Webster Financial Corp (WBS) 2011 Q2 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's second-quarter 2011 results conference call.

This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provision 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 statement 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 second quarter of 2011.

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

Please go ahead, sir.

Good morning, everyone; welcome to Webster's second-quarter 2011 earnings call and webcast.

Our earnings release tables and slides are in the Investor Relations section of our website at WBST.com.

I'll start by providing highlights of the quarter and comments on strategy; Chief Operating Officer, Jerry Plush, will discuss asset quality and capital and report on our plans for achieving a 60% efficiency ratio, an initiative a recall Pathway to 60%.

Then CFO, Glenn MacInnes, who joined Webster last month, will review the quarter's financial results and will open it up for your questions.

Beginning with slide 3, we reported solid earnings per common share of $0.36 for the quarter.

This was unchanged from $0.36 in Q1, but, as you may recall, last year's quarter included a $0.02 gain from the earn-out related to the 2008 sale of our insurance agency.

I should say Q1 of 2011.

Revenue grew modestly both linked-quarter and year over year and the efficiency ratio also improved linked-quarter and year over year as revenue grew faster than expenses.

Linked-quarter revenue growth was driven by an increase in core business lending, a 2 basis point increase in the net interest margin resulting primarily from lower deposit costs and steady loan yields and higher non-interest income while core expenses declined.

While virtually all key metrics, business loan growth, margin expansion, higher non-interest income, asset quality improvement, a lower provision, lower expenses, higher pre-tax pre-provision earnings and EPS, are individually and collectively positive and encouraging, the stubbornly slow economic recovery challenges us to do more to maintain earnings momentum.

And we'll discuss our plans in this call.

Loan originations in the quarter were about $640 million of 17% linked-quarter and 11% year over year.

On the consumer side a marked drop in mortgage loan originations was mostly offset by increases in very high-quality secured home equity lending.

I want to call attention to our continuing solid performance in commercial non-mortgage lending, that's middle-market, small business and industry segment lending, where new loan commitments were up significantly from Q1 and balances grew 16.5% from a year ago, mostly achieved through share gain at good pricing as spreads for all commercial loans have continued to widen.

We're winning market share and growing our loan book in our core franchise despite the subdued economic recovery and demonstrated preference by many businesses to minimize exposure to debt.

Specifically regarding this key initiative, middle-market loans are up over 30% from a year ago and the pipeline remains strong as our market momentum and reputation as a reliable, committed local lender are driving the share again.

Middle-market DDA balances are up more than 25% from a year ago and our private banking initiative is gaining traction in this group.

Small business loan originations reached the highest level in three years while renewals and new loans combined for small business were the highest for any quarter in our history.

This is tangible evidence that our focus on building relationships with small-business owners from Westchester to Boston, combined with our efforts to broaden and develop our internal sales force and to recruit high-quality business bankers, are showing increasingly good results.

Commercial real estate lending represents a special opportunity for judicious growth.

We have a terrific and growing team of seasoned bankers who have good relationships with preferred sponsors and developers in our markets.

Strong originations in Q2 more than offset a continuing high level of repayments and the pipeline has also grown significantly which bodes well for future originations.

Loan growth overall was muted due to our controlled decline in equipment finance loans both linked-quarter and year over year as we pulled back to a regional footprint similar to our earlier decision in asset-based lending.

We expect the equipment finance loan book to stabilize in the fourth quarter as out-of-market run-off subsides and in-market originations increase.

Our view of the slowly recovering regional economy is consistent with the Fed's most recent beige book.

New England manufacturers continue to report small increases in demand while commercial real estate markets are improving modestly, retail reports are mixed and residential real estate markets remain weak.

Turning now to distribution strategy, our overall distribution strategy is designed to align Webster's delivery channels and capital investment with customers' shifting preference to utilize electronic and mobile channels to transact most of their banking business.

Customers still prefer branches and to some degree our customer care center to open accounts and seek financial advice.

We believe we can achieve the dual objective of shifting our investment from physical to electronic channels while reducing operating costs overall.

This is a key element of our Pathway to 60% that will Jerry will discuss in a moment.

During the quarter we announced the closing of six branches as of early October, bringing to 11 the number of branches we'll close this year.

As with the earlier closings, we expect minimal customer attrition.

With the exception of one small outlier office in Massachusetts, the branches slated for closure are all within a short distance of another Webster branch and about 90% of the customers of the affected branches regularly use other Webster branches.

These 11 closures complete phase one of branch optimization where we can simply close a branch with confidence that customers can easily be absorbed by nearby offices with minimal customer and revenue impact.

We don't anticipate further outright branch closings, but we do see a limited opportunity to combine a small number of closely located branches into better locations.

We also plan to relocate several branches over the next three years into smaller facilities or to better locations close by.

Typically these two-for-one combinations and branch relocations involve branches that are in facilities that are too large for the need or in locations that have seen traffic patterns shift or would benefit from additional capabilities like drive-thru's.

We've also embarked on a three-year project to optimize our ATM network by better aligning the location of our ATMs to household usage, transaction volumes and profitability.

Consistent with our branch optimization efforts, the realignment of ATMs responds to changing customer usage patterns.

We simply have more ATMs than our customers need, including 71 owned in remote locations many of which are not carrying themselves, as well as multiple ATMs in branches that may need fewer ATMs than they have today.

As part of this effort we've committed to upgrade our software to make our machines easier to use and to enable the capability to upgrade and add machines that do not require an envelope to accept deposits.

We're applying the same logic used for the branch decisions and we'll be replacing, moving, removing and in some cases adding ATMs.

Over time we expect there will be a net reduction in total ATMs and, again, as with the branches, meaningful improvement in efficiency.

As we optimize the physical infrastructure we're elevating our customer care center from a place where customer issues are addressed to one that also enables sales across all channels.

Front end technology improvements will enable us to recognize our customers and their relationships at the moment of connection.

Our customer care center will be an increasingly important relationship place where we can serve our consumer, mortgage and small-business customers efficiently and effectively while capitalizing on our highly regarded service attitude.

For example, we've begun a pilot in which dedicated representatives are assisting small business customers and we're pleased with the results to date.

We'll make appointments for our investment reps, take mortgage and consumer loan applications and follow up on marketing campaigns.

We expect that customers will appreciate these channel changes as improving the convenience of our locations and the continuity of our franchise.

Every branch and ATM location is under review as we seek to optimize our investment in physical infrastructure and improve efficiency in our delivery system.

Meanwhile, we'll continue to selectively open new branches and install ATMs in desirable locations with the goal of gradually and efficiently expanding the franchise.

Lastly, I'd like to address the Fed's final rule for implementing the Durbin amendment.

I'll resist the urge to editorialize on the evil of price controls and the damage that capping fees will inflict on banks' profitability and potentially the quality of investment in the payment system.

It is what it is and we have to deal with it.

While somewhat improved from its original version, the final rule still falls short of covering our all-in cost of providing debit card services.

We expect the final rule to reduce our annual revenue by about $15 million as compared to the $18 million to $20 million we previously estimated.

We observe that most of the sell side analysts who cover us have been adjusting their earnings models along the way based on our guidance.

Obviously some of the lost revenue will have to be absorbed by the account relationship rather than the card itself.

Our decision to replace completely free checking with a new suite of checking accounts in Q3 last year was timely and it will help us replace some of the lost revenue through higher balances or account fees.

Other moves are under active consideration, including our plans to rollout a reloadable prepaid card product in the near future, and will be needed to offset the one-two punch of Reg E changes to overdraft rules on debit cards and lower interchange revenue.

One bit of good news is that we believe that Durbin will not extend to our HSA accounts since they're bona fide trust accounts and therefore appear to be exempt from Durbin under revised definitions in the final Fed rule which we appreciate.

The current run rate for HSA interchange fees is about $6 million a year.

As I turn it over to Jerry, I want to express the sentiment that guides us in our planning process as we seek to invest in strategies that increase economic value.

With all of the improvements that I've noted, and our progress is clear to see, we recognize that we're still well short of our goals of creating sustainable operating leverage, driving our efficiency ratio under 60%, and earning in excess of our cost of capital, and that's where Pathway to 60% comes in.

For example, if we had operated at a 60% efficiency ratio in Q2 we would have earned in excess of our cost of capital.

We reiterate today our commitment to achieve that goal.

You'll be hearing a lot about Pathway to 60% in the quarters ahead as we report to you on our progress.

With that I'll turn it over to Jerry.

Thank you, Jim, and good morning, everyone.

If you'd turn to slide 5 of the presentation, here you'll see our key strategic priorities for what we refer to as the 2011-2013 planning horizon.

And you'll recall we established these priorities and announced them at our Investor Day in Boston last September.

These are based on our performance gaps compared to the top performers in the $10 billion to $45 billion in asset class commercial bank peer group, that's the peer group we measure ourselves against.

And all of our line of business plans, projects, investments, contribute in some way to the achievement of these priorities.

And you can see there's been solid progress in the quarter on many of these priorities that we'll be reporting on in detail over the remainder of our remarks.

First, a lot of focus has gone into growing transaction accounts and balances with an increase in non-interest-bearing and low-interest-bearing transaction accounts.

And that's grown to 16.9% and 18.1% respectively compared to Q1 of 15.5% and 16.8%.

Our transaction accounts now comprise 35% of total deposits, which is the highest ever.

As Jim just reviewed, you can see we had solid core business banking growth year over year and quarter over quarter.

We're expediting problem asset resolution; this quarter marks the lowest level of non-performing loans we've reported since March of '08 and this amount includes over $78 million of paying loans of which $31 million of consumer, which once seasoned within the next two quarters, should return to accrual status, and about $47 million of commercial, which is in various stages of negotiation to resolve.

I'll also cover in a few minutes the steps we've taken to expedite the sale of our existing REO inventory to reduce the cost of carry and improve profitability and focus in future periods.

And then, as part of our Pathway to 60% initiative, we've begun evaluating additional opportunities and sources of non-interest income as well as net interest income and then reductions in and optimization of all our expenses to ensure we're on a path to a 60% efficiency ratio.

We'll do more on that as well in a few slides.

So let's now turn to slide 6 for some key asset quality progression review.

Here we've provided a five-quarter trend in total non- (technical difficulty) loans, OREO repossessed property and our past due loans.

And what you can see here is a continuation of favorable performance in all categories.

Just a reminder, you can find individual credit and other performance data for our principal loan segments in the supplemental information that's posted in the Investor Relations section of our website.

We've also, again, posted disclosure on troubled debt restructures.

And as a preview, the TDR data will show you that balance that are accruing and non-accruing yields before and after modification and total loans modified greater than a year and which shows the strong performance of the loans that have been modified.

Overall TDRs declined by a net amount of $18.1 million as of June 30 as payoffs on existing restructures took place primarily in commercial real estate of $14 million in the quarter.

You'll note that non-performers declined by $33.7 million in Q2 as our new non-accruals declined by 27.9%.

We saw declines in every loan category in the quarter except commercial non-mortgage.

Our NPLs are now 2.07% of total loans compared to 2.92% a year ago.

REO and repossessed equipment portfolio declined by $6.6 million or 23% in the quarter and that totaled $21.8 million as of June 30.

This decline reflects $5.1 million of write-downs on foreclosed assets to expedite the sale of existing REO inventory within the next six to nine months and $0.8 million of write-downs and net losses on sales of $3.4 million of other properties in the quarter.

So let me make a comment here on the REO to give you some insight on some of our thoughts.

We want to minimize the additional expense of maintaining, reappraising the ongoing legal expenses among others, plus the cost of carry, which while relatively low in the current interest rate environment, could quickly become more onerous in a rising rate environment.

We've got to get these costs out of our results.

So with this ongoing drag on ROE, as long as we have all of these, is an impact to our insurance expense as well.

We've indicated expediting non-performers with a key strategic objective and after further consideration of holding and weighting versus marking these down further and pricing them all to move above all else, the plan is to have the bulk if not all of the existing inventory off of our books in the next two quarters with the potential for some deals to lag into the following quarter.

We also intend to explore alternatives to expedite the balance of the non-performing loan portfolio which I'll comment on shortly.

So again, in summary, with the significant reductions in NPLs from lower non-new accruals and increased cures as well as an REO from the write-downs to expedite the sales, non-performing assets have declined by $51.8 million or 17% in the first six months of this year and now total $250 million, or 2.26% of total loans plus REO.

That ratio was 3.21% a year ago.

Our past due loans have been below 1% of total loans for five quarters now and were down to 60 basis points at June 30.

The $18 million decline in past due loans during the quarter was led by a decline of $17.6 million in CRE loans.

You'll recall in our first-quarter conference call that one CRE credit for $13.5 million was past due at March 31; we expected that to refinance in the second quarter and that did take place.

You can refer to the tables included in the press release for some more detail on progressions by loan segment.

Let's turn now to slide 7 and here, again, we provided a reconciliation of NPLs over the past year.

New non-accruals were $49.7 million, the lowest level of the five quarters that we show here, and it's an improvement of $19.2 million from the first quarter.

Our cures and exits increased by $9 million from the first quarter, so when you combine lower new non-accruals, higher cures along with charge-offs and transfers to REO, you can see why we have a substantially lower level of non-performers in the quarter.

It's important to note that just 7.4% of decline from prior periods, by the way, of our troubled resolved loans in the consumer channel since March of 2009 have resulted in foreclosure which demonstrates our commitment to keep borrowers in their homes.

Our re-default rate on modified resi and consumer loans is running around 13% and this continues to have a favorable impact on our results and it's reflected in our cure numbers again -- once again this quarter.

Our performance continues to be very solid in comparison to industry rates and it reflects an overall approach to successfully working with at-risk borrowers.

So we'll continue to explore all opportunities to expedite reducing the balance of the non-performing loans.

So again, remember that $78 million of these are performing non-performers, which means they've been modified, their paying is agreed and appropriately weighting for the $30.6 million of consumer to season before returning to accrual status and for the $47 million of commercial to complete the various stages of renegotiation to resolve.

So the real population that we need to focus on is the approximately $150 million of nonpaying loans as of June 30.

So even so, having much if any level of non-performers impacting our results, you can be assured we're continuing to look at ways to minimize that in the third quarter and beyond.

We'll turn now to slide 8 and take a look at the allowance for loan losses.

The provision for loan losses now has declined for the seventh consecutive quarter.

The provision was $5 million for the quarter, noticeably low net charge-offs for the fourth quarter in a row, and it's at its lowest level since the second quarter of 2007.

Our ability to report provision less the net charge-offs reflects the continued improvement in all of our key asset quality indicators, including the fact that commercial classified assets declined over $79 million or over 10% in the quarter, as well as the overall adequacy of the allowance when measured as a percentage of coverage to non-performing loans, and also from declining levels of past due loans as well.

So our net charge-offs of $21.7 million are after $4.7 million of recoveries in the quarter, and our level of recoveries in the quarter were very consistent on average with recent quarters.

Our allowance for loan losses now represents 2.55% of total loans and our coverage ratio is 123% of total non-performers.

So you can see, even with the lower provisioning, our coverage of our non-performers remains well above 100%.

And again, as a reminder, we've got five quarter trends, stats and information on each of the segments posted on the supplemental slides.

If we'll turn now to look at the Capitol beginning on slide 9.

Our tangible common equity ratio increased to 7.28% at June 30 from 7.10% at March 31.

The Tier 1 common to risk weighted assets, which we view as a very highly valued regulatory capital measure, that grew to 10.79% from 10.53% at March 31 and from 8.12% a year ago.

And our tangible book value per common share increased to $0.1442 as of June 30 for growth of 13% over the past year.

This marks the fifth consecutive quarter of increased tangible book value per share growth.

Our capital levels remain well in excess of regulatory requirements and our internal targets we believe are already fully compliant with Basel III including the conservation buffers.

And our excess capital will enable us to pursue loan growth; it supports the increase of the quarterly cash dividend of $0.05 per common share that we announced on April 26.

As you noted in the last quarter, we expect a dividend payout ratio to be in the range of 10% to 20% over the near term and that $0.05 per quarter is about 14% based on second-quarter earnings.

Over the next several quarters this could potentially rise depending on what the other needs for capital are be it, for example, mergers and acquisitions at that point or for growth in the loan portfolio among other factors.

We would take all of these into account when considering future dividend levels.

On slide 10 we're pleased to have acquired just under 70% of the roughly 3.3 million of warrants to purchase the Webster common stock in an auction conducted by that US Treasury on June 2.

The warrants were issued to the treasury in November of 2008 under the Capital Purchase Program and the auction occurred subsequent to Webster's full repurchase of CPP last year.

Webster and the other investors who acquired the 1 million warrants paid $6.30 per warrant under the auction.

Webster's repurchase of 2.3 million warrants for $14.4 million reduces potential future dilution and we consider it to be a highly efficient use of capital.

The 3.3 million warrants represented 557,000 shares in the average diluted share count in the first quarter, which was the last full quarter before our purchase of about 70% of the warrants.

So in the second quarter, 2.9 million warrants were outstanding in the average representing 342,000 shares in the $92.2 million(Sic-see press release) average diluted share count for the quarter.

Note also that the warrant repurchase, along with favorable market valuations, had a favorable impact to the fully diluted share count this quarter which declined from Q1.

We'll turn now to talk about efficiency and we've included a slide on recent quarterly progressions in our efficiency ratio and that's calculated using SNL data basis methodologies so as to provide consistency in comparison with peers.

This is the yardstick that we measure our progress in managing the Company to an efficiency ratio lower than 60%.

Now, Glenn is going to provide full details on the revenue expense on non-core elements that you see here for Q2 during this portion of this discussion, but you can see on the slide there's some improvement that occurred during the quarter as the efficiency ratio came in at 65% compared to 67.61% in the first quarter.

Revenue has grown in each quarter, as seen here, in what's been a challenging operating environment and there's a reduction in core expenses in 2Q.

We recognize there's much work still to be done to get below 60% and I'll now map our specific thoughts on the project we've called Pathway to 60%, or [Pto60%], as we now turn to take a look at this on slide 12.

So in looking at the Pathway to 60%, let me start by saying we realize there is more pressure than ever to get this done now.

The implications of Durbin that Jim reviewed, the potential margin compression from the current rate environment, and there's likely more compression once rates begin to rise given the $2 billion in loan floors in place which serve us very well today, as well as competitive pressure and regulatory compliance, all of this will go into impacting the efficiency ratio.

Improvement in efficiency will require contributions from a combination of revenue enhancements along with expense optimization and reductions.

So, when you look at 2Q for example and you annualize this, it would have taken $38 million in additional revenue and in lower expense to achieve a 60% efficiency ratio.

Our goal is to add revenue in both net interest and non-interest income and to optimize and further reduce expenses.

So, at a high level here's a walk-through to our approach.

Examples in each category which is not all-inclusive of everything being considered or implemented follow.

So first, let's cover net interest income.

We'll continue to use disciplined loan and deposit pricing and you can see the benefits from this in the quarterly improvement in the NIM; further NPA reductions and the reinvestment of proceeds into earning assets which you can see some of the progress in steps that we're taking there; continued growth in core deposit transaction accounts to further reduce our funding costs; and certainly growth in overall earning asset levels which we expect in coming quarters.

In non-interest income such items would include changes in pricing of deposit fees such as overdraft, paper, statement fees for those not on e-delivery of monthly statements, growth in wealth and investment fees from renewed focus on growth in this line of business and the rollout of reloadable debit cards among others.

And for non-interest expense, examples will include the rationalization of all our staffing levels in each area, and that will start with an analysis on temporary help and contractors ensuring appropriate [expanse] control; we'll look at the impact of consolidating and closing facilities, what we've done now and additional steps among others.

We'll benchmark all of our benefits expense through branch combinations and continued corporate facilities optimization.

We'll justify all vendors and professional services and all contracts and we'll look to self fund all investments and projects both in fiscal plant and technology among others.

This list is certainly not all inclusive.

But again, our goal is to look for sustainable expense reductions against our current run rates.

And some of these things are evident already.

For example, we announced a number of branch and facilities closures in prior quarters and you can see a portion of that benefit in lower occupancy expense in 2Q.

And this will all continue to build as we optimize branches, ATMs as well as corporate facilities in future periods.

So as we complete this process this quarter we'll update everyone no later than our third-quarter earnings call on all final decisions and outcomes.

At this point, I'm going to turn things over to Glenn who will provide a review of our financial results.

I just want to say that we're delighted to have him on our team.

He's already making a meaningful contribution in his new role in the very short period of time that he's been here and we look forward to even more from him in future periods.

Thank you, Jerry.

It's great to be part of the Webster team and I look forward to working with you who follow Webster.

Let me start by turning to slide 13 which provides an overview of our core earnings for the second quarter.

As we highlight, for the period ending June 30 Webster reported pre-tax income of $50.1 million, this compares to $44.6 million in the first quarter and $18.2 million prior year.

Our core pre-tax pre-provision earnings were $60.4 million; this compares to $54.5 million in Q1 and $57 million a year ago and represents our highest pre-tax pre-provision earnings since the fourth quarter of 2008.

As we have done for you in the past, page 13 provides a reconciliation of our pre-tax income or pre-tax pre-provision.

Now let me give you some color on these items.

First, as Jerry highlighted, during the quarter we had a provision for loan loss of $5 million.

Next we had a gain on investment securities of $1.6 million, which is the net result of a sale of $182 million in mortgage-backed securities and the sale of a non-accruing pooled trust preferred security.

In addition, we had $794,000 in foreclosure write-downs and net losses on sales of the OREO in the quarter.

[The] quarter also included a total of $6.1 million up specific items.

Included in this number are the following -- a $5.1 million expense for write-downs on foreclosed and repossessed assets related to expediting the sale of the existing OREO inventory as highlighted by Jerry; a $1.1 million expense for severance and related charges due to organizational realignment; an $859,000 charge for branch and facilities optimization; a $350,000 expense for legal fees associated with our registration of warrants held by the US Treasury; a $194,000 provision for litigation and settlements which relates to post-judgment interest; and lastly, within our operating expense, we had a net reduction of $1.4 million, which is composed of a $3.3 million reduction in reserves for unfunded commitments.

Similar to our overall progression and credit, this reduction is reflective of an improvement in the credit metrics of the commitments, partially offsetting this reduction was a $[1.8] million provision to increase our loan repurchase reserve.

This is the result of a successful negotiation in a settlement on a large portion of potential exposure from prior period sales.

This settlement effectively reduces future claim exposure and the increase is reflective of an adequate reserve on the remaining portfolio.

I will turn now to slide 14 which focuses on our quarterly core performance and earnings drivers in Q2 compared to the prior four quarters.

The $5.9 million linked-quarter increase in core pretax pre-provision earnings reflects an increase of $2.1 million total revenue and a decrease of $3.8 million in non-interest expense.

As you can see, our reported pretax income also improved by $5.5 million, or 12%, versus prior quarter and $31.9 million over prior year.

Key drivers for the quarter include the following -- net interest income was $140 million in the quarter, primarily as a result of further expansion in our net interest margin which averaged 346 basis points in the quarter.

The two basis point increase over prior quarter is reflective of both our disciplined approach to loan and deposit pricing and further improvement in the deposit mix.

Non-interest income increased $1.5 million from Q1 despite a $1.1 million gain from direct investments during Q1 reflected in other income.

The increase for the quarter is primarily due to particular strength in loan fees, wealth and investment services and deposit service fees.

With respect to non-interest expense, our $3.8 million decline in core expenses includes the anticipated decline in compensation expense from a seasonally high first quarter as well as lower occupancy and marketing expense.

In summary, we are pleased with the solid results for the quarter as well as the consecutive progress we have made on the path to becoming a top-performing institution.

That being said, as both Jim and Jerry highlighted, we believe there's more to accomplish.

Moving on to the balance sheet, our investment portfolio is highlighted on slide 15.

The portfolio totaled $5.3 billion at June 30 with $2.2 billion or 41% in the available for sale portfolio and $3.1 billion or 59% in held to maturity.

The portfolio currently represents about 30% of our total assets.

This ratio will fluctuate primarily based on asset liability and liquidity needs.

As you can see, the securities portfolio decreased about $140 million in the quarter, with $52 million of the decrease in the available for sale portfolio and a decrease of $88 million in the held to maturity portfolio.

The modest reduction was intentional as we anticipate better buying opportunities in the second half of 2011.

Purchases during the quarter continued to be in the agency CMOs with three and a half to four and a half year duration and limited extension risk.

The full TruPS security sale leaves us with just seven remaining bonds with $57 million of book value, six of which are fully paying and the remaining bond is expected to resume payment in 2011.

The total portfolio duration was 3.6 years at June 30 compared to 3.9 years at March 31; the decline was driven by a reduction in interest rates during the quarter.

We keep duration shorter in the available for sale portfolio given it serves as a primary source of liquidity.

The held to maturity portfolio is composed of longer duration assets that match liabilities while providing protection to the capital position in a rising rate environment.

The portfolio also provides significant liquidity in the form of high quality collateral for pledging purposes and monthly cash flow.

Included in that held to maturity portfolio is $661 million in municipal bonds and notes.

The municipal portfolio is comprised of bank qualified bonds, over 94% rated A or better in 81% rated AA or better.

In addition, the municipal portfolio is composed of 84% general obligation loans.

The overall securities portfolio yield was up 10 basis points in the quarter as a result of slower prepayment speeds on premium bonds and the sale of lower yielding mortgage-backed securities.

As we highlight in the footnote, the AFS portfolio includes $45.4 million in unrealized gains at June 30 versus unrealized gains of $35.9 million at March 31.

And the held to maturity portfolio excludes unrealized gains of $115.6 million compared to unrealized gains of $73.7 million at March 31.

Our interest-rate risk profile is modestly asset sensitive in rising rates even with a flattening yield curve.

During the last year we have been prudently executing forward starting swaps to lock-in fixed rates on anticipated future borrowings and we entered into a structured repo that converts to a fixed rate in the future.

In total these transactions add up to $500 million in new fixed rate funding with terms of three to six years.

The first $100 million of funding took place on June 1 with the next $100 million expected near the end of Q3.

Pressure on our NIM would likely occur in a period of protracted low interest rates and a decline in long-term interest rates.

Slide 16 highlights our loan mix and yields.

Yield on the portfolio increased 2 basis points to 4.41% and is reflective of strong pricing discipline previously noted.

Modest increasing yields in commercial, commercial real estate and consumer portfolios more than compensated for a 4 basis point decline in the residential portfolio.

As Jim noted, the net growth in our commercial category is a result of strong growth in our commercial non-mortgage portfolio which was up $84 million or almost 20% on an annualized basis, partially offset by a decline in balances in equipment finance as a result of our regionalization effort and relatively flat balances in asset-based lending.

The reduction in the residential portfolio is a net result of amortization of payoffs exceeding originations which were impacted by rising rates.

Also, we continue to sell all of our conforming fixed-rate 20- and 30-year mortgage originations.

The reduction in the consumer portfolio reflects lower line utilization of 52.5% in June versus 54% in March.

As a final note, we believe the continued focus on commercial and commercial real estate will result in a favorable change in our loan portfolio mix and position us well for eventual higher interest rates in the future.

We'll now turn to slide 17 and take a look at our deposit mix and cost.

Total deposits decreased by $408 million from March 31 as a result of declines of almost $615 million in money market deposits primarily in government banking which typically reaches a seasonal low point in the second quarter.

As I highlighted in my opening comments, we are particularly encouraged by the demand deposit growth which increased by about $140 million from March 31 and now stands at 17% of the total deposit base compared to 15% in March and 13% a year ago.

The core to total deposit ratio remained at 78%, similar to prior quarter and up from prior year 74% and our loan-to-deposit ratio was 80% compared to 78% at March 31 and 81% a year ago.

So in a historically low rate environment our improved mix, as well as our continued pricing discipline, resulted in further reduction in the cost of deposits.

For the quarter we were at 62 basis points, a 4 basis point decline from Q1 and a 25 basis point decline from a year ago.

On another point with regard to the CD portfolio, we don't expect significant declines in balances or costs due to a low level of maturities in the coming months.

Of course we continue to evaluate pricing opportunities in all the account types and believe we have some additional room on the deposit side.

Turning now to slide 18, one of Webster's competitive advantages is the ability to gather deposits across five lines of business.

With the exception of government banking deposits, which are driven by seasonality, we continue to build deposits across all lines.

Specifically I would highlight small business and commercial banking which have realized a 6.6% and 5.9% improvement respectfully versus the prior quarter.

What's impressive is that this was done while continuing to reduce deposit cost.

On slide 19 we highlight our borrowing mix and cost.

The $223 million increase in short-term borrowings from March 31 coupled with a decline of $187 million in securities and interest-bearing deposits are the offset to the $408 million decline in net deposits during the quarter.

The increase in short-term borrowings took the ratio of borrowings to total assets to 11.5% at June 30 compared to 10.2% at March 31.

This ratio has consistently been in the range of 11% to 14%.

The increase in the cost of borrowings reflects the lower average balance in Q2 versus Q1.

The decrease in the average balance was achieved primarily by paying down short-term borrowings at 30 basis points or less, thereby increasing the average cost in Q2 since most of our borrowings are longer-term.

Also in the quarter we redeemed $2 million in Eastern Wisconsin Bancshares Trust II, which explains the small reduction in the long-term debt that you see here.

This follows the redemption of $10.3 million in new New [Milford] Statuatory Trust in Q1.

As a result Webster now has $223 million in trust preferreds outstanding at June 30 compared to $236 million at December 31.

During the third quarter we intend to redeem an additional $10.3 million trust preferred securities with a coupon rate of 11.7%.

Like the other issues, the instrument is slated to lose its Tier 1 capital status beginning 2013 and we think these are costly forms of Tier 2 capital.

All three TruPS were from prior acquisitions.

So before turning it back over to Jim for concluding remarks, let me provide a few comments on expectations for the third quarter.

Starting with NIM, we'd expect NIM to be about where it is for Q2, so in the range of 343 to 347 basis points.

This is likely to be the net result of continued pressure on asset yields being offset by pricing initiatives.

Further, we would expect our average earning assets to increase modestly in the third quarter.

As we have discussed, credit continues to experience positive trends along all key asset quality metrics.

Assuming this continues we would expect to see comparable levels in provisioning in Q3.

With respect to core non-interest income, we would also expect it would be relatively comparable to Q2 exclusive of mortgage banking and one-time gains.

Non-interest expense we would expect to continue to be in the [$125 million] range.

As you know, we are working hard with an eye toward improving our efficiency and expect that we will start to see the results of this effort beginning September and into Q4.

With regards to the tax rate, our second-quarter tax rate of 31.7% included a discrete item.

Excluding this our rate would have been closer to 30%, so a 30% tax rate would be appropriate going forward.

Lastly, fully diluted shares based on our current market price I would assume to remain about 92 million.

With that I'll turn things back to Jim for concluding remarks.

Thanks, Glenn.

The second quarter is replete with accomplishments and favorable trends and at the same time reminds us that we've got much to do.

We're strong, we're focused and we're committed to the Pathway to 60% as the way to increase economic profit for our shareholders.

This concludes our prepared remarks.

We'd be happy to take your questions.

(Operator Instructions).

Ken Zerbe, Morgan Stanley.

Thank you.

Just a quick question on -- in the Pathway to 60%, I know when Jim ran through -- sorry, when Jerry ran through I guess the different items, the net interest income, the expense side -- is there a way to quantify how much of the reduction in your efficiency ratio comes from sort of expense items that you can actually control versus revenue items which you cannot control?

Hey, Ken, it's Jerry.

Yes, you know, good question and I think, as I had indicated, we're going to give you obviously a lot more clarity in the upcoming call or maybe even potentially just before the end of this coming quarter depending on what presentations we have with the investor community.

But I would say you can be assured that given a piece of this is going to come from earning asset growth -- you know, Glenn's given guidance that we would expect to see some growth albeit slow, you'll see a piece come in there.

You'll see some of it, because, you know, on the fee side, particularly in the quarter, a lot of the things that we were talking about aren't getting implemented and begin to actually start to show in results until the month of September.

So you'd start to see that begin to flow through -- and you're talking in the millions of dollars that are going to be coming from it, I'll refer to it as the single of millions of dollars if you were to try and measure it within a period and then annualize it.

So it's very -- you can safely assume there's a large piece of this that certainly, as you -- we're entering into 2012, is going to be coming out on the expense side.

And that's why there really wasn't a line item on the expense side that's not going to go through intense scrutiny.

I happen to -- we didn't cover specifics on marketing or FDIC insurance, but there's obviously initiatives in those areas as well.

So I think you could say it's safe to say you're probably looking maybe 25-75 in terms of percentages as kind of a placeholder to think about.

But it could skew a little bit one way or the other depending on the success.

And certain things roll out and they're more successful than we're running our protections on the revenue side and obviously that will take a little bit of the pressure off on some of the actions.

But the bottom line is not just to get to 60 and I think that's the key point we're trying to emphasize.

And the most important thing is we want to make sure it's sustainable.

I'm sure one of the questions that will come up is we've gone through the One Webster initiatives in the past.

And you know, all of those savings that occurred, because you were comparing a baseline back to '07, were offset by the fact that we've always, across the industry, had much higher FDIC insurance expenses.

We've obviously invested in people, we've geographically expanded.

You think about the emphasis we placed in the regional hubs, the additional business development officers, the build out of risk.

So there were clearly conscious decisions that were made to strengthen the organization and to expand.

So our view is we're taking all of those type of things in account too as well, sort of the strategic plans that we've got and saying where are we going to make sure that everything we're going to put in place gets us to this being sustainable.

And the biggest risk that we all know, and I think we've said it a couple times, is just the margin compression that could take place.

And we are concerned in a rising rate environment that you could see obviously some compression because of the floors.

That will be temporary and could sort of bob that number up and down in the future.

But our view is, sort of going back, we want to make sure that everyone would recognize we know a lot of this has to come from the expense side.

Okay.

And --.

I'm sure that was much longer then you were expecting, you just wanted some specific numbers.

But I'm just not going to put targets out there other than the percentages that we gave you on specific dollars (multiple speakers).

No, that's fine.

I'm sure we'll get more detail (multiple speakers).

You get an idea directionally and you're not that far away from getting more facts on this.

Got it, okay.

And then just a quick question, on the OREO expense, how you took a big charge to kind of clean that up for sale, I just want to make sure I heard correctly that you're going to have most of your OREO gone in two quarters, maybe a little bit into the third quarter going forward.

But have you priced that or marked that down to -- like the entire portfolio down to sale value at this point?

Or was the charge taken this quarter related just to the pieces you expect to sell near term?

Yes, no, take the existing inventory, we went through asset by asset and we've either got it under a sale agreement, we've got an indicative bid, or we've gotten the best view of what it will take to move it, which is why we're looking to take that remaining $21 million in change and have it off of our books.

And again, my comment was the next two quarters is what we're targeting and clearly there could be some slippage going into Q1.

But the goal is really to try and get it off within the next two quarters and that's what the team is working very hard at.

All right, great.

Thanks.

Sure.

Bruce Harting, Barclays Capital.

Hi, this is actually Eric Beardsley filling in for Bruce.

You guys had talked about your strong Tier 1 common ratio of 10.8% and seeing an opportunity for organic growth and M&A with that.

But I didn't hear you mention share repurchases.

How do you think about that in terms of your capital deployment longer term?

Yes, Eric, I think we've been very up front that our view short-term -- certainly 2011 view is we continue to look and evaluate the dividend levels in the short term.

And then we did not rule out if you look over the longer horizon the option of using share repurchase to optimize.

So I think it's still on the table, it's just not something that would be a -- we would consider to be in the offing in 2011.

We look at it more as a long-term tool.

Okay.

And is there a specific Tier 1 common ratio that you're managing to longer term?

You know, we're certainly high in the range I would say is probably the best way for you to think about it.

I think if -- we want to make sure that we see where everything obviously ultimately falls out, but I think we're looking at -- we're happy with where our TC levels are, if anything they're a touch high against their targets and I think we would say the same thing about our Tier 1 common.

Yes, on the Tier 1 common we'd say we're well over our internal standard.

So we've got plenty of room to be able to grow or consider deployment.

All right, great.

Thanks a lot.

I think around 9% longer-term would be a good number.

Mark Fitzgibbon, Sandler O'Neill.

Hey, gentlemen.

Two questions for you.

First, could you share with us the size of the loan pipeline right now?

I don't think we normally disclose the size of the pipeline, Mark, but we try to make it clear that on the commercial side, whether we're talking about middle market, small business and commercial real estate, that the pipeline is quite strong (multiple speakers).

Even stronger than it was last quarter?

At least as strong.

Yes, Mark, and I think our view would be that it's strong across all three lines of business there.

So if you were to look at small business, middle market and CRE, good activity in all three lines.

So the expectation is for greater contribution than you see.

Okay.

And then, Jerry, I think you mentioned in your comments about dividends that -- something about potential acquisitions.

Last quarter you had sort of said that was not a priority for the Company.

Has the view changed?

Yes, I think the view though, Mark, has been very consistent.

We obviously think that there's value to return to our shareholders in terms of improving the currency and that's why the Pto60% is so important for us, that the better we improve our profitability the stronger our currency is.

So we are -- we're not saying that we're -- I think we've been consistent all along saying that we would look to folks who've got similar views and I think Jim has consistently used the words "like minded partners".

I think we've been consistent on that.

We've talked about M&A not being our top priority and the top priority meaning our top priority is executing and I think that's really been the focus.

So probably more of a down play than necessarily off the radar screen.

Clearly at this point we see as credit continues to improve we continue to get stronger and this could become more and more of a consideration for us if opportunities present themselves.

Yes, I'd like to just add one thing to that.

I think the way we've characterized it before is not a priority over the near term, though interested in having discussions with those like-minded partners that would value our currency in a transaction that would have strategic value for us as well.

And we've said also that we need to demonstrate that we're a high performer before we go out and start inviting other people into the fold.

And I think that we're one quarter closer to that than we were the last time that we talked about it.

And given now that we've laid out our plans for Pathway to 60% we can actually see the time where we would begin to acquire.

Thank you.

Damon DelMonte, Keefe, Bruyette & Woods.

Hi, good morning guys.

How are you?

Hey, Damon.

Hey, Damon.

Could you give a little color as to where in your footprint you've been seeing the commercial loan growth?

Is it more in the home base of Connecticut or are you seeing more traction in the Boston area?

It continues to be strong clearly and where we've geographically expanded, but we're also taking share in our home state as well.

So I would say, Damon (multiple speakers).

Can you describe some of the pricing trends that you're seeing?

Yes, Damon, I just wanted to make one additional comment.

It's been pretty consistent for us and I think that's reflective of the quality of the team, as Jim was mentioning.

So I think we're pretty pleased with the efforts we're seeing across the footprint and I think that shows in the numbers.

So, I'm sorry, you had another question?

I'm sorry, I have another question, yes.

Regarding deposits, you had some outflow this last quarter in the money market accounts.

It looked like it was in governmental.

Is that just more seasonal?

Yes, it's a combination.

It's -- a big piece of it's seasonal with June 30 being year-end and there's obviously draws.

We're also continuing to price down and if certain entities find options elsewhere where there's a competitor willing to pay a higher rate, our view is we're very focused in that line of business on core operating relationships.

And I think that this money is -- it can move at a moment's notice sitting in those money market accounts.

So our sense is that a lot is seasonality, there's also some that relates to the discipline we've continued to apply around pricing.

Okay, great.

And then I guess just quickly on TDRs, are you guys forecasting any type of an impact of the new rules that will be coming on board in the third quarter?

You know, we're continuing to look that TDRs could have the same kind of trend as you go forward.

We don't really think that there's an impact for us.

Okay.

That's all I had.

Thank you.

Casey Haire, Jefferies & Company.

Hi, good morning, guys.

My question is on the equipment finance product.

You know, it's at what, 5.78 now, which is I believe the level you said was the right size level last quarter.

Do we expect the run off to stabilize going forward here?

Yes, we actually said in the discussion that as we pulled back to regional that there is pay down in the broader markets as we had anticipated and we expect that to continue into the fourth quarter as we ramp up on the regional side.

So the stabilization we did say would occur, we expect though, consistent I think with what I said on our last discussion, that that would happen toward the end of the year.

That could occur anywhere around 500, even a touch below 500.

But we expect we'll probably reach stabilization in Q4, Q1 most likely (multiple speakers) while we're beefing up the sales staff within the region to generate additional originations.

You probably noticed that the origination number was low as well.

So we expect the runoff to decline and the originations to increase likely Q4, maybe into Q1.

Okay, great.

And then just a point of clarification.

On the interchange hit, you expect a $4 million hit beginning fourth quarter, is that correct?

We said it's a $15 million annual impact, so that might be close, yes.

Okay, so that would be about -- what was the -- I mean what's the run rate -- what's in the interchange -- what's in the run right now for interchange?

Around 21 to 22.

21, 22.

Okay.

Great, thanks very much.

Sure.

Thank you.

We have reached the end of our allotted time for the question-and-answer session today.

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

We think there may be some more questions in the queue?

Rob?

Okay, sir, let me check that out for you.

Stand by, sir.

Sir -- I'm showing there are no questions (multiple speakers).

Okay, they may just have disappeared there apparently.

Okay, listen, thank you, everybody, for being with us today.

We look forward to keeping you posted on our Pathway to 60%.

Have a good day.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.