings through the combination of increase in 29 basis points in the margin and $324 million increase in average interest earning assets.

In comparison to Q4 the net interest margin increased by 2 basis points to 3.28% while earning assets increased by $108 million.

On an average basis, we had combined growth of $327 million in securities and short-term investments and that offset a combined decline of $219 million in loans and loans held for sale.

The net result a million dollars increase in net interest income quarter over quarter.

Our noninterest income declined by $3.5 million most of which is explained by a seasonal decline of about $3 million in deposit service fees.

Other income was somewhat higher at $4.3 million compared to $2.6 million in Q4 and that is the result of bank owned life insurance proceeds and some direct investment gains offsetting declines in other categories such as loan related fees and mortgage banking revenue.

Our core expenses declined by $2.6 million from Q4 and that's even with higher than expected marketing expenses that we noted on our last call that would happen in Q1.

Lower comp and benefit expenses in Q4 we also saw reduced utilization of outside professional services in Q1.

It is also worth noting here that the margin would have been 3.31% in Q1 if not for the $1.4 million of Freddie Mac buybacks for mortgage backed securities.

The result of a policy change which enables the GSCs to repurchase loans out of MBS at par.

These buybacks and they are actually buyouts to be technically correct in effect create faster amortization and hence a proportional write off of any premium on each security must be taken.

Fannie Mae is doing a similar program in Q2 and we will have some more on that when we talk about perspectives in the second quarter in just a few slides.

Turning to Slide 11.

You can see the activity in the investment portfolio in the quarter.

The increase in the portfolio compensated for soft loan demand in certain lines of business and the sale of conforming mortgage loan production during the quarter.

We continue to buy short duration agency CMOSs with limited extension risk and we sold some 30 year agency pass throughs and 10/1 hybrid arms with greater extension risk.

The portfolio's overall duration remains unchanged at 3.7 years.

Note that 55% of our portfolio is in held to maturity.

This portfolio is mainly comprised of $1.1 billion of residential mortgage loans that we have securitized in the past and $675 million of municipal securities.

The classification of longer duration securities in the HTM portfolio will provide protection to the TC ratio should interest rates rise.

The $2.4 billion of securities in AFS are shorter duration, they've got excellent liquidity and should provide us with whatever flexibility that may be needed to manage the balance sheet going forward.

Turning now to the loan mix and yield slide.

Here you can see our yields in the overall portfolio increased by one basis point during the fourth quarter.

The improvement was primarily due to a 13 basis point increase in commercial yields and that is mainly from improved spreads and fees on loan renewals.

Yields increased by 33 basis points on $228 million of renewals of commercial loans during the quarter on top of $108 million in loans that we modified by 91 basis points in the fourth quarter.

The declines in the three other categories they largely reflect the effect of fixed rate maturities that are priced at higher levels being replaced by new originations at lower rates.

Average balances declined across all categories.

Note, however, that period end balances and commercial nonmortgage which excludes are assets based lending and equipment finance divisions, they grew by $34 million up to $1.54 billion.

Again, this represents our core middle market and small business lines.

This growth is encouraging, it reflects our initiatives in these areas as Jim previously noted and came despite generally weak loan demand in the market.

Turning now to Slide 13.

We will take a look at key asset quality progressions and here we provided a five quarter trend in total nonperforming loans, REO, repossessed property and past due loans.

Individual credit and other performance data for our principal loan segments like we have done in the past.

Here today we included them in the supplemental information posted in the investor relations section of our website.

So, overall, nonperforming loans declined by $24.2 million in the quarter and that is a continued reduction in new nonaccruals and a continued increase in cures and exits and we will review that in greater detail in the next slide.

It's instructive to note here that about 30% of our NPL's are actually current as we have been actively identifying and addressing problem situations.

Our Real Estate owned and repossessed equipment have been relatively flat over the past year and that reflects our focus on remediation of problem loans and the resolution of repossessed property and equipment.

Our past due loans remain in a fairly tight band at around 1% of total loans over the past year.

The March 31 balance of about $115 million is influenced by a $12 million commercial credit that reached principal maturity, was current on interest, was in legal documentation at quarter end and then was resolved subsequent to quarter end so our past due loans were actually flat then compared to year end.

We will turn now to Slide 14.

And here we have provided a reconciliation of NPLs over the past year.

Here you can readily see the continued decline in new nonaccruals and continued increase in cures and exits.

We've also had the more recent favorable trend of a declining level of gross chargeoffs since the third quarter of 2009.

We had one CRE loan of $15 million that came on to and then off of nonperforming status within the quarter.

The amounts indicated in Q1 for new nonaccruals and cures were therefore influenced by this particular loan.

If those new nonaccruals otherwise would have been closer to $101 million compared to $125 million in the fourth quarter and the cures and exits would have been closer to $81 million, then still well in excess of the Q4 results of $55 million.

Our redefault rate on modified residential loans is approximately 9% and that clearly had a favorable impact on our results and it is reflected in the cures number this quarter.

We have seen industry redefault rates in the range of 40 plus percent so our performance here has been very solid in comparison.

Continuing with key asset quality progressions on Slide 15.

Here we show net chargeoffs in the provision for loan losses decline for the second consecutive quarter.

The provision totaled $43 million in Q1, that is slightly above the gross chargeoffs we reported and as you can see the excess of the provision over the net chargeoffs reached its lowest level over the past year at $2.7 million, a positive sign.

The allowance for loan losses now represents 3.16% of total loans and provides a coverage ratio of approximately 99% of our total NPLs.

Most of the $11.5 million decline in net chargeoffs from the fourth quarter is explained by reductions of $8 million in equipment finance and $3 million in CRE.

You can see more details as you review the supplemental slides on our website which also now provide five quarter trend statistics and information for each loan segment.

We will turn now to Slide 16 to take a look at deposit growth.

Here you can see we grew deposits at a 10% annualized rate versus last quarter and our total deposits were up $1.3 billion or 10% from a year ago.

With the deposits first initiative we announced at the beginning of 2009, we have consistently demonstrated over the last 5 quarters an ability to grow deposits cross multiple lines of business while maintaining a very effective pricing discipline of reducing our cost overall.

We've also improved a mix of core to total deposits and our total to loan deposits ratio overall.

We also acknowledge that the environment has contributed to the improved core to total ratio as we saw strong consumer preference for liquidity as they moved money toward MMDA now in savings and away from CDs.

This mix change has also been beneficial to our cost of funds, but it's also increased the risk to rising rates which we have began addressing.

I will provide some more details on that in a few minutes.

In summary, good growth again in Q1 and a 12 basis point decline in costs compared to Q4 with reductions in costs in all categories.

Let's turn to the next slide to discuss more of what has happened in deposits by line of business.

And here on this slide, you can see our competitive advantage in deposit gathering is very clear.

Throughout 2009, our focus on deposits is not happening on one or two lines of business but across the five lines of business as detailed here on Slide 17.

Of particular note is our focus on growing core accounts, DDAs in every line of business as the key to strong customer relationships and profitability clearly starts there.

It's important to note that retail grew $97 million over the past year, inclusive of a billion dollar decline in CDs.

Our small business deposits grew 10%, HSA grew 27% and our commercial deposits grew over 56%.

Our government business continues to grow with new operating relationships in the quarter in all four states that we serve.

Advisory services in this line of business are also showing very solid growth trends.

So in summary, overall growth of $1.3 billion over the past year, we have significantly reduced costs by 81 basis points and that reflects our competitive differentiation of strong deposit gathering capabilities across 5 lines of business and a consistent deposit first focus.

And with our loan-deposit ratio at 78% we have the funding flexibility to target growth in different areas at different times based on costs and market opportunity.

We will turn now to Slide 18 and we wanted to review some changes that have happened in borrowing mix and costs.

Clearly the strong deposit growth we just reviewed reduced the need for the utilization of borrowings and they are down over $400 million in the last year.

They are up slightly quarter over quarter from some on-balance sheet interest rate risk moves that we took Q1.

In Q4 we began to execute a series of liability lengthening strategies to better prepare for the possibility of a rise in short-term interest rates and you can see some of the impact here in the lengthening of duration from 1.5 years in Q3 '09 to 2.3 years in Q1.

We have managed to do this without materially changing the overall cost of borrowings or the size of the portfolio.

We began in Q4 with the termination of $150 million of pay floating interest rate swaps on long-term debt and the restructuring of $100 million of fixed rate FHLB advances from an 8 month maturity to a four year maturity beginning on the interest rate swaps being advertised over the four year remaining life of the fixed rate debt.

We have replicated that derivative strategy again in Q1 and we've added a few twists that you will see as we go to the next slide.

Here on Slide 19 you can see that we have executed in the first quarter a combination of $1.2 billion of on and off balance sheet transactions to lengthen liabilities.

Let me spend the next few minutes explaining a couple of these transactions in greater detail.

So in first transaction we sold $600 million of fed funds futures contracts for the next year, locking in an average fed funds rate of about 48 basis points.

We view this as a partial hedge to protect against spread compression and our $1.8 billion portfolio floating rate loans which are currently priced at floors.

We should point out that this transaction does not qualify for hedge accounting treatment and it is mark to market on a daily basis and all the gains and losses flow through other noninterest income and at the end of Q1 there was a loss of $152,000.

But we should also point out that the timing of gains may not also coincide with spread compression on floored loans when rates rise due to the forward-looking nature of the contracts and we will be sure to clearly illustrate any material impacts for you in future releases.

But the real issue is we've protected the economics more so than the NIM for the organization.

The second contracts designed to protect us from a rise in rates further in the future.

Although you can see we have taken steps to protect ourselves from a sudden rise in rates, we feel the more likely scenario is for the fed to raise rates late in 2010 or in 2011.

The $100 million forward starting swap locks in a fixed rate hedge of 285 for 3 years starting in April of 2011.

This does qualify as a hedge and there will be no impact to earnings in 2010.

In addition, we entered into a $100 million swap and terminated $175 million of existing swaps again to convert floating rate liabilities to fixed.

We added about $75 million of new fixed rate term wholesale funding to replace maturing funding.

And then the final piece of our multi-pronged strategy is to book more long-term retail CDs and so far we have been very successful in increasing that portfolio with terms greater than two years up to five years by $111 million.

So excluding the retail CDs we calculate the incremental costs of these wholesale transactions were around 75 basis points compared to today's targeted fed funds rate.

We are now in an asset sensitive position to both parallel changes in interest rates and to a flattening of the yield curve as interest rates rise.

We have some liability sensitivity to an increase of just short-term rates primarily due to the floored floating rate loans.

We will continue to evaluate additional cost-effective risk mitigation transactions in 2010 as our balance sheet and conditions change but we believe a change for substantial additional actions are unlikely.

I'm going to conclude my remarks by providing some comments on expectations as we look forward in the second quarter.

If we start with credit.

There is clearly positive signs that we saw in Q1 which could continue into Q2.

We do have to remain cautious due to the economic uncertainty including employment levels and we also note that the first quarter did not have any lumpy commercial chargeoffs which are always difficult to predict.

So there is always some risk on the commercial side.

On the margin we would say that the margin is going reflect the Fannie Mae buyouts we referenced earlier.

Again, similar to the Freddie Mac buyout program in Q1 we estimate this could have a $2.5 million impact in net interest income.

However, an expected increased level of average earning assets will help to keep net interest income relatively flat and we will need to look forward to continued discipline around the deposit pricing and loan renewals to try and offset some of the Fannie Mae impact.

We will feel the full impact in Q2 of these and then we will expect a rebound to be showing up in Q3.

We would expect core noninterest revenue to be consistent with first quarters level as a rebound of deposit service fees from the otherwise seasonally low first quarter is likely to offset what we think will be a reduced level of other income.

Also, please note as Jim said before deposit fees will be under some pressure in future quarters.

We would expect our core noninterest expenses to increase slightly from the $120.5 million in the first quarter due to marketing initiatives we are undertaking and also from some higher compensation levels from our expanded service initiatives and as we continue to hire additional bankers.

Please note that these investments will show benefit then in subsequent quarters.

Also the preferred dividend expense should be expected to be around $4.7 million as we see the full quarter benefit on $100 million of CPP that was repurchased in early March.

I'll now turn it back to Jim for some of his concluding remarks.

Thank you, Jerry.

Our first quarter results are a major step forward.

Webster Bank has returned to profitability.

Credit trends have been positive.

Webster is emerging from a most challenging period as a better, stronger company endowed with a team of talented motivated bankers.

Our regional bank strategy is clear.

And we are committed to executing it in a manner that delivers improving returns on capital.

That concludes our prepared remarks.

We are pleased to take your questions.

Thank you.

We will now be conducting a question and answer session.

(Operator Instructions).

Our first question is from Ken Zerbe with Morgan Stanley.

Please proceed with your question.

First question on TARP repayment.

I heard your comments that you wanted to do it in a shareholder friendly manner and it seems that you are off to a good start with $100 million.

Going forward are there any other considerations that we should be aware of that would lead you to try to repay it sooner rather than later which may have an increased likelihood of an equity issuance or are you comfortable repaying $100 million every couple of quarters for the next year or so?

Well, it as great question, Ken.

There is a lot of moving parts there and I think it as question of timing.

When is the best time to repay that is providing maximum consideration from a shareholder perspective.

We are willing to stretch this out for a while to make sure that we raise the minimum amount of common equity that may be required in order to repay it.

But it is hard to put an explicit time frame on it right now.

As I indicated the first step was to be able to pay back $100 million without a capital raise was an important step forward and validates the capital strength of course.

Now, as our credit performance continues to improve and profitability as well, we will be in a stronger position to repay we think with less need for capital raise.

We need to see how all the variables play out as to what the timing ought to be.

I would say that if we pay it back sooner rather than later there is a high probability there would be some type of capital raise that would be involved.

I would only indicate that we would do our utmost to minimize the amount of common equity that might be involved.

Alternatively we could wait longer term and balance that against other desires to exit the program in order to pay a substantial portion back out of earnings going forward.

I think we just have to evaluate as we go and just reassure that whatever decision we make we will make it at that time in the best interest of shareholders.

In the past you mentioned that you were worried that you could potentially see some pressure from -- or competitive pressure from people who don't have TARP basically using that against you.

Now that you started to repay, do you still feel those pressures?

We think repaying it was a very big step forward in that regard to show momentum and to show the capital strength of the company in the process.

That is out there as a consideration.

We don't think it is a negative for us at this point but something you have to continue to watch.

If others don't have the capital and you do that is one of the elements you have to weigh in your repayment plans.

All right, thank you.

Thank you.

Our next question is from Dean Choksi with Barclays Capital.

Please proceed with your question.

Good morning.

Glad to hear that you are back on some of the offensive on some of your initiatives.

Jerry, you talked about the expense structure being up going forward.

Given all the internal activities that you are doing, how should we think about the expense structure going forward and when do you expect to see net loan growth or when do you kind of see the benefits of that?

Dean, it is Jerry.

First on the expenses, the guidance I wanted to try and provide in terms of generalities is there is two lines to be thinking of that will -- we believe will definitely increase in Q2 and that will be again around comp and benefits and around marketing.

Marketing is absolutely -- and to tie into Jim's comments -- we are rolling out a very strong series of campaigns right now, whether it is on TV, whether it is radio, whether it is direct mail, whether it is in the billboards.

So you would expect to see that continuation if not even slightly higher marketing expense in the second quarter and then you will begin to see that to tail off in Q3 and Q4.

As it relates to compensation expense, I think you would see us this would be a natural in terms of the extended hours initiatives and all the hiring plans that we've listed out in the update and some of the strategic initiatives.

So they are sort of the higher areas to expect.

We are running a series of, you should expect, however, the OneWebster savings that will continue to come through.

Expect us to continue to work away from a procurement perspective and from an efficiency perspective in other line items in Q3 and Q4 and see us trying to adjust and if not only completely offset, begin to bring expenses down in those quarters.

Do you have a sense of kind of how much expense can be removed through OneWebster if it is remaining?

We have about $5.5 million in remaining ideas that need to be executed on and you will start to see the benefits of that and again that is annualized that you will see start to flow through.

You will only get a part of that obviously in Q3 and Q4.

And then in addition it will be based on the success of how we continue then to execute on our continuous improvement and idea generations thereafter.

We do have opportunities that we have identified and you should see several million dollars worth of benefit in each quarter thereafter.

Great, thank you.

Sure.

Thanks, Dean.

Dean, you did ask, wait, I think there was a comment there about loan demand.

And I would think that on the loan side clearly, like probably others have reported, we continue to see softness in the market.

I do think that the real positive for Webster is the continued buildup on the small business as well as in the middle market areas as we continue to add folks, as the folks that we already added gain traction, we still look forward to some nice growth and because we are very, very focused on those specific areas.

I would think that you would see some moderation if not rebound in the residential area and I would think that we would probably stabilize more on the consumer side as well.

So, I think generally speaking, the first quarter was really a transition quarter for us as an organization.

I think we talked about that a lot in the fourth quarter that really because of the planned declines that we saw in ABO and equipment finance and Jim give some perspective in terms of where those balances would settle out we would expect that we would pretty much be there within the next couple of months.

And then you will begin to see sort of the new areas where we are very, very focused particularly in small business and middle market begin to take hold and really show consistent growth.

So we tend to think that the additions again, the additions to staff, the existing complement and just the way we are positioning ourselves in the market will be our competitive advantage to gaining some share back there.

Thank you.

Our next question is from Amanda Larson with Raymond James.

Please proceed with your question.

You had some very strong trends in the cures and I just wanted to know if there was any specific loan bucket that was driving the strong trend?

Yes, Amanda, it is Jerry.

The one point, that's why I wanted to bring it out the curing that is happening in terms of all the residential modifications.

That's probably the single category where we are seeing the best experience in terms of the fruits of all the work that was done over 6 months ago that is now coming back in.

I would say that category in particular.

I think there is obviously we talked a little bit on the commercial side that we had a couple of credits that came back in as well.

I think we have to point towards the modification program that we talked about a lot last year is really showing some of the benefits and with very low redefault rates that is a huge, huge positive for us.

And I think that's the compliment to the group and how they restructured.

I think when the loans were restructured they were done well and if there were writeoffs that needed to be taken at that point in time they were taken.

So I think we've set a lot of customers up for success and set ourselves up for success with the way the program has been managed.

Great, I appreciate your commentary on the projections for growth.

I was wondering to what degree do you believe consolidation in New England is necessary for growth in your legacy footprint in Connecticut with so many strong players there?

Amanda, this is Jim.

Hi, Jim.

Our focus is on organic growth and we believe that with the strategy and initiatives that I outlined which is one of the reasons I wanted to do that we would be able to achieve our goals through organic growth.

We are not looking so much at acquisitions at this point but do believe that as our currency recovers that over time there may well be the opportunity for us to make acquisitions or like minded partners that decide that the market is a little bit too crowded.

And as you know, historically we have done very well by combining with other institutions.

So we see that as part of our plan but not the focus at this point.

We also think that while there may well be significant consolidation in New England over the next several years, that it is not as immediate right now, that the focus is more likely to be on the very few assisted transactions that may come up in this region.

But that there will be consolidation in New England down the line and we would like to be part of it.

Okay.

Very much appreciated.

Thanks.

Sure, thanks.

Thank you.

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

Hi, Good morning guys.

How are you?

Jerry I was just wondering if you could recap your comments at end of your remarks regarding the NIM and fee income going forward.

If you were to look at the NIM for Q1 normalized without the buybacks it probably would have been around 331.

If you look at the higher level of buybacks we are expecting from the Fannie Mae buybacks, that probably takes about 6 basis points or so off of that number and basically in order to achieve that level and then continue to try and work up from there during the quarter we are going to need to be very, very diligent as it relates to deposit pricing and continue the discipline and also be very disciplined around loan pricing.

And again our expectations are you would see a rebound from that back more normalized in Q3.

Hope that is helpful and gives you a little more perspective around what to think.

Do we think there is upside to trying to offset some of the buyouts?

Yes we do.

And I think the flip side is it does really depend as well, though, on the loan mix that is booked during the quarter and in terms of some of the pricing decisions we make there.

Great, thank you very much.

Sure.

And then in regards to your core fee income going forward.

Could you just recap your comments on those lines of business?

Sure.

Deposit service fees will pick up because Q1 tends to be lower transaction volume quarters, just, seasonality.

And so we would expect a rebound there.

Generally speaking, I would expect that to more than offset the drop that we probably see in other income, there was a lot of ins and outs in other income during the quarter.

So, if you were to be thinking about consistency to Q1, that is probably not a bad way to think about it.

Okay.

Great.

And then just lastly with respect to your securities portfolio, that has grown to be about 29% of total assets, I think that is up from 20% a year ago.

Kind of where do you see that shaking out in the coming quarters?

Damon, and in my comments one of the things I wanted to try and highlight was the fact that we have got several billion of that in AFS, and we also you have to remember there is fairly high prepaid speeds happening in this portfolio.

It is probably paying down at $100 million or so a quarter or excuse me a month within the quarter so you have several hundred million dollars potentially that can come out of that portfolio at any given quarter just given where interest rates are.

And then also with all the securities in AFS it gives us a lot of flexibility to use that for funding loan growth.

I don't think it is our intention to grow the portfolio further.

We thought that it was necessary to deploy the inflows that we were fortunate enough to receive and certainly, we want everything.

We have talked a lot about the deposit side, it is all about organic, it is all us, and you can hear in a lot of the remarks today that is the way we are thinking about the loan side and there is really tangible evidence of that taking hold.

So the expectations are we want to see the loan side and get ourselves back to a lot more normalized loan to deposit ratio probably back in the upper 80s to 90% type of range and that would be the goal as well.

So I think the combination of not really wanting to grow the investment portfolio further, being able to use the cash flows from that to fund loan growth coupled with we have got all of the -- and a desire to get the loan to deposit ratio back now as things have stabilized more to what we would refer to as more normalized level for us going forward.

Great, thank you very much.

Sure.

Thank you.

The next question is from Bob Ramsey with FBR Capital Markets.

Please proceed with your question.

Hey, good morning, guys.

Good morning, Bob.

As you are looking at the aging of the modified loans, do you expect you will see a similar amount of NPL cures in the second quarter as in the first?

Good question.

We would expect to see a fairly consistent number, not necessarily as high a number.

So if you think about the program, and just in terms of the timing and sort of the six months that we take to make sure that these loans are performing before we will take them back into accrual status we probably had the high peak in terms of timing wise.

Okay.

And then as you think about the provision here, do you think that the build over chargeoffs will continue to narrow?

Obviously there is not a lot of cushion there and when do you think you may actually switch to provisioning less than chargeoffs?

We want to remain cautious which is why we continued to be actually slightly above.

I would expect we want to have more certainty in Q2.

Probably would say if from the chair today make the observation that we probably offset chargeoffs and I think that cautious approach will pay dividends down the road.

So I think in terms of being anxious to try and get into, are we going to start to charge off more than we provide, I think that may be something that we would look at in the second half of the year.

Clearly we think that chargeoffs will remain at a pretty good clip like we saw in the first quarter throughout the course of 2010.

That doesn't necessarily mean in the second half of the year that we would necessarily continue to replenish at the same rate.

But I would think for Q2 we want to make sure we are absolutely certain, in terms of and I think that is just prudent management, we are trying to be cautious about this, make sure there is no downward trends that we see.

Okay, great.

And then last question, as I think about the diluted share count for you guys, once you do swing back to profitability assuming the stock is sort of where it is today, what is a good diluted share count to factor in (inaudible) and the TARP warrants?

In terms of what we have got projected for Q2 through Q4 we are probably around 81 million shares if I have got that number accurate.

Might be a slight tick below.

Might be 80.7, rising to 80.9.

But gives you a pretty good band within which to work.

Great, thank you, guys.

Sure.

Thank you.

Our next question is from Matthew Kelley with Sterne Agee & Leach.

Please proceed with your question.

Hi, guys.

Hi, Matt.

On the Freddie buyout, what was the actual dollar amount that was bought out.

There is two issues.

There is your premium amortization but then you also have a lower investment yield.

Curious of the dollar amount on the Freddie buyout and then a similar overview of the Fannie buyout for Q2.

It is about $45 million that came out and then you could probably roughly say twice that amount.

So it would be in that range, maybe about $80 million related to Fannie.

And the reinvestment yields, how much lower would they be on that $125 million?

Maybe 1% or so.

Okay.

So the $1.4 million this quarter, the 3 basis points, that is just the premium amortization, correct?

Yes.

Yes, that is all you can take, yes, Matt, right.

But I mean just going forward you got 120, down 100 bps.

Right.

And you got it.

Okay.

And then on the Reg E changes, the $15 million, just to confirm that is a full year number, correct.

That would be the second half assuming zero opt-in.

That is just the raw number.

Okay.

And what Jim's comment was very consistent because I made a statement in the fourth quarter, we talked about a range of anywhere between $5 million to $7 million and we wanted to actually give you a broader perspective of what Jim did of no opt-in because of what we think our exposure could be.

So it gives you a sort of range of thoughts that we have been having around potential success rate or not.

We are not going to know that until we get to the third quarter and actually walk through the experience.

Remember, this is consumer optionality.

It is up to the consumer on the opt-in process here and that is going to depend on everyone's individual situation what they want to do.

I think the way we've laid out the plan, we will talk more about that obviously in the second quarter.

Just to be clear, the $5 million to $7 million is lost potential income in the second half of the year?

No, per quarter.

Okay.

We are saying that gives you a range of potential we think if you were to look at anywhere between $10 million to $15 million, $15 million would be the maximum.

Okay.

But that depends on opt-in rates and we have got, as Jim said, we are going to be very guarded about this.

We know how we are going to roll out the program.

We are very active in terms of executing on our strategy around that and we will certainly be in position to talk more about that on the second quarter call.

Okay.

We have a good program.

Fair enough.

And than just last question.

As you move to the positive side and then into the black, what should we be thinking about the tax rate?

20% for the balance of the year.

And then for next year?

I think you are going to look at something higher than that.

I think you will see some gradual increase.

We will give you guidance on that when Terry makes the rounds.

Okay.

All right, thank you.

Sure.

Thank you.

Our next question is from Collyn Gilbert with Stifel Nicolaus and Company.

Please proceed with your question.

Good morning, guys.

Good morning.

Just a question on the credit front.

You were cautious at the beginning of the year, a little reluctant to commit too much on the positive outlook on credit because of the CRE and equipment finance.

Just the performance you saw this quarter and I know you indicated if you see stability in the second quarter you will feel better.

Have you seen trends change in CRE and equipment finance that has given you more confidence or is it the overall market or maybe just talk a little bit about that?

I think and John is here today, too, and he will probably have an observation or two.

I think I will take the -- maybe he won't after I'm done.

In terms of sense, I think it is overall.

What we talked about and when you look at the detail slides there is good trends pretty much throughout the portfolio.

Clearly on the chargeoff side you saw better trends from equipment finance as well as from CRE but I think we still continue to feel very good about the way the portfolio has been managed on the CRE side, very good about the way we are working out the problem credits.

Sponsors continue to step up.

We continue to see some good signs in that portfolio.

The cautious comment is we are not out of the woods yet in terms of the industry but we think in particular for us it is better at this point in time to remain a little more cautious and give it another quarter before we say we have definitely seen that we have got more than a quarter or two's worth of data to say that we have absolutely got rock solid positive trends.

But the data sure points to it across the board when you look at the declines in delinquencies, the declines in NPLs, the declines in chargeoffs, the drop off as it relates to the provision expense that we had to book related to each portfolio.

Regarding equipment finance, clearly I think what you saw us do towards the latter part of 2009 was be very, very proactive to try and address and charge off a lot of the problem credits that we had within that portfolio and clearly you are starting to see some better experience from that portfolio that was very evident in the first quarter.

So I would say net/net, we are seeing and feeling good about the portfolio and you do always do a touch wood and you, just again, given all the uncertainty of the economy among just in terms of particularly around employment but in equipment finance it is a lot of small business owners.

And if you see that their demand starts to pick up you've got a lot of people then that obviously will be getting stronger cash flows than from the increased orders of business that they get, and we should see more stabilization as you think about the balance of 2010.

Okay.

That's helpful.

And then just, Jim, I know you have in the past mentioned a targeted efficiency goal of 60%.

Are you still on track you think to be able to achieve that?

Hey, it's Jerry.

Yes.

And I think the efficiency goal has to come from a combination of two things.

Clearly we have to continue to be after the expense side.

We are going continue to look at things like consolidation, opportunity, centralization opportunities of facilities but we have not been reticent to spend money here in the midst of all the things that we have been doing to really invest in the franchise and to build the earnings of the franchise and I think you can clearly see with all the business development officers that we are adding and the fact we are bullish about Westchester and putting a regional headquarters there that there is definitely some increased commitment that will drive expenses.

And the end result of that is that we believe they pay off with a lot more revenue opportunities and a lot deeper stronger customer relationships.

It has to come as well from the revenue side.

It has to come from greater asset size, greater earning asset size predominantly.

I hope that is helpful because I don't think it is -- people tend to spend a lot of time focused on that.

I know we have had some conversations in the past and it is not to say that we don't think that continuing to be very hawkish around expenses looking for renegotiations of contracts, looking for are departments structured appropriately?

Should we look to centralize versus decentralize?

Should we look to consolidate?

A lot of those ideas continue to be in play and that is with the whole OneWebster initiative aside, put that to the side, as it relates to the asset side of the company, we have to grow our earning assets and that is another big lever that we have to pull on that.

Okay.

I wanted to add something if I could.

In the context of getting a return on our capital, we see that the efficiency ratio would have to be 60 or less than that over time in order to achieve that.

But to Jerry's point, some of that may be driven by revenue rather than simply by reducing costs.

So we wouldn't say look for 60 in the second quarter or the third quarter of 2010 in part because we think now is the time to be investing in our future to create the opportunity for more revenue whether it is that extended hours program we are talking about or the business bankers or other things we mentioned here today.

As much as we are doing our best to be as efficient as we can on the cost side we are making investments that cause expenses that could push the ratio even a little bit higher over the near term even though we think longer term we would have to be in that range to be competitive and to generate the kinds of returns we think we are capable of.

That is very helpful.

One final question, I just want to make sure that I got your comment right, Jerry, on the securities front you said you are not interested in really growing that so we probably won't see the growth rate in the securities book going forward that we have seen in the last few quarters.

Yes, and if anything we may keep it at a stable level depending on how we see loan demand in the second quarter.

But there may be some increase as it relates to the average, Collyn.

I think that is one of the things so in terms of maybe point to point you won't see it, but In terms of the average for the quarter there could be a pop-up there, probably around $100 million or so.

But the one other thing to take into account again we really want to see, we are out there and we are being proactive.

We really want to lend.

And I think it is not just lend.

We really want to develop customer relationships and we have been very successful on the deposit side and we have really got to, as we see some economic recovery starting to kick through here and our ability to take away market share from competitors, that is really the key thing.

So this quarter is a lot about execution for us as an organization and in terms of signaling we certainly don't want to signal our intent in terms of getting to earnings is to grow the investment portfolio.

Okay.

That is helpful.

Thanks, guys.

Thank you.

Thank you.

Mr.

Smith, there are no further questions at this time.

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

Thank you very much.

Thanks everybody for being with us today.

We look forward to seeing you soon.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.