Webster Financial Corp (WBS) 2013 Q2 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's second-quarter 2013 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 might 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 second quarter of 2013.

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

Please go ahead, sir.

Thank you, Jessie.

Good morning, everyone.

Welcome to Webster's second-quarter earnings call and webcast.

I am joined by President and COO, Jerry Plush, and CFO, Glenn MacInnes.

Based on your feedback, we shortened our remarks to about 20 minutes with less focus on strategy and more on quarterly performance.

Webster delivered solid second-quarter results driven by several factors.

A stable net interest margin and strong commercial loan originations contributed to record net interest income.

A 16% year-over-year increase in noninterest income reflected gains in deposit fees, loan fees, wealth and investment services and mortgage banking.

Overall, revenue grew by over 5% year-over-year to a quarterly record.

Improved asset quality was marked by a sharp linked quarter decline in commercial classified assets, a 6% decline in nonperforming loans, and the lowest net charge off since 2007.

Core expenses declined both linked quarter and year over year.

We are really pleased about that.

The result was a 13% year-over-year increase in pretax earnings and a 9% increase in earnings per share.

Positive operating leverage of 6.6% drove the efficiency ratio back below 60% from 63.75% a year ago.

Return on assets climbed to 92 basis points and return on equity was 8.8%, still short of our overarching financial goal to deliver economic profit but ever closer to our goal to be a high-performing regional bank.

Net interest margin flat at 323 basis points benefited from continuing solid commercial loan originations and in part from a slowdown in premium amortizations in the securities portfolio.

Commercial and commercial real estate loans grew at a 16% annualized rate in the quarter matching their strong year-over-year growth rate.

And loan yields and spreads stabilized as the fundamental shift in the yield curve appears to be taking some pressure off loan pricing.

We're well-positioned for the long end up interest rate scenario.

In fact, our investment portfolio strategy was built with this outlook as the highest probability.

Glenn will discuss the investment portfolio in more detail but let me note that the value of our available-for-sale portfolio declined less than 2% during the quarter and tangible book value was unchanged despite a 70 basis point rise in the 10-year treasury rate.

The regional economy across our four-state footprint continues to grow at a slow but steady pace that has characterized recent quarters.

The outlook for businesses in the region is fairly positive with most expecting the current pace to continue or pick up according to the most recent Fed Beige Book.

Meanwhile, the housing market continues its recovery both in sales volume and pricing.

In our core Connecticut market, May home sales were at their highest level in three years and the median price per single-family homes rose 8%.

Turning to capital, last week the Federal Reserve finalized its rule implementing Basel III capital requirements and related Dodd-Frank changes.

Those changes were approved by the OCC and FDIC earlier this week and include three pieces of relatively good news for Webster.

First, regulatory capital ratios were unchanged from the proposed rules in the Basel III NPR.

Second, while advanced banks must include unrealized available for sales securities gains and losses in capital, midsized banks like Webster can opt out of that treatment.

This allows us to avoid regulatory capital volatility and managing our balance sheet and interest rate risk.

Third, proposed risk weightings on mortgages and home equity loans will not be implemented leaving Basel I treatment in place, which results in an estimated forward benefit of about 75 basis points in our Tier 1 common to risk-weighted assets ratio as compared to the original proposal.

Now that we have final capital rules and greater clarity on stress testing, let me encapsulate our capital strategy by saying that we are setting our capital targets to provide sufficient cushion not simply to meet a point in time standard but to also confidently pass the annual regulatory severely adverse stress scenario.

At this point, a 10% target for Tier 1 common to risk-weighted assets seemed reasonable leaving us with a comfortable cushion.

We estimate that all of our regulatory capital levels remain well in excess of the recently published Basel III regulatory requirements with tangible capital above 8% and Tier 1 common above 11%.

And in further capital development this week, the FDIC proposed increasing the leverage ratio at large complex banks and holding companies to as high as 6%.

For comparison purposes, our leverage ratios are 8.9% at the holding company and 8.2% at the bank.

This proposed rule could have multiple positive competitive ramifications for well-capitalized regional banks like Webster given the challenges it poses for the big banks, most of which we will need to build capital.

So we are pleased with our capital position and continue to target a dividend payout ratio in the 30s consistent with the Board's decision in April to boost the dividend by $0.05 a share to $0.15 or a 32% payout.

Given the newness of the capital rules, we will be cautious regarding stock buybacks for now.

In closing, I hope to see many of you at Webster's Investor Day in September in New York City.

For your convenience, we have scheduled the meeting shortly after the conclusion of the Barclays Financial Services conference.

With that, I will turn the call over to Jerry for comments on line of business performance.

Thanks, Jim.

Let's begin on slide three to review our commercial banking results.

Overall loans were up $211 million or 4% for March 31 and they are up 16% from a year ago.

Total originations were up $433 million from Q1.

Loan and origination growth in the quarter includes a Webster agented transaction for $65 million where we will sell down $45 million this month.

This is part of our agented and direct business, which generated $795,000 in fee income during the second quarter.

The 2 basis point increase in portfolio yield reflects a benefit from deferred fee income from prepayments and also from past-due borrowers paying current in Q2.

The yield on new fundings was 4.35% compared to 4.15% in Q1 and 4.30% a year ago.

The commercial bank pipeline now stands at $378 million compared to $322 million at March 31.

Deposits totaled $2.8 billion at June 30 for growth of 25% from a year ago even as a 12 basis point cost of funds in Q2 was 4 basis points lower than a year ago.

We can turn out to slide four and we will review our personal banking results.

Our overall consumer loan balances have declined 2.5% over the past year from ongoing consumer deleveraging.

Our residential mortgages are essentially flat over the past year largely driven by our strategy of selling conforming fixed rate loans.

The personal bank portfolio yield declined by 5 basis points in the second quarter.

Our consumer lending originations remained strong in the second quarter.

The yield on new originations rose to 3.83% compared to 3.58% in Q1 and 3.79% a year ago.

Purchased loans represented 37% of the total production in the second quarter compared to 23% in the first quarter and 31% a year ago.

The pipeline in consumer lending remained strong at $535 million at June 30 compared to $551 million at March 31.

Our focus remains on originating a larger percentage of jumbo mortgages and 44% of the total portfolio is now jumbo loans, up from 40% a year ago.

Transaction account deposits are over 25% of total deposits and that is up from 23% a year ago.

Our emphasis on transaction accounts and overall pricing discipline has resulted in a continued reduction in cost of funds over the past year.

We continue to work to optimize our delivery channels.

In June we introduced Mobile Deposit Capture for iPhones and Android smartphones.

MDC is a crucial step in helping transform our banking centers from transaction processors to sales and advice platforms.

We also began construction of a new banking center in New Milford Connecticut as part of a 2-for-1 consolidation.

And we have launched major upgrades at our four banking centers in West Hartford Connecticut.

Our new banking center in Storrs, Connecticut will be completed this month.

And in Waterbury, work is underway on the relocation of our flagship branch.

We're reducing that from 8000 square feet down to 2500 square feet.

We will turn now to slide five to review our business banking unit which has seen loan growth of 12% compared to a year ago.

Our portfolio yield was down 6 basis points from Q1 reflective of the flat yields and new originations offset by the runoff of higher yielding loans.

The yield on originations in the quarter was 4.31% compared to 4.29% in Q1 and 4.43% a year ago.

Our business banking transaction account deposits are approaching 75% of total deposits and they are at a cost of 9 basis points in the second quarter.

The group has seen transaction deposit growth of 13% compared to a year ago.

We can turn now to slide six and take a look at the results of the private banking unit.

The group recently added a chief investment strategist and a director of fiduciary services as it strengthens its platform to capitalize on what we see as a very attractive high net worth market opportunity for us.

Loan growth in the private bank was $24 million or 9% for March 31 and $51 million or 21% compared to a year ago.

The pipeline remains strong at $59 million at the end of this quarter compared to $54 million at March 31.

We did see a slight decline in deposits from March 31 but we did post growth of 45% from a year ago.

Also important to note that assets under management grew 9.5% to $1.8 billion.

We will turn now to slide seven for the results of HSA Bank.

Deposits grew $35 million following a seasonally strong Q1 when most of our deposit growth occurs each year.

Deposits grew overall 22% from a year ago.

We continue to tightly manage the tiered rate structure that we pay on our health savings accounts, which resulted in a 6 basis point linked quarter reduction in the cost of funds.

We added over 29,000 new accounts compared to 23,000 new accounts added a year ago.

Turning now to slide eight, this shows our overall loan balances and originations on a consolidated basis compared to the line of business breakouts we just reviewed.

Overall, our loan balances are $12.25 billion.

That represents an increase of 2% from March 31 and up 6% from a year ago.

Our total originations are 20% higher than a year ago and they reflect strong commercial performance.

Our residential mortgage and consumer originations of our portfolio also performed well with a combined increase of over 20% compared to Q1 and also a year ago.

With that, I will turn it over to Glenn for comments on financial results and also an outlook for Q3.

Thank you, Jerry.

I will begin on slide nine which summarizes our quarterly trend of net income available to common shareholders and key performance ratios.

Of note is the $3 million increase in earnings over prior year.

The increase is after additional preferred dividend costs of $2 million this quarter related to our $126 million preferred issuance in December 2012.

As you see, return on average assets was 92 basis points in Q2 and return on average tangible common shareholders equity was 12.26%.

A slight decline in return on tangible common versus prior year was driven by a $78 million increase in tangible common shareholders equity.

Slide 10 highlights our core earnings drivers.

Over the next few pages I will discuss in more detail the key drivers of our earnings growth but would note our average interest earning assets grew $44 million compared to the first quarter and our net interest margin remained flat at 323 basis points resulting in an increase of $1.3 million in net interest income to $147.1 million in Q1.

Noninterest income also improved to $51.9 million resulting in an increase in total revenues of $5 million from Q1.

The last driver of our core earnings growth is our continued prudent management of operating expenses which resulted in a decrease of $1.4 million from Q1.

As a result, our core pretax, pre-provision earnings of $76.4 million nearly matched the record established in the fourth quarter of 2012 and is $6.4 million higher than last quarter.

Slide 11 highlights the components of our net interest income for Q2 compared to Q1.

As Jerry noted, most of the strong growth occurred late in the quarter as we generated $244 million in period end growth compared to the average loan growth -- compared to average loan growth of $37 million that you see here.

The benefit in the quarterly growth in average earning assets of $44 million was offset by a 3 basis point decline in the yield on interest-earning assets resulting in interest income relatively flat with Q1.

Including in earning asset yields were 2 basis points of interest recognized on a previously nonperforming commercial loan resolved during the quarter.

Average deposits increased $36 million while we reduced the rate paid by 3 basis points.

CDs represent our highest cost of deposits at 126 basis points.

For the remainder of the year, we have approximately $700 million of maturities at a rate of 72 basis points.

To the extent they roll over, our current cost average is around 30 basis points on our new CDs.

A 5 basis point reduction in the cost of borrowing from Q1 primarily reflects the April maturity of $100 million in FHLB advances yielding 3.35%.

There are no significant long-term FHLB maturities until June of 2014.

Incremental funding is done primarily at short-term rates from 10 basis points to 20 basis points.

At the end of June, we did add $50 million in five-year FHLB advances at an effective yield of 1.5% to maintain funding duration.

We also added $50 million of 8.5 year 3% LIBOR caps in April as we continue to opportunistically position the balance sheet for higher rates.

Interest expense for the quarter declined $1.3 million which drove the improvement in net interest income.

Jim and Jerry have already discussed the activity in loans and deposits and given the recent changes in markets, I wanted to touch on some of the points regarding our investment portfolio beginning on slide 12.

So as we highlight on slide 12, we continue to keep the investment portfolio relatively flat as we reinvest cash flows of over $400 million per quarter.

With a 70 basis point rise in the 10-year during the quarter, the unrealized gain in the AFS portfolio fell by 1.8% of the portfolio or $60 million.

The duration of the AFS portfolio extended from 2.7 years to 3.2 years.

Our longer duration investments in the held to maturity portfolio which extends from 2.9 years to 4.1 years.

We maintain a roughly 50-50 split between AFS and HTN to balance liquidity needs with the protection of GAAP capital.

The extension was expected and included in our interest rate risk modeling.

We have consistently disclosed that rising long-term rates benefit the bank's earnings.

In this case, we expect to recover the reduction in AFS market value in less than three years through the P&L.

Note the tangible book value per share was unchanged this quarter despite the AFS mark which was primarily offset during the quarter from an increase in retained earnings.

Earnings will increase due to a combination of higher rates on new fixed-rate loans, slower prepayments fees on loans and investments and reduced investment premium amortization.

Unamortized premium on the entire portfolio was $245 million compared to $236 million at March 31.

Premium amortization on the entire portfolio was $15.7 million compared to $16.3 million in Q1.

The decrease is a result of a 1.8% decline in Agency MBS, annualized common cash flow from 28.3% to 26.5%.

We expect further declines in Q3 and Q4 which would further benefit net interest income.

Prepayments, calls, amortizations and maturities during the quarter amount to $433 million with a yield of 319 basis points.

During the quarter, we purchased $476 million of securities at an average expected yield of 218 basis points and a duration of 3.8 years.

Most of our purchases were fixed rate Agency MBS although we added $77 million of floating-rate CMBS and collateralized loan obligations at a yield of 179 basis points.

Our AFS portfolio now contains $345 million of high-quality floating-rate CMBS and CLOs yielding around 185 basis points.

Our fixed rate Agency MBS purchases have been concentrated in higher coupon -- higher premium bonds which we think will perform better than lower coupons and will increase in yield as rates rise with limited duration.

In July, our expected yield and fixed-rate MBS purchases has been in the 275 basis point to 300 basis point range with a duration of about four years.

Given the current level of the 10-year, we would expect our investment portfolio yield to have reached a bottom in Q2.

Slide 13 provides detail on noninterest income.

Gain on sale of loans remains strong at $5.9 million but was nonetheless lower than the first quarter by $1.1 million.

Included in the $1.1 million reduction was a loss of $600 million on the sale of a commercial credit.

In Q2, we originated and sold $206 million in conventional fixed-rate mortgages at a gain on sale of 273 basis points.

This compares to $229 million of originations in Q1 sold at 297 basis points.

Wealth and investment services had a record quarter and grew just over $1 million quarter to quarter.

Likewise, loan fees each grew by $1 million in Q2 driven by continued production, momentum, and strong commercial originations.

Lastly, other income improved by $2.1 million as Q1 included a one-time $1.5 million write-down on a loan previously transferred to held for sale.

This is reflected in the BOLI and other category on the chart.

Slide 14 highlights our core noninterest expense which decreased compared to both Q1 and year ago.

In addition to the anticipated decline in compensation and benefits expense from a seasonally high Q1, we achieved meaningful declines in occupancy, professional services and marketing as well as loan [workout expense].

Our efficiency ratio is highlighted on slide 15.

Our core efficiency ratio of 59.98% was back in the 60% range after the expected seasonal uptick in expenses in Q1.

Ongoing achievement of positive operating leverage helped us maintain the efficiency ratio below 60%.

Turning now to slide 16, which highlights our asset quality metrics, nonperforming loans declined by $12 million in the quarter led by an exit of a $9 million commercial real estate credit that was included in nonperforming in Q1 and lowered new non-accruals of $34 million compared to $48 million in Q1.

We had an increase of $10 million in past-due loans.

This follows a significant reduction of $34 million in Q1 and represents a reduction of 24% from a year ago.

For the quarter, the increase was the result of a high level of business banking maturities, which will resolve over the next two quarters as well as a single commercial nonmortgage loan that we expect to be resolved in July.

We've made continuing progress in commercial classified loans which declined another 14% on a linked quarter basis and are now below $300 million.

Going forward, we expect the ratio of commercial classified to commercial loans to be in the range of 4% to 5%.

For Q2, the delta between the provision of $8.5 million and the net charge-offs of $12.9 million was less than $5 million.

Assuming recent trends remain intact, we think continued improvement in asset quality can be expected in 2013.

Slide 17 highlights our capital position.

Our tangible equity and tangible common equity ratios are only slightly lower from March 31 despite a $219 million increase in asset growth and the aforementioned reduction in unrealized gains in the AFS securities.

This underscores the strength of our earnings in Q2 and the effective management of our investment portfolio.

Our Tier 1 common risk-weighted asset ratio increased from March 31.

You will also note in our appendix that the three key regulatory ratios increased from March 31 as well once again highlighting the strength of our overall capital position.

We're also pleased the regulators have settled on capital rules, in particular the exclusion of AOCI from regulatory capital.

If the same exclusion applied to TCE, as we think it should, our ratio would increase 30 basis points to 757 basis points.

Before turning it back over to Jim, I will provide a few comments on our expectations for Q3.

Overall our average earning assets will likely grow in the range of 1% to 2%.

We expect average loan growth in Q3 to be in the 2% to 3% range.

Net interest margin pressure has diminished with the recent rise in rates but we think we are at or near the bottom.

As a result, should current rates continue, we would expect no to minimal marginal compression.

That being said, we expect net interest income to be approximately $2 million higher than Q2 level primarily due to loan volume.

Regarding asset quality, our leading indicators of credit were encouraging during the quarter and may signal further improvements in asset quality.

Given our outlook on Q3 loan growth, we can see a modest increase in the Q3 provision.

Regarding noninterest income, we expect to see continued pressure on mortgage banking gain on sale revenue.

As a result of the rise in rates, we have begun to see pressure in mortgage activity levels.

In addition, we expect tighter pricing due to increased competition and higher GSE guaranteed fees which will likely compress gain on sale levels.

Partially offsetting this headwind is the continued progress we've made in the areas of wealth and cash management services.

In addition during Q3, we will be implementing pricing changes and looking to launch additional value added products to mitigate the expected decline in mortgage banking.

Taken all together, we see a modest reduction in linked quarter noninterest income.

We would expect to see core operating expenses close to Q2 levels as we continue to invest in our business while focusing on operating leverage to achieve a sustainable 60% efficiency ratio.

We expect our effective tax rate on a non-FTE basis to be around 31% in Q3.

Based on our current market price and no additional buybacks in the quarter, we expect to see the average diluted share count be approximately 90.3 million shares.

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

Thanks, Glenn.

I trust you can see reflected in our second-quarter results our commitment to invest in strategies that increase economic profits.

We are continuing to reconfigure the personal bank to meet changing consumer preferences and improve economic returns and we are successfully building profitable relationships across our business units.

Expenses are tightly controlled, asset quality continues to improve and our capital position is rock solid.

Taken together these are the elements that propel us toward our goal to be a high-performing regional bank.

We're now pleased to take your comments and questions.

(Operator Instructions).

Dave Rochester, Deutsche Bank.

Glenn, just real quick, you mentioned 2 basis points in the margin came from recaptured interest this quarter.

Did I get that right?

That's correct.

And how much came from prepayment penalty income?

For the quarter, probably about 2 basis points.

Great, and that is versus what in 1Q?

I think it was about the same in Q1.

Oh, okay, great.

And in terms of your margin guidance, how much of an unwind of the securities premium amortization are you assuming for that going forward?

Meaning how much does it drop?

Yes, how much does that decline?

How much are you assuming?

So I think it is probably about $400,000 quarter over quarter.

You are talking about the total amortization level?

In terms of the amortization expense, that's right.

Yes, so it's probably about $400,000 to $500,000.

So you are assuming that the current curve stays where it is to the end of the year?

Yes, I am using a 250 10-year and assuming that we stay in the 250, 260 range.

Perfect.

And on loan pricing, you guys had mentioned the environment had improved somewhat.

If you'd just talk about some of the areas that you been able to raise pricing and by how much, that would be great.

I'd just say pricing has been firm and Jerry went over what some of the numbers were.

Pricing was higher on obviously on the origination of mortgage loans including those that went in the portfolio.

Commercial pricing was firm.

You saw it up about 15 or 20 basis points in the quarter, also higher than last year.

And I also made the comment that it feels as if the increase in long rates has had an overall impact on the ability to hold pricing pretty much across the board.

Great, thanks, guys.

Bob Ramsey, FBR Capital Markets.

I thought the margin guidance was particularly encouraging.

Did I hear you correctly that not only should margin be more or less flattish from here but that the securities portfolio yield you believe is at a bottom end of second quarter?

Yes.

We believe the securities yield is at a bottom.

We did highlight that there were 2 basis points in the 323 this quarter that are sort of non-reoccurring, Bob.

So, 323 will be in the 321, 322 range.

Okay.

And I know you just spoke about the firmer loan pricing you had talked about that earlier on.

I am just curious how much of that do you think is a reflection of the movement that you've seen in rates?

How much of it -- are competitors being a little bit more rational this quarter or sort of what do you attribute the better loan pricing in the market to?

It is hard to say which proportion.

I would say it is probably a little of both driven by the fact that rates are up.

I think it got people's attention in a big way.

And is obviously your loan yields on the originations are better this quarter than the prior quarter.

How much of that was back-end loaded sort of in the month of June I guess when really rates started to move and how much was sort of through the quarter?

A fair bit of it, Bob, given that is when a lot of the funding actually took place.

If you look at our average loan growth, it is less than 0.5% and yet we are up 2% -- $244 million so most of it did come in in June.

Okay, great.

Those are my questions.

I appreciate the time this morning.

Steven Alexopoulos, JPMorgan.

Sorry if I missed this but what is the current balance of the unamortized premium that is left in the securities portfolio?

As of second quarter, it was $245 million.

Okay.

And I'm curious on -- in terms of the mortgage business, the 30-year mortgage now in the 4s.

Can you talk about what you are seeing from the consumer side?

Are you seeing more demand for ARMs?

Are people trying to lock in quickly?

Just curious what you are seeing there?

One of the big trends that we are seeing is a reduction obviously in refinance volume whereas it was two-thirds and the first quarter, it is now shifted to like a 50-50 mix.

So that's one of the things we are seeing.

As far as products, Jim?

Generally people still favor the fixed.

But we expect that as rates or should rates continue to rise that that will start to change but if anything, those that were thinking about refinancing are moving more quickly to do so.

So there really hasn't been a significant shift toward ARMs yet.

And how did gain on sale margins change in the quarter?

So I think we were -- in my comments I think we were down 10 basis points or so.

So we were at 297 in the Q1 and we went to 273.

Okay.

Just a final question, I know you've commented on this a few times but this thought of less pressure on loan pricing, is this including -- I could see that on real estate related given the curve has steepened up -- but even on C&I products, are you seeing less competition or not as much competition in terms of loan pricing?

No, there is plenty of competition.

And it may be that -- from quarter to quarter, it could be what the makeup is of the originations.

But it just feels like that withering pressure we were seeing in Q1 seems to have abated I guess is the way I would say it.

And as a result of that, our rates were -- our yields were a little bit higher on originations than they were in Q1 and higher than they were in Q2 last year on the C&I side.

I think, Steve, one of the trends we have seen when we look at business that we have passed on is that about two-thirds of that, the business again we passed on is relative to structure and one-third pricing and if you go back a year ago, it was almost the opposite.

Interesting.

Okay, thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Just on the securities portfolio I appreciate the detail you talked about with the extension of the duration there.

Are you guys taking actions or do you plan to take actions to sort of proactively keep the duration a little bit shorter just given the move up in rates that we are seeing whether it is new investments that you are making at shorter durations to keep the average a little bit lower or not going up as much?

Yes, well we have purchased CLOs in part to that.

But the other part of it is is when we look at future rate shocks, future increases in rates, I think the steepest part of the duration would be from where we were to today's point at the end of Q2.

And then it starts to abate as we go anything over 100 basis points in additional on the long end.

So there is not as much as much as you go further out -- it is not linear.

Okay, so less of a need, got it, okay.

Another thing, Ken, is that as rates continue to rise from here, the extension of the duration will slow down.

And we anticipate that the duration doesn't get that much past five years even in a significant upward shock from here.

All right.

That helps.

And then just one other question on deposit outflows or industry deposit trends.

Obviously you guys had good deposit growth this quarter.

Another mid-cap bank recently talked about deposit outflows maybe it was a timing issue.

Just want to check, when you look at the month-by-month trend in deposits, are you seeing any slowdown, any kind of uptick in outflows in the back Of the quarter versus the first half?

You know, Ken, it is pretty consistent because most of the outflows that we are experiencing continue to come from maturing CDs.

We are actually seeing a fair bit of that actually stay and transfer in the transaction balances or get reinvested.

We reported record fee income in our Webster Investment Services division.

So you are seeing some depositors seek alternatives.

You know, I think the really encouraging news with us is that you are continuing to see nice inflows and build in both the number of new accounts as well as also in balances in the existing portfolio on the transaction account side.

So I think that's just emphasize -- that shows the emphasis that the team respectively in each of the lines of business are really had a lot of focus on that.

Perfect.

All right, thank you.

Casey Haire, Jefferies & Company.

Just a follow up.

One more question on the NIM, on the funding side of things.

I was just wondering does the guidance -- what does it assume on the funding cost side of things?

It doesn't sound like there is much more help on the [FLB] side or CDs.

So I was just curious.

Do you expect it to be flat from here or does it bake -- does it assume any increase in funding costs?

Yeah so I think that we will probably be down 2 to 3 three basis points on funding costs.

We do have some actions that we are taking on deposits that will further reduce some of the rates that -- 2 to 3.

Okay.

And then on the expense side, the flat sounds like it is flat quarter to quarter.

I know you guys have a lot of initiatives in place, FIS, JLL.

It sounds like e-banking initiatives came online in June.

I was just curious how much are you guys now with NIM kind of stable from here?

Is franchise reinvestment kind of the theme going forward which we shouldn't expect much more leverage from here going forward?

Not sure.

Yes, I think that two things.

One there is still some of the initiatives that we began were in the first part of the year at Universal Bank or branch rationalization and JLL Outsourcing, FIS, some of those things.

So we are just starting to see some of that.

I think you will see more as the year progresses.

And the point being is that we continue to drive down expenses.

So it is not that we have reached a plateau by any means on expenses.

Okay.

And then just lastly on capital, obviously sounds -- if I understand it correctly -- it sounds like you guys are close to 12% under the new rules on Tier 1 common.

Obviously these are all new and it is constantly evolving but at what point do you guys get a little -- I mean what is the trigger point where you guys are a little bit more aggressive with capital and what is the priority?

Well, the priority is to make sure we have ample capital regardless of the scenario and some of these things are still relatively new.

We want to make sure that they are adopted as we think they will be and that we are comfortable with them, which is why I made the comment about being on the conservative side for now.

But you are right, we do have ample capital.

I don't know if it is a 12 but --.

(inaudible) 11.22.

It is somewhere around 11 plus --.

11.22.

Yes, 11.22.

So we are well over our estimate of necessary capital plus buffer to meet the adverse stress scenarios.

So to your point, we do have capital that we can leverage as we go forward.

Okay.

I mean is it safe to say that you guys are going to keep conservative until you get through the stress test?

Well we have done the stress testing so we know where we stand.

But I would say we are going to be cautious over the near term is I guess the best way to put it.

Okay, thank you.

Dan Werner, Morningstar Inc.

You indicated with regard to the expense levels that you thought they would be maintained at the 122, 123 level here.

And you had declining occupancy expenses on a linked quarter.

I am trying to reconcile how does the establishment of the Metro New York hub impact that?

So it is Glenn, and first, we didn't -- we are not saying we are staying at 121, 122.

We continue to rationalize our expense base.

Okay.

We are working it down.

And we are reinvesting in the business at the same time, much like we have done over the last couple of quarters where we have launched private banking, treasury and payment services, we have expanded our commercial loan and our mortgage banking officers all while reducing expenses.

So the model here is positive operating leverage and we continue to reinvest in that business to the extent our financials allow us to.

Yes, and I think to the point on the Metro New York office, we are already at 360 Lex with our Webster Business Credit, so our ABL business is already headquartered there.

There is capacity to take on some additional personnel in that facility and that is where we will have our new regional president sitting.

Okay.

And then one last question on the commercial growth.

And I apologize if you touched on this.

How much of the growth was due to line utilization versus new customers?

All of our line utilization increase was in asset-based lending.

Yes, I think it was virtually all in terms of incremental originations.

Okay, thank you.

Matthew Keating, Barclays.

As it relates to capital, I guess your most recent Basel III impact I guess before today was about 100 basis points impact.

So I guess what you are saying is post the new Fed's final NPR that there won't be any impact essentially from Basel I to Basel III on Tier 1 common.

So I guess my question is given sort of higher capital levels and you kind of mentioned in your prepared remarks that you think some the new leverage ratios for largest bank significantly advantage smaller regional players.

Can you talk about what impact you think these capital trends will have on the bank M&A environment in general?

Thanks.

Well, haven't spent a lot of time thinking about it but would say that the larger banks are probably going to be a little bit less interested than they were before.

I think it does create really more competitive opportunity than anything else for the midsized banks that significantly exceed the leverage capital ratios of today.

So whether it drives additional M&A among them I would doubt except that they have some assurance that until they hit a certain size now that they are not going to be subject to the large complex bank rules and that they can rest assured that they can be confident in their current leverage capital ratios.

So to the extent that gives people more confidence to do things now that we have clarity, perhaps it would have an implication for M&A activity.

Okay, and in Webster's case, any change in your stance on M&A?

Continue to look for opportunistic partners but no real change then, is that safe to presume?

That's true.

And I would deemphasize looking.

I would say we are investing in organic growth and improving what we do.

And sure there may be some opportunities that come along but it is not an important strategy prong.

And my final question would just be with the 2014 CCAR getting a lot closer, can you talk about I guess the link between that process and your capital plan?

Is there a strong link there in terms of what you can return on the capital front versus stress test and just maybe talk about how you expect that process to proceed?

Thanks.

Well, you know we are not part of the CCAR but we do have our stress testing under the Dodd-Frank rules.

And I was mentioning in my comments that we are already well into that process and that in deciding what are capital levels ought to be, we are looking at what our levels would be in a fully stressed out, the maximum stress adverse scenario.

And saying that our ratios are not simply for what we need to have today but looking at what do we look like nine quarters out?

What are our capital ratios and are we going to exceed the requirements for well-capitalized plus a buffer?

And so we are saying at 10%, we would easily make that target on the Tier 1 capital side.

And we are sitting at 11.22, so we have an abundance of capital even relative to looking at what the implications of the stress test will be.

So in us it is a validation of the very strong capital position that we have.

And again, you get some clarity out of that that allows you to make some confident decisions going forward.

So I think a lot of the capital questions are being resolved.

And even though it may mean there is more capital to be carried than people might have desired, the certainty I think will be an asset in making strategic decisions going forward.

Thanks very much.

David Darst, Guggenheim Securities.

Can you discuss the sustainability of your origination volumes?

And then two questions, one, should we see the loan growth topline loan growth pick up as your prepayment speeds slow?

And then also on loan fees, are your loan fees pretty well tied to your commercial origination volumes?

Hey, David, it's Jerry.

I'd just make a comment right out of the gate that the one thing we have been pretty consistent in reporting on has been the pipeline and I have got to say that the strength of the pipeline that you can see that even with really, really strong origination numbers, you can see that the pipelines remain pretty robust across the board.

So I think that's -- that gives you a good view into our sense of the quarter upcoming.

So I think that we feel good about the ability and I think Glenn gave the guidance of our ability to continue at about this 1.5%, 2.5% growth rates that we have been putting out the last couple of quarters.

Would you also say that your loan fees are directly tied to the level of originations or is it something with that agent direct business that you are doing that might increase that?

I think it's that good point, and I think it's a combination of the two.

I think in terms of when we made specific comments of what our expectations of what happened in the second quarter and that we continue to see that there is some real opportunities for us to continue in the agented business in the third and the fourth quarters.

So I think you continue to see some good fees continuing in those periods in addition that I think you also see the fees associated with the origination volumes also continuing.

Okay, great.

Thank you.

Matthew Clark, Credit Suisse.

A lot of my questions have been answered but on the loan front with the stronger originations, can you give us a better sense of where you are seeing the new business, whether it be the types of businesses, the types of competitors and where -- from a geographic standpoint?

Yes, I think on the business banking side, we are seeking really good results across the core footprint.

We certainly are continuing to see equally strong demand in the New York side of our footprint as well.

So good news there in the pipeline rebuild in the quarter.

So I think you can get a fair sense of -- it is really core footprint on that side of the fence.

In terms of on the commercial side, I think you can see that is also pretty much across all the geographies and I also think it's pretty safe to say you are seeing it across all the lines of business pretty so we are seeing a nice pick up evenly distributed across those as well.

Okay, okay.

And again it is largely market share gains?

Yes, I think so.

I think in terms of we are taking business -- we are certainly head-to-head.

There's a lot of competition out there certainly in the segments that I just reported on and I think you would say that we're continuing to take some share.

Okay.

And then on the reserve front, reserve release, it was a little bit less, obviously, to support growth.

But I assume you want to still keep reserves above last cycle at least relative to the trough.

I mean, can you give us a better sense of how much more we might see on the release front?

Well, it is all driven by loan growth, obviously.

So that's one of the key factors and actually one of the things we looked at this quarter.

But you are right that if net release was only 6 -- a little over 6% of our core earnings where last year it was close to 20%.

And so this is -- it is encouraging to us that our earnings are real quality earnings as well.

But the [133] that we are as coverage right now as we said in the past, I mean subject to loan growth and with an eye toward the improving asset quality, we think could likely drift down to 125 in that range, 120 to 125.

Thanks, guys.

Matthew Kelley, Sterne, Agee.

There is an uptick in the deposit service fees.

I'm wondering if you can just talk about the outlook for that business -- that line item and the implications of some of the changing of transaction ordering, a little update on that conversation?

Yes, I think on the deposit service fee side you are seeing some of the seasonality that you would naturally see take place.

We are also, and I think Glenn alluded to this in his comments, we are looking at some pricing changes that we would expect to take place by the end of the third quarter that would also continue to bolster that as we go into Q4 and also obviously into 2014.

Also looking to launch some additional value added products and services that should continue to also help support on the personal bank because particularly the consumer deposit side, some ancillary products that will help keep that going.

And do those offset the change in the transaction ordering?

Yes, that is what I was going to highlight.

That -- we had previously I think highlighted that.

We thought it would be as much as $2.5 million of a negative impact.

In fact what we have seen is a reduction in NSF fees quarter over quarter.

So and I think that is somewhat self inflicted in that we -- the mobile products out there, and the online product.

Consumers are more in touch with their balances and we have also moved upstream as far as average account balance.

So we don't think that the impact is going to be as high as $2.5 million anymore.

We are actually running through that data now.

But it is going to be significantly less than that.

How much were NSF fees down, what is that trending towards?

Well going -- actually the biggest drop off we saw from Q4 to Q1 was about on our base about $1 million in Q1.

And then it sort of stabilized in Q2.

But definitely downward pressure on NSF fees.

Yes.

And then on the mortgage banking business, what type of offsets will you have in kind of reducing headcount or operational type expenses in that business as volumes and sale margins decline?

Yes, so, the guys in mortgage do a real good job and look at the sensitivity to changes and shifts in volume.

And I can tell you if we get a 10% to 15% reduction in volume, that could reduce expenses on an annualized basis somewhere around $2.5 million.

So you can sort of use that number.

We are very efficient in the mortgage business.

We have an efficiency ratio somewhere just north of 50% so they are pretty efficiently run.

And just last question, Jim, I'm wondering if you can just talk about again M&A.

Obviously you have a much stronger multiple now.

There has been a pretty healthy stream of transactions, smaller banks throughout New England.

It seems like the math could be a little more compelling with some of the changes in valuation particularly your currency.

And just give us an update on your appetite for deals now versus three, six months ago?

Pretty much the same.

I don't know if you heard my previous response but we are really 100% focused on doing better what we do well.

And there may be some opportunities that come along and it is great that if our currency has a higher relative value that would make us a more compelling potential partner to somebody that sees us as that like minded partner.

But it is not occupying a lot of our time.

Okay, thank you.

Collyn Gilbert, KBW.

Just a question sort of tying two things together.

Number one is the structure that you guys are seeing on your new loans.

I mean are these sort of prime LIBOR-based loans; are they fixed rate?

More on the commercial side is my question, obviously.

Yes, they are LIBOR-based and I think one of the things the team are really sticking to their guns and not conceding on structure.

Okay.

And did you -- Glenn, you may have said it, and if you did I apologize.

The yield on the ABLs, the new ABL originations that you are seeing this -- is what?

Yes, you didn't miss it.

So the coupon rate is about 3.5% for the quarter.

Okay, okay.

And then do you guys look at the duration?

I know you have talked obviously about the change in duration on the securities book.

How about the loan book, how that has changed?

Yes, absolutely we do.

In fact, if you look at duration on loans because of the loan mix and the repricing of our loans, that we actually are quite asset sensitive when you look at the loan book versus the deposits.

So the duration of our deposits on the bank, forgetting the borrowings or securities portfolio, the duration of the liabilities is significantly longer than the assets.

It is part of why we have our investment portfolio strategy as we do.

Okay.

So the loan book that -- do you have those numbers specifically?

The loan book is more sensitive than it was a few years ago.

But 65% of our portfolio is floating.

So it's --.

Okay, okay.

All right.

And then, Glenn, you had mentioned I think when you were talking about the change in the early-stage delinquencies in the quarter, something about big business banking maturities.

Did I -- I was just trying to --.

Yes, these were credits that were written five to seven years ago.

And they are all maturing now and so it is really -- if you looked at the $10 million increase, about $4.2 million is business banking unsecured lines maturing now.

The biggest pop came in during the second quarter.

It will blend down for the rest of the year.

And by the way, they are still paying it for the most part.

So we think this will all be resolved by year end, it's not an ongoing trend.

The program ended in 2007.

So it's a timing issue it sounds like more than anything on this tranche of --.

That's right.

-- loans?

Okay, okay.

And then just finally on the provision, it seemed like it came in a little bit higher than what you guys had sort of indicated maybe at some of the conferences.

Is that just a function of the late quarter loan growth or was that a function of these early-stage delinquencies?

No, more of the first, the late stage loan growth came in pretty high.

And I just want to say on the delinquencies, remember that a slight uptick but down by almost a third from two quarters ago and there was reduction on the consumer side.

So that was not a factor in the bump up in the provision.

Got it.

Okay.

Thanks, guys, that's all I had.

John Pancari, Evercore Capital Partners.

Want to see if you can comment on the NIM outlook beyond the third quarter if you can.

I know your comments around pricing as well as what you are seeing how the curve is influencing that could bode well for the longer term use.

So I want to see if you can give us a little bit of color there.

Sure.

I think that we will flatten out going into Q3 ex the 2 basis points that we talked about and then we will see a gradual rise.

I mean I think we are at sort of at the bottom but it will be sort of protracted before it really starts to increase.

So 3Q could really mark that inflection, in other words, 4Q could actually be up?

4Q could be slightly up.

Again, it is driven off of 10 year, we use [250], [260] 10-year swaps or 10-year treasury and you see the volatility is still there.

So we are certainly hopeful.

If we were to stay in the ranges of 250, 260 or [275], we would start -- I think we would start to see an increase in probably beginning and the late fourth quarter.

Okay.

And then on your pricing comments, are you seeing any differentiation between the pricing on C&I versus CRE?

I would expect that you may see a little bit more relief on the CRE side since it's particularly accurate to the five-year to an extent.

But are you seeing any differentiation there?

I think there is some signs but right now I would say that it is pretty similar.

Okay, all right, thanks.

Jake Civiello, RBC Capital Markets.

Just as a follow-up to John's question.

If we were see a continued steepening in the yield curve in the second half of the year with the 10-year approaching 3% or potentially even higher and Fed Funds remaining flat, what would that do -- what would that do to the margin?

It would be a positive.

I don't know whether you heard the comment we made before but the long end up scenario with short rate staying down for some period of time is very favorable for us.

And it is the one when we are building our investment portfolio strategy to which we gave the highest probability weighting.

So long end up is good for us.

Said that is positive regardless of how quickly the long end moves higher?

Pretty much.

Yes, I mean I think I would just say if you look at the analysis, the interest rate risk analysis we do in our Q, long end up 50 basis points gets us 2.5% in additional pretax pre-provision net revenue.

And so that is sort of held -- so you can look at it that way.

As it goes [15] and another [50] that it is more of a marginal benefit but it does obviously help us.

Okay.

That's all I have, thanks.

Jason O'Donnell, Merion Capital Group.

Can you provide an update on the rollout of the Universal Banker's strategy and whether you still expect that to be completed by year end?

Yes, Jason, it's Jerry.

We are about 60% of the way through so roughly 102 of the 168 banking centers that we have got it rolled out, we've got a really nice phased approach between now and the balance of the year.

And you know our expectation is that we are going to be on track to achieve the results that we expected.

We are also seeing a really nice increase in sales per FTE from those who have been through the education sessions and where it has been implemented.

So we think that also bodes well for the future.

Okay, great.

And then just one housekeeping item.

It looks like other noninterest income was a little higher than we were expecting.

Were there any nonrecurring or non-core items in there that drove the linked quarter improvement?

Yes, there was $1.5 million in a commercial credit that we wrote off that was held for sale we wrote off in Q1.

That change quarter over quarter is what you are seeing.

Okay, great.

Thanks a lot.

Thank you.

It appears there are no further questions at this time.

I would like to turn the floor back over to Mr. Smith for any concluding comments.

Thanks, Jessie, thank you all for being with us today.

Have a good day.

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

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.