Webster Financial Corporation
Q1 2008 Earnings Call Transcript

Published: 22 Apr 2008

[Operator:]

Welcomes to the Webster Financial Corporations First Quarter 2008 Earnings Result Conference Call. At this time all participants on listen-only mode. Later we will conduct the question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder ladies and gentlemen, this conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation and Reform Act of 1995 with respect to Webster financials condition, results of operations and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions as described in Webster Financials public filings with the Securities and Exchange Commission, which could cause future results to differ materially from historical performance or future expectations. I would now like to introduce your host for today's conference, Mr. James C. Smith, Chairman and Chief Executive Officer. Thank you, please go ahead sir. James C. Smith Chairman and Chief Executive Officer Good morning, everyone. Welcome to Webster's first-quarter 2008 investor call and webcast. Joining me today are Bill Bromage, our President; Jerry Plush, our CFO; and Terry Mangan, Investor Relations. I'll provide some highlights and context for the first quarter results, and Jerry will provide comments on our financial performance. Our remarks will last about 30 minutes, and then we will invite your questions. First, I want to report on yesterday's announcement that Bill Bromage will retire from Webster at the end of this year. Bill will continue as President and COO until June and will then service Vice Chairman of Webster Bank for the balance of 2008 and will assist me in the organizational transition. We have several important projects; we will be working on together for the balance of the year. As we note our strategic focus in recent quarters, Bill and I looked at the job of President and COO and agreed they really no longer fit our operating models. It was eight years ago that we named Bill to this position. He was a key leader of our transformation to a commercial bank and of our growth as a regional competitor, and he was a huge help in recruiting a senior talent that we now have on board. Press releases are understandably brief and to the point. They aren’t conducive to an expression of feelings. So I want to take to this opportunity to express a few well earned accolades regarding Bill. Bill is a personal friend, and he has been a real source of strength to Webster. I am indeed for his service to Webster and for his support over more than a decade. I deeply appreciate all the Bill has contributed and start this call by saluting him and thanking him. Jerry Plush - Chief Financial Officer The first quarter results have two distinct components. First is with core operating results not including provisions and charge-offs net expectations. The net interest margin improved from Q4 '07, and primarily for this reason revenues grow $2 million. Non-interest expense has actually declined on a linked quarter and on a year-over-year basis. Especially positive for loan growth and quality is the reader mediation taking place in the credit markets, as high quality customers are returning to banks from the capital markets, and we expect this trend to last for some time. You can see that our commercial real estate and C&I loan portfolios in Q1. Core deposits are growing. And given recent market conditions, we can choose to advantage between CD's and short term borrowings to meet our funding goals. Despite higher provisioning and marks against the securities portfolio, our capital ratios remain closed to our published targets and well above well capitalized requirements. Our solid capital position is strength during uncertain times. The other distinct component in the first quarter results is the impact of the down leg in the credit cycle and quality is measured by provisions and charge-offs. First quarter results included provision expense of $15.8 million, which matched net charge-offs and a continuing loan portfolio, and resulted in credit reserves at 1.21% against the $12.2 billion continuing loan portfolio. The $15.8 million of charge-offs founded being higher than originally anticipated, primarily as a result of two large credits in the commercial portfolio and a single large borrower in the retail portfolio. These three loans comprised two-thirds of the charge-offs. It’s important to note that we don’t see any systemic problems in continuing portfolio and that in occasional blowup is expected when a cycle turns down. One investor might look at Q4'07 versus Q1'08 results, you can see a 13 $million increased in charge-offs, while another might consider Q4 to be abnormally low and focus on the two quarter average charges-off that are less than $10 million each. In any event, it is hard to predict a run rate. We choose to provide for the full charge-off amount for two reasons. First, because we anticipate that commercial and commercial real estate loan growth will continue and we want to think longer term in reserving against the changing loan mix. A loan coverage ratio about 1.2% fills about right given our shifting loan mix. The second reason for reserving the full amount of the charge-off, which I might add exceeded first call estimates by about $0.09 a share. It’s just too early to guess the pick in the cycle. One real positive indicator for us though is that our primary franchise at least statistically speaking is measured by job loss and real estate values, and we seemed to have been impacted less harshly than many other regions. Turning now to first quarter results, we reported $0.51 in diluted earnings per share from continuing operations, which includes a net reduction of $0.02 for items specific to the quarter that we spelled out in a table and in release. This compares to continuing EPS of $0.10 in Q4 which included the impact of the special provision for discontinuing indirect lending channels and other charges in the quarter, and compares to adjusted EPS of $0.68 a year ago. Our insurance operations which are now shown separate from continuing operations had a loss of $0.04 in the quarter primarily from due related costs in connection with the sell of Webster insurance on February 01. I am going to focus with a balance in my remarks on loans and credit quality. Webster continues to show momentum in commercial lending. Total commercial loans and consumer loans now represents 71 % of total loans compared to 70% a year ago. Commercial loans consisting of C&I and CRE loans total $5.8 billion and grew by 7% combined from a year ago, and now comprise 46 % of the total loan portfolio compared to 44% a year ago. The C&I portion of the commercial portfolio totaled $3.6 billion in March 31 and grew 4% compared to a year ago, led by our equipment finance and asset base lending businesses. The C&I portfolio is by design about twice the size of the CRE portfolio. Portfolio yielded 6.32% in the quarter down from 7.41% a year ago with the decline driven by the rate cuts that begin last September. Our commercial real estate portfolio totaled $2.2 billion and grew 13% from a year ago. Most of the growth has come in the last six months as a direct result of disruption in the capital markets. We’ve been able to book some better loan to value deals which until recently would not have been available to us with good pricing levels. We are here to strict underwriting guidelines in CRE including no LTB’s over 80%, no 10 years interest only and no 30 year amortizations and this has been the case throughout the cycle. We saw very little pay off activity in the first quarter which helps to bolster the net growth. The total CRE portfolio yielded 6.30 % in the quarter compared to 7.13% a year ago. Our equipment finance business has outstandings of $983 million at March 31, and grew by about 7% from the year ago. New business originations are centrally underwritten and monitored by a management team that’s been in place for over a dozen years. This unit finances non-specialized routinely sold commodity equipment that is revenue producing. For repayment terms that are on average significantly less than the underlying assets useful lives. Most contracts take the form of full payout loans, and there is only about $ 2 million of true residual value risk in the portfolio. The top state concentrations and equipment finance are Texas at 12%, California and Florida at about 8% each, Pennsylvania at 6%, New York at 5% and Connecticut, Massachusetts, New Jersey, Illinois and Ohio at about 4%each. At March 31 non-performing loans totaled $5.7million, and represented a less than 0.60% of outstandings, which compares quite favorable with overall industry levels. The deliberate granularity and the relatively small average loan size in this portfolio enhance its value in the current economic environment. Assets base lending outstandings totaled $831 million at March 31, and grew by 12 % from a year ago. 92% of outstandings are secured by accounts receivable and inventory. Equipment is 7% and real estate is 1%. As you can see from these figures this port folio has a solid current assets coverage position which is typically help to keep losses low and below industry averages. 56% of this portfolio is in the Northeast, 22% in the Southeast, 16% in the Midwest and 6% in the West. NPA’s were 1% of the port folio at March 31, the consumer loan portfolio totals $3.2 billion or $2.9 billion excluding the $326 million liquidating home equity portfolio. We’ve moved completely to a direct-to-consumer retail base channel model for in-market growth. Bank based branch originations were a $148 million or 89% of the $166 million of total production in Q1, compared to 159 million or 61% of $260 million of total production in Q1 '07, which included $98 million from the now discontinued national wholesale business. The continuing home equity portfolio had weighted average FICO of 757 and CLTV of 68%, each had origination. The continuing portfolios was about 50-50 split between home equity loans and lines. The total consumer portfolio including liquidating yielded 6.09% in the quarter down from 7.03% a year ago. Residential loans totaled $3.6 billion and declined 3% from a year ago. Resi loans now comprise 29% of the loan portfolio compared to 30% a year ago, as we have for some time now the deemphasize resi loan growth. The resi portfolio yielded 5.70% in the quarter compared to 5.77% a year ago. I will comment briefly on Webster's exposure to residential constructions loans, aside from the now separated National construction lending portfolio. At March 31, Webster had $341 million in residential construction loan outstandings. $123 million through the retail mortgage banking group in market are contiguous. 8.3 million or 7.04% of that $123 million portfolio was non-accrual at March 31, compared to 7.7 million at December 31. Noted roughly, two thirds of that is from two loans with moderate loan-to-value ratios. The balance of resi construction outstandings of 218 million is in the commercial RESDEV group, and non-accruals are $10.9 million or 5%, compared to 4.4 million or little over 2% a year end. The $6.5 million increase relates to two loans, one of which is current that we putted on non-accrual given slowness and finding a buyer for the homes. We believe that the other loan can be restructured and return to performing status over time. Total non performing assets increased to a $154 million at March 31 compared to a 121 million at December 31. NPA’s in the continuing portfolio were a 113 million at March 31, compared to 91 million at year-end. CRE represented $8.3 million of the increase, marginally as a result to the RESDEV credits described earlier. C&I loan NPA’s increased by $7.1 million, while continuing resi and consumer NPA's increased by a combined amount of $6.8 million. You note in the financial tables and our earnings release that we’ve recently began to show NPA as to loan and charge-off data for our continuing and liquidating portfolios. In the continuing portfolio the allowance for credit losses was 1.21% of total loans. NPA’s were 0.93% of loans plus other real estate owned, and the net charge-off rate was 52 basis points annualized in Q1, largely as a result of two commercial credits that I mentioned toward the beginning of my remarks. Overall including liquidating portfolio, the credit reserve coverage ratio is 1.51%. Credit metrics in the $2.8 billion continuing home equity portfolio performed with a normalized provision levels with a delinquency rate declining slightly to 0.72% at March 31 from 0.76% a year end, while the non-accrual rate increased to 0.60% from 0.50% at year end. The annualized net charge-off rate was 27 basis points in Q1, excluding a charge-off $1 million from our Webster's Financial Advisors client, and that compares to 14 basis points in Q4. The 13 basis points increase in the charge-off rate represents about $900,000, about two-thirds of which relates to the just under $400 million a broker originated loans within our fore state footprint. I will now provide some detail on the liquidating portfolios consisting of indirect out of market home equity and national construction loans. We had $395 million of outstandings in these portfolios at March 31 compared to $424 million when the liquidating portfolios were established a year end '07. The total of 395 million consists of 68.5 million in construction loans and 326.5 million in home equities. We had liquidating portfolio charge-offs of $7.8 million in the quarter with 4.3 million against the construction loans and 3.5 million against the home equity loans. As we've spelled out previously charge-offs from the liquidating portfolio were taken against the special reserves established in Q4 '07. As a result, we now have reserves of $12.9 million and $29.2 million against the respective March 31 portfolio amounts, or $42.1 million in total reserves against $395 million in total balances. Overall the liquidating portfolio has performed close to expectations. Delinquencies have increased somewhat faster than planned offset to date by lower losses given default than plan. Before I turn it over to Jerry, I must comment on the early success of our One Webster earnings optimization program. This employee lead initiative is Webster's highest operating priority for 2008 and will touch every area of the company, leading to sustainable efficiency gains throughout Webster. Early indications are enough to make me smile with confidence that we will achieve our goal of driving Webster's efficiency ratio under 60%. I'll now turn the program over to Jerry so he can provide more detail on Q1 financial performance.

[Jerry Plush:]

Thank you Jim and good morning everyone. Lets first cover capital and where we stand as the quarter ends. The tangible capital ratio as of March 31 was 5.77% compared to 5 at the end of the fourth quarter and 6.99% a year ago. Capital declined from the fourth quarter even with the contribution of net earnings in Q1, due to a $46.7 million increase in unrealized losses of which 32.3 million occurred from value declines in capital trust securities and are available for sale portfolio as credit spreads of widening this asset class and caused the significant valuation to climb. As previously disclosed we did not buy back stock during the quarter and we do not intend to do so in the near term. Regarding dividends, we did announce today that we will maintain our current dividend at $0.30 per share. We recognize that strong capital levels are even more critical in the current economic environment. We want to know that Webster remains well capitalized as our projective leverage ratio of 7.88% at March 31 and our projected total risk ratio of 11.2% exceed the regulatory standards of 5 and 10% respectively. Turing now to the loan to the deposit ratio, it increased to 104% from March 31, that’s in comparison to a 101% at December 31 and 98% a year ago. While we have been diligently working to improve this ratio, this was a proactive move on our part to allow for this increase. We are working to change our deposit mix and lower the cost to deposits and we also took the opportunity to utilize lower cost borrowings for our funding needs as well. Regarding the deposit mix, certificates of deposits decreased by 208 million and broker deposits decreased by 25 million. While our core deposits increased 22 million and that resulted in an improved core deposits to total deposit ratio of 60.7% compared with 59.5% at year end and 57.8% a year ago, and our constant deposits declined to 2.49% for the first quarter compared with 2.9% for fourth quarter and 2.87 a year ago While we're discussing deposits, let me take the opportunity to give you an update on our de novo program as well as give you an update on the HSA Bank. We've opened 29 branches since 2002 or 16% of our total retail branches. The de novo program has total deposits of 797 million at March 31, and his compares with 781 million at year end and 752 million a year ago, an increase of 6% over the past year. We still plan to open a new office later this year in North Kingston Rhode Island and we are in the process of evaluating others. Two planned branch relocations in Ridgefield Connecticut are also underway. Turning now to HSA bank. We had 483 million in health savings deposits in this division as of March 31st, and that’s an increase of a 126 million or 35% from a year ago. We also have 61 million in linked brokerage accounts compared to 44 million a year ago. Our average cost to deposits in HSA were 2.46% in Q1 and that compares to 2.97% in the fourth quarter, and slightly lower overall than our overall cost to deposits. Strategically through HSA Bank we have expanded our reach for core deposit accounts; we've tapped into a market that still has significant growth potential. At the end of March HSA Bank had 208,000 accounts and this in comparison with a187, 000 accounts at year-end at 169,000 accounts a year ago. The average deposit balance per account is now over $2300, and this is compared to little over $2100 a year ago, which we think helps to confirm the viability and acceptance of the consumer-directed healthcare model in the United States. Turing now to borrowings primarily repurchase agreements, they increased 237 million as of March 31 in comparison to December 31st, and our cost of borrowings declined to 4.14% for the first quarter, from 5.10% for the fourth quarter, and 5.45% a year ago. These actions lowered our cost of funds and contributed to the improvement that you see this quarter in the net interest margin as well, which rose to 3.27% in comparison with 3.26% for the fourth quarter. Turning now to asset quality, the provision for credit losses was 15.8 million for the first quarter compared with 45.25 million for the fourth quarter, and 3 million from a year ago. Our total allowance for credit loss to total loans was 1.51% as of March 31, in comparison with 1.58% at December 31, and 1.24% a year ago. The allowance for our continuing portfolio was at 1.21% and that compares with 1.23% at year-end 2007. As Jim indicated, we provided a detailed breakout showing all the activity in both portfolios in the tables in the company's press release. Our charge-offs for the first quarter of 2008 were 15.8 million in the continuing portfolio, and 7.8 million for the liquidating portfolio. Our fourth quarter results included 2.8 million for the continuing portfolio and charge-offs and 8.9 million in charge-offs for the liquidating portfolio. Let's now take a look at first quarter results. First, please note for presentation purposes, Webster Insurance continues to be shown separate from continuing operations and our Financials. So excluding insurance, earnings from our continuing operations were $0.51 per share. This excludes the $0.04 per share negative impact of the discontinued operations of Webster Insurance in the quarter. As previously reported, our decision to sell our insurance operation resulted in this activity being reported separately from our continuing operations. The securities portfolio totaled 2.8 billion at March 31 of 2008, and that's an increase of a 105 million from December 31 of 2007. The yield in the securities portfolio for the quarter was 5.75%, and that's down 10 basis points from 5.85% for the fourth quarter and 5.85% for the first quarter of last year. Our decision to continue to increase the portfolio albeit slightly reflects a number of factors including to offset some of the lost mortgage warehouse balances of roughly $200 million over the course of 2008. This can be seen in our results of this quarter as our loans held for sale declined to just $8 million compared with 222 million at year-end and over 456 million a year ago. The securities enhanced our net interest income as short-term interest rates fall and they provide additional collateral from municipal deposits and for other businesses, our intent is not to substantially grow the portfolio further, we believe we are at appropriate levels given our asset liability mix. Our non-interest income was 47.8 million for the first quarter including a $709,000 loss and the write down of the direct investments of fair value, a $544,000 write down of equities securities to fair value and a $1.6 million gain from the VISA IPO. Non-interest income was 48 million in the fourth quarter and that included a $3.5 million write down of direct investments to fair value, and that's compared with non-interest income of 47.4 million in the period a year ago. Deposit service fees totaled 28.4 million, and that’s in comparison of 30.6 million for the fourth quarter and 25.4 million a year ago, and the growth over the prior year resulted from the implementation of the new consumer fee structure in 2007. The lower amount in Q1 compared to Q4 of '07 reflects a normal seasonal decline. Loan fees were 6.9 million in comparison to 7.3 million in the fourth quarter and 7.9 million from a year ago. Our wealth management was 7 million compared to 7.5 million in the fourth quarter and 6.9 million a year ago. Our non-interest income was 1.8 million for the quarter and as compared to 2.1 million in the fourth quarter and 1.9 million a year ago. Our revenues from mortgage banking activities were $740,000 for the quarter, and that's in comparison was 1.3 million in the fourth quarter and 2.2 million in the first quarter of last year. Reduced income and mortgage banking activities over the last year reflects the closure of our national wholesale mortgage lending operations in the fourth quarter of 2007. Net gains from the sale of securities in the quarter were 123,000 and that compares with a 195,000 in net gains in the fourth quarter of '07 and $541,000 recorded a year ago. Turning now to expenses. Our total non-interest expenses were 116.1 million for the quarter and as compared with the 120.3 million for the fourth quarter of '07 or a $121.2 million for the first quarter a year ago. Our compensation expense increased 3.5 million on a linked quarter basis, and that’s due to seasonal charges associated with payroll taxes in the 401-K match. Our first quarter results also included $650,000 credit from the partial release of the Visa related litigation reserve that we established in the fourth quarter of 2007. Fourth quarter of '07 and the first quarter of '07 also included charges of 6.9 million or 4.5 million respectively for severance and for other costs. Now let’s look forward to the second quarter of 2008. Let's first address the net interest margin. We would expect this to be relatively unchanged compared to the first quarter, and as always this is contingent upon non-performing assets levels. 26% of our loans are variable, so Fed cuts have an impact until we adjust deposit rates accordingly, particularly certificates of deposits. We continue to be very focused on attracting other sources of deposits in commercial and retail government finance and HSA to ensure that we continue to effectively manage our cost of funds as we see valiant pressure on loan pricing. The provision, we recorded 15.8 million of provisions in the first quarter for our ongoing portfolios. We would anticipate given the current economic environment, our quarterly provision could range between 10 to $15 million next quarter, and of course that’s all dependent on economic conditions and the corresponding impact on asset quality. This also assumes that we continue to shift our loan mix more towards the 50/50 balance between the consumer loan portfolio and the commercial loan portfolio and that risk levels in each assets class do not change substantially. On the expense side, our second quarter expenses will increase specifically in marketing as we rollout initiatives related to consumer banking. Also as stated when we announced our earnings optimization initiative, there will likely be severance related job elimination and other charges as a result of the program that we’re undertaking. We expect to be in a position to provide more information on this later in the second quarter. To reiterate a comment I made in the last quarter and Jim also reiterated today. There is a firm commitment by everyone at Webster to be in position upon completion of the earnings optimization program to consistently deliver positive operating leverage specifically by driving our operating efficiency down to a stated target of 60% by the end of '08. Our one Webster project is supported by the efforts of Harvest Earnings. While relatively new firm itself Harvest was sided by two individuals, Jeremy Eden and Terri Long both have extensive experience in the space working for other firms. This process that we are undertaking is the bottoms up approach, that over 3800 ideas have been generated by our employees to share the commitment we are making to a success of this program over 152 Webster people are actively involved in the evaluation of its ideas. We are very pleased with the progress we are making and we have confidence in both the process and the guidance we are receiving from Harvest Earnings. And in closing, I would want to note that we announced today, we've reached definitive agreement to sell Webster written services and expect closing to take place by the end of the second quarter. With that, I will now turn the program back over to Jim for closing remarks.

[James C. Smith:]

Thanks Jerry. Webster first quarter operating results are beginning to reflect positive results from our narrowed focused on doing well what we do best. Our capital and human resources are focused commercial and retail banking business in our core franchise and on our four specialty businesses, equipment finance, asset base lending, commercial real estate lending and health savings accounts, these are direct-to customer businesses centrally operated serving customer in market as well as regional internationally and generating relatively high returns. The One Webster earnings optimization initiative will help us to enhance revenue and eliminate expenses as we bring our operating efficiency ratio down. And as we have said I guess repeatedly this program will have a meaningful positive impact on our future operating results. When today's challenging economic environment eventually gives way to comer times we are confident that our narrowed focused on core franchise activities will lead us to success as a regional and commercial bank. We are well positioned for success. Thank you for being with us today. We will now be pleased to respond to your questions.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Ken Zerbe with Morgan Stanley. Please state your question.

[Ken Zerbe:]

Thanks. If I understood correctly, your provision expense of 15.8 matched your charge-offs with the continuing portfolio. Can you just talk about how you came to the decision not to increase the reserve ratio in your continuing portfolio given that -- I guess, given the deterioration we are seeing in the credit environment, in fact, that most of your peers have been increasing the ratios? Thanks.

[James Smith:]

Sure. Ken, I will comment briefly that Webster for long time has reserved more than its charge-offs in a quarter, and during a period of a couple of years where a lot of our peers were not doing that, we continually with the exception I think of only one or two quarters reserved at or greater than the charge-offs, and therefore we built up our overall ratio to over 120 which we think compares relatively, favorably with the peers. The other reason is and I try to cover this in my remarks that embedded in the 15.8 million of the charges are three specific loan charge-offs that accounted for over two-thirds of the total charge-offs. So we’re saying that we want to be sure that in this environment we cover at least what we charged-off, but we believe that looking ahead that the 15.8 million was the right number to handle for this quarter. We don’t expect to let our ratios fall behind and I made the comment we expect it will target range of around 120 going forward.

[Ken Zerbe:]

Okay, great. And then the second question I have, can you just remind us quickly on the liquidating portfolio, how fast is that running off, and also at what point would you consider increasing your special reserves, like what types of things would you be looking for that we could see?

[Jerry Plush:]

Well, we try to breakout the numbers. So you can track it pretty closely. And one comment we made was that the overall liquidating portfolio declined at about $30 million in the quarter from 425 to 395. The construction loan piece is dropping as you would expect at a faster rate than the home equity lending piece, which frankly is dropping at a little bit less than we originally had expected that it would. We setup the reserves in that portfolio back in Q4 with the idea that the default rates would rise throughout 2008 particularly in the home equity portfolio and that there would a high loss given default. As we look at the actual performance of the portfolio in Q1, I made the comment that the delinquency ratio is rising a bit faster than we had anticipated, but the loss given the defaults have been a little less than we anticipated. So we are pretty much within range of what we originally had anticipated for the performance of that portfolio. We also indicated that we thought that the bulk of the losses would occur in the first two years after setting up the portfolio and then a portion of the reserve was against the tail that would run out in future years. So, I guess, the best I could respond is, we will try to give you good information, and because we are breaking out the portfolio you can track what's happening to delinquencies and non-accrual rates and charge-offs in that portfolio directly against the reserves that we have set up for.

[Ken Zerbe:]

Thank you very much.

[Operator:]

Our next question comes from Andrea Jao with Lehman Brothers. Please state your question.

[Andrea Jao:]

Andrea Jao from Lehman. Good morning everyone.

[Jerry Plush:]

Hello Andrea.

[James Smith:]

Good morning Andrea.

[Andrea Jao:]

I was hoping to get a little more detail on your outlook regarding loan growth. I know you are shifting the mix to more 50/50 mix between consumer and commercial, but what are the conditions out there and what kind of competition in pricing are you facing?

[James Smith:]

Well Andrea, if I talked about the segments of the portfolio, first I would say that in that we are discontinuing of course the indirect out of market lending that we expect that the actual origination rate for consumer loans and for resi loans will be lower than it was in the past. The in-market rate of originations given the focus that we have will be a little bit higher than it was, but still it's unlikely that we will have much growth in resi or the consumer portfolio, let's say, through the balance of 2008. We believe there is opportunity for growth in the middle market portfolio on the commercial side and in the CRE portfolio as well in part because of what's happening with what I refer to as a reintermediation from capital markets of high quality credits back into banks where we are able to do commercial real estate relative to loan to value ratios at significantly higher spreads than we were before, same effect on some of the market opportunities, and what's happening to us is that the pay downs that we were experiencing are less because our existing customers are moving toward the capital markets. So, we see a continuing opportunity to book high quality commercial loans in particular over the foreseeable future at expanded spreads. So, on the one hand we think spreads will widen to some degree, we think there will be the opportunity for loan growth particularly in middle market and commercial real estate lending and those would be the areas we will focus on for growth. So, we would be talking about perhaps mid-to-high single-digit growth rates in those portfolios with the consumer and the resi portfolios being relatively flat. Another driver of this is that we want to calibrate our own spreads to make sure that every dollar of additional asset that we put on the books is generating a high return on the precious capital that supports it.

[Andrea Jao:]

Great, how about on the deposit side, are you seeing; do you think there was again markets driving more of your consumers to the safety of bank deposits? Can you talk about your outlook there?

[Jerry Plush:]

Yeah, hi Andrea this is Jerry, I just wanted to sort of profess that and my response is I think if you were to reflect back on the 2000 outlook deck that we released with our fourth quarter earnings, we emphasized that we're taking, I think we’ve actually stated sometime like the year of the deposit and that is just incredible focus both in the retail commercial, the government finance, and obviously as we talked here today on the HSA bank side on bringing in lower costs, core deposit relationships, and there is deliberate steps in our actions here to follow through and you could see that in the jump in our core deposits. So, when you look at everything other than certificates will call and you see the improvement in the ratio, you know, that's a consorted effort, a planed effort that we are undertaking and it’s also part of the change that we want to see in our balance sheet next. So on the deposit side, and I also think this coincides with having very good products and services from a cash management standpoint that are enabling us to win over more commercial relationships and more government finance relationships. So, I think what we'll see is, when you see spots of this, or signs of this, I should say in our first quarter, we expect to see more of that in the second, third, and the fourth quarter of '08, we’ll be reporting back. I just wanted to add a comment to the earlier question which is, we've talked also about changing our plan mix in and around the balance between a commercial banking and the consumer banking. For purposes of that conversation, it's really consumer bank residential and consumer, we're seeing that this is again a plan we went from about 59

[Andrea Jao:]

It was helpful. Thank you so much.

[Operator:]

Thank you. Our next question comes from James Abbott with FBR Capital Markets. Please state your question.

[James Abbott:]

Yeah, hi good morning.

[Jerry Plush:]

Good morning Jim.

[James Smith:]

Good morning Jim.

[James Abbott:]

On the home equity in your slide that you have a really good detail slide on some of the delinquency trends and the continuing portfolio based on loan-to-values, and I don't know if you mentioned it earlier in the call, but if you did I apologize, do you have any updates on that table as to how, especially like in the 95 to 100% combined loan-to-value part of the portfolio, what the non-accrual rate in the 30 to 89 days delinquency, are we seeing a lot of migration there or fairly stable?

[James Smith:]

Yes, we do actually, I have information. And as of March 31, breaking down the continuing portfolio and the liquidating portfolio by combining loan-to-value ratio, but I need to be sure as to when these loan-to-value ratios were….

[Jerry Plush:]

Yeah, at origination….

[James Smith:]

Yeah, at origination, right. So, I don't have the numbers to show the updated estimated loan-to-values based on the AVMs, but I can tell you which -- are you interested in the liquidating portfolio?

[James Abbott:]

Well, I am trying to understand a little bit about how things are developing. So if liquidating portfolio is a better indication of how things to come then I would be interested in that.

[James Smith:]

Sure, let me say this, in my remarks I said that the 30–89 day past due rate and the continuing portfolio was 0.72 which was down from 0.76 at the end of the year and the nonaccrual rate was 0.60 which was up from 0.50. In the liquidating portfolio, the 30 to 89 day past due rate is 3.21%, and by the way you can deduct these figures from looking at the charts that are in the deck today, and then the non-accrual rate is 2.87%. And I think that the charge-off rate was around…

[Jerry Plush:]

4, 4.17%.

[Unidentified Company Representative:]

4.17% annualized in Q1.

[Unidentified Company Representative:]

For the liquidating portfolio…

[James Smith:]

For the liquidating portfolio and let me also say that Jim if we'll have these slides updated and available, we'll put them out on the web so you can get a look at them.

[James Abbott:]

Yeah, so the short version is that you are seeing some modest improvement in the continuing portfolios home equity, but further deterioration in the liquidating portfolio.

[Jerry Plush:]

No, the improvement was in the 30 to 89 days past due, but it was only about 4 basis points from 76 to 72, but that’s great to see, but we’re not going to see that makes a trend yet, I think that could be final because we've been managing the collections extremely well. We've got a full group it’s on that, and I think they have done a very, very good job and that's part of our lowest mitigation strategy. So, that's a good development. You are right. And the liquidating portfolio, as I've mentioned in my comment today, the trend toward higher default rates is consistent with what we had expected.

[James Abbott:]

Okay, I appreciate that. And then another question, and then I’ve got a housekeeping type of issue I want to clarify a comment you made earlier. But on the C&I credits that went in non-performing status or net charge-off status, where there any specific industries or can you give us some color as to what was behind the defaults on those?

[Jerry Plush:]

Again, we mentioned that we had two credits specifically. I'm going to ask John Ciulla who is our Chief Credit Risk Officer to comment.

[John Ciulla:]

Good morning. The $9.5 million were in the commercial loan group. There were two credits $6.1 million charge related to a fabric manufacturer housed in our asset-based Webster Business Credit and the $3.35 million was middle market credit, a commercial cleaning company in our footprint in Connecticut.

[James Abbott:]

It sounds like those could be related to the housing industry, is it?

[John Ciulla:]

I would say that, that’s probably not the case. The commercial cleaning company actually had issues with respect to an acquisition and some pension liability and we have a personal guarantor there, and we’re actually confident that overtime we will be able to recover a portion of that charge. With respect to the asset-based credit, it really had to do with a dramatic devaluation in inventory. It was a retail supplier or a retail home goods company. So I guess there, there was a slight connection to the housing market, but not entirely related.

[James Smith:]

Okay, I guess you give me the opportunity to make another point I have made before which is -- that's two credits comprising 60% of the total charge-offs for the quarter. One is in the asset-based lending group; one is in the middle market group. There is a systemic issue as to deterioration that we know.

[James Abbott:]

Okay and the last is a real quick housekeeping, just you motioned that in the press release there is some seasonal expenses I think of $5 million but then you mentioned in the Q&A or later in the outlook I guess that expenses should go up in the second quarter. Am I interpreting that correctly that the seasonal expenses will be offset by some increases elsewhere?

[Jerry Plush:]

Yeah Jim, it's Jerry. We have planned marketing expenses in the second quarter. So if you just look specifically at the marking line and that was what my comment was around you should see an increase just in relation to some of the campaigns that we are doing in deposit gathering as well as in some of the loan areas

[James Abbott:]

Okay thanks. Just want make sure I interpreted correctly. Thank you.

[Jerry Plush:]

And it’s specific to that line when I make that comment.

[James Abbott:]

Super.

[Jerry Plush:]

Okay thanks.

[James Smith:]

Thanks Jim.

[James Abbott:]

Thank you.

[Operator:]

Our next question comes from Collyn Gilbert with Stifel Nicolaus. Please state your question.

[Collyn Gilbert:]

Thanks, good morning guys.

[James Smith:]

Hi Collyn

[Collyn Gilbert:]

Just a follow up actually while we are on the discussion of expenses. Jerry, can you just give a kind of an indication of where you think the quarterly run rate is on expenses over the next couple of quarters?

[Jerry Plush:]

Collyn, I think when you look at the lines, while first I want to prophesies my response by saying we do believe there will be some charges in terms of related to our One Webster initiative. And as such, once we've completed that process and have evaluated what we will continue to do what we want would have to come back out and tell you a lit bit more about what expenses look like on an ongoing basis. So I would have to almost and I don't want sound like I'm side stepping, there will be some dramatic changes in the expenses in terms of run rate post One Webster. Some will be immediate and we will see those in the third and the fourth quarters, others will take place over 18 to 24 months. And, we're going to do our best to spend some time as I'd indicated to make sure that everyone is thoroughly versed on the types of decisions that we’re making and what kind of impacts that would have. So I would have to say that for now the guidance I was able to provide around expense really is only for the second quarter and its difficult to project forward the type of savings that you might be able to see in specific line items. And so, we really get to the conclusion of One Webster. So I hope to be able to come back with Jim and others and provide an update, if not before the earnings calls, certainly by the next earnings call on an absolute latest.

[Collyn Gilbert:]

Okay. So by you -- mentioning dramatic changes, is that how you're going to get to that 60% efficiency ratio?

[Jerry Plush:]

You know the combination for One Webster is enhancing revenue and systemically reducing expenses. So it’s a combination of the two that gets you to that ratio.

[Collyn Gilbert:]

Okay. And you are sticking to that goal by year end?

[Jerry Plush:]

For the fourth quarter of year end, that's what we would like to stick to.

[Collyn Gilbert:]

Okay. And then Jim, just to talk about credit for a second, could you just give some colors as to the life cycle of these three credits that were charged off, because I thought that the guidance post the fourth quarter was that the provision or at least the core provision was going to be fairly comparable to the fourth quarter, and I think at that time you said too that you didn't necessarily see sort of systemic risks or significant deterioration in the outlook for credit, but yet, we had a pretty sizable jump in the provision, and I'm just trying to quantify what you mean by no systemic problem?

[James Smith:]

Yes Collyn, I am going to comment that and I have John Ciulla who will comment specifically on these credits. But the point that I am trying to make is that in the down leg there are going to be blow ups that occur here and there and that’s what happened. And so that’s why we have sighted the two commercial relationships and the one other relationship that accounted for two-thirds of the charge-offs, and I have to acknowledge that a couple of these came up on us pretty fast in Q1 which is the reason that the charge offs were higher and therefore we elected to boost provision as well. And it may well be more of these that we don't see that are going to pop up which is why we are being very careful now to predict that we've reached the peak or we'll see a diminution of the charge-offs in the immediate future. We are in a down cycle, we don't how deep it's going to be and so, we just have to wait and see what's going to happen. But I would stick to my comment that we don't see a growing systemic threat in any parts of the portfolio. We see higher delinquency rates; we see higher non-accrual rates. It's what we would expect, and then occasionally there may be a blow or may be there won't. But I think we have to assume that in this kind of an environment it’s more likely that there will be, than that there would not. As to the particular credits I will ask John Ciulla to comment.

[John Ciulla:]

Yeah, I would say that there's significant volatility, so in terms of our visibility on the two credits that comprise the 9.5 million. We were well into the first quarter, we obviously had identified the two credits, but our embedded loss numbers even halfway through the quarter had projected a charge-off number significantly less than where we ended up. So what we had a sort of fast moving results, we had anticipated a lower amount for the asset base credit, and as I said some M&A activity that we are hoping would arise and a dramatic shift in inventory value lead to a larger and swifter charge on that credit than we had thought, and we actually had relative confidence that the other credit , the middle market credit would continue to perform and survive throughout the first quarter as some drastic changes were being made in the management of that company and unfortunately some of the external factors made it impossible for the company to continue to meet its obligations.

[Collyn Gilbert:]

Okay. So where these on non-accrual status at the end of the year?

[Jerry Plush:]

The middle market credit was not and I do not believe the Webster business credit was either.

[Collyn Gilbert:]

Okay. And then just finally, Jim, if you could just sort of give some color as to sort of how the executive team is laying out now with you know, there is a pending departure of Bill and with Joe having left. And just how you see the management, the executive management team structured going forward.

[James Smith:]

Well let me comment that Bill is still the full fledged President and Chief Operating Officer and will be till the end of June. And then you will continue as Vice Chair until the end of the year and I try to make clear that we would be in a transition period and that he and I and others on the executive team would be working out what the new organization would be. So I want to be careful not to be trying to lay that out at this time. I think that there is a couple of things to say, one is that we have narrowed our focus on core franchise activities and that’s why I made the comment that the Chief Operating Officer was not central to the operating model anymore. Bill also has been of great value in recruiting high quality people to run our business units. So we're much a stronger company than we were 5 or 7 or 10 years ago when we first started down this path. So we're looking at whether some of these responsibilities will be assumed by others that are currently in the organization and that is likely, and maybe that we need to do some recruiting as well to make sure that the totality of Bill's responsibilities get transferred properly throughout the organization. There is no doubt there's a significant void that's created particularly because of the contributions that Bill has made and that’s what he and I are going to working on as we lay out the organizational change here over the next couple of months. So I rather not try to nail for you right now, but say that we will provide that information later on.

[Collyn Gilbert:]

Okay, great. Thank you very much guys.

[Operator:]

Our next question comes from Gerard Cassidy with RBC Capital Markets. Please state your question.

[Gerard Cassidy:]

Thank you, good morning.

[James Smith:]

Good morning Gerard.

[Gerard Cassidy:]

I apologize that you have answered some of these question, I’ve been jumping on and off your call. So I apologize if you have to repeat them.

[James Smith:]

Okay.

[Gerard Cassidy:]

Regarding the Visa gain on that you reported of about $0.03 a share. Did that include the reversal of any expenses that you may have taken in the fourth quarter on the Visa litigation?

[Jerry Plush:]

Yes, there is a partial release of about $650,000 from the liability we recorded in the fourth quarter.

[Gerard Cassidy:]

And that….?

[Jerry Plush:]

So, we reported about a 1.5 million in the fourth quarter and 650,000 of that is in that $0.03.

[Gerard Cassidy:]

Okay there's been the $0.03.

[Jerry Plush:]

Yes.

[Gerard Cassidy:]

The next question is on the loan to deposit ratio, is there any target that you guys would like to be at by the end of '08?

[Jerry Plush:]

We've been coveting being in and around the 100%, so that in effect we've got our full funding for loan growth coming from deposit growth. I think in my remarks we've seen that we are shifting away from CDs and have pushed and really have made a concerted push across all lines of business in the organization on either no interest bearing or low interest bearing transaction accounts and we've seen some good success here in the first quarter. We keen to kind of continue that. That coupled with the attractive rates that we can get in terms of borrowings and you could see that in what a substantial decrease we had in the cost of borrowings from quarter to quarter. We deliberately say that we would allow ourselves to go back up over that 100% and stay in and around where we are today. In terms of target, I would have to tell you that we love to be at a 100%, but at this point in time we just see at attractive alternatives out there and think it's in our best interest as we build the low and no cost interest-bearing accounts under our books and the tap in the borrowings market is a good thing to do here.

[Gerard Cassidy:]

Thank you. And then on the net charge-offs that you guys just addressed, the three commercial net charge-offs I guess, where two of those in the asset-backed portfolio?

[Jerry Plush:]

No, one of them was asset-backed Gerard, and the other was middle market.

[Gerard Cassidy:]

Okay. And in the asset-backed portfolio, is there any degradation in the portfolio geographically, are you seeing a stronger part of the portfolio in the northeast, weaker in the west or something like that?

[James Smith:]

I would say no, we are not. Actually, the overall portfolio is pretty strong and I don’t know whether you heard the portion of our comments, but we think we’re in a pretty strong position there. 92% of our outstandings are secured by AR and inventory for example. The NPAs and the whole ABL portfolio were 1% at the end of March and we also did say that close to 60% of the portfolio was in the northeast, but pretty much the credit stats are fairly similar across the whole portfolio.

[Gerard Cassidy:]

Okay. And then finally on the liquidating home equity portfolio that you guys mentioned. In a recent presentation you made in February, you gave a nice breakout of the loan to value, the consolidated loan to value, the portion of 95 to 100% are you seeing higher charge-offs in that when they go delinquent, are they showing higher charge-offs in the liquidating portfolio that part of it versus less than 80% or 80 to 85?

[James Smith:]

Yeah, generally speaking, the higher the CLTV at the time of origination, the higher the charge-off given default. And we will update that and we will put it out so you get a look at it.

[Gerard Cassidy:]

And what kind of severity are you seeing in that 95 to 100%, when it does go delinquent, are you seeing upwards of 100% type of charge-off?

[James Smith:]

I am not sure we have that number right now.

[Unidentified Company Representative:]

Case by case.

[James Smith:]

Yeah, I would say it's on a case by case basis and I wouldn’t want to just blank it and say that, yes, that it is.

[Gerard Cassidy:]

Okay.

[James Smith:]

But I will say that we will have the updated in our slide presentation within the next couple of weeks.

[Gerard Cassidy:]

Okay. And then just finally, some of the larger banks are alluding to the fact that the consumer is having a behavioral change in that when their house falls below the value of their first and second mortgage, they have the capability of paying, but they are choosing not to pay. Are you seeing any of that? Or can you dig into that at all and say if you are being affected by that if that's happening?

[James Smith:]

Well, it's hard to determine what the psychology is on a case by case basis. I mean we know that there is a rise in non-accruals and that maybe and probably is one of the elements particularly given all of the publicity that the downturn in the cycle has received. So we will say we imagine that that's out there but we can't point to specific cases where we think that that has occurred. We also think that the longer somebody has lived in a home, the more likely they are to want to continue to meet their obligations, so part of this maybe that people haven't been there very long or they bought it on sort of a sense of being able to flip it or whatever the particular behavioral influence was that in those segments that the probability of just stopping payment or trying to walk away is going to be considerably higher. But in the core market of people that bought their homes to live in them and tended to do their best to make their payments, we’re not not seeing that behavior.

[Gerard Cassidy:]

Thank you.

[James Smith:]

Thank you.

[Operator:]

Our next question comes from Damon DelMonte with KBW. Please state your question.

[Damon DelMonte:]

Hi. Good morning guys. How are you?

[James Smith:]

Damon, good morning.

[Damon DelMonte:]

Pretty much all of my questions have been answered, but just one last one regarding the tax rate. I know the rate this quarter was higher than - it would have been 31% but it was higher because of the FIN48. What are you guys forecasting for a rate going forward?

[Jerry Plush:]

31%.

[Damon DelMonte:]

31%, okay. Thank you.

[Jerry Plush:]

Thank you, Damon.

[Operator:]

Thank you. Our next question comes from Andrea Jao with Lehman Brothers. Please state your question.

[Andrea Jao:]

Hello again.

[Jerry Plush:]

Hi Andrea.

[Andrea Jao:]

Just circling back on deposit service fees. I know those were seasonally weak this quarter, but if you are making an effort to bring in more deposits, are you more willing to waive fees and therefore the ramp-up in service fees should be slower going forward?

[Jerry Plush:]

No actually Andrea, we are trying to systematize the collection of fees the best that we can so that we have less leakage perhaps then we have today. And we are making a considered effort to bring in operating or transaction accounts and so we hope that actually the ability to attract new relationships will have a positive impact on fees. And as we pointed out we generally have a seasonal decline in Q1, that has occurred again in 2008 and we expect that there will be a ramp up in those fees through the balance of the year. Andrea Jao Fantastic. Now on page 14 in the press release it did show a 30 to 90 days past dues for the continuing portfolio and those have gone up between year end at March 31, what this been translates into with respect to the NPA ratio under continuing portfolio?

[Jerry Plush:]

You mean the flow through rate.

[Andrea Jao:]

Yeah.

[Jerry Plush:]

It's hard to say some of those cure relatively early on depending upon on which category they are in, others of them are more predictable to flow through such as the consumer in the resi type. I am a little hesitant to try to make the prediction on that.

[Andrea Jao:]

Okay. Thank you so much. Jerry Plush You know, Andrea, I just – I further comment that we do look at what it is, assuming that every loan that goes delinquent has a certain chance of curing, if it doesn't cure, it’s going to flow through and then at last given the fault would be x, I mean, we do look at that for purposes of trying to make our own projections, but I think we’re in uncharted waters here and it's hard to rely on any simple formula for that purpose.

[Andrea Jao:]

Okay, fair enough. Thanks again.

[Operator:]

Thank you. Our next questions comes from James Abbott with FBR capital markets. Please say your question.

[James Abbott:]

Yeah, hi a real quick question again. On the commercial business lending, I am wondering if you could take us, as we kind of get into a weak economy here, can you take us through what you do as a company that maybe better than industry practices to help prevent losses there, what sort of policies or procedures do you have on that portfolio, its something that most of us has taken for granted over the last few years as being just a performing portfolio and maybe you give us some detail on how you manage that business?

[John Ciulla:]

Yes, it’s John Ciulla again. Our philosophy is we’ve got a signature approval process system in the bank, we have Credit Approval Officers, Senior Credit Approval Officers that have a specific asset class expertise, as you look at our balance sheet we have, as you know a fairly diverse set of commercial banking activities and we pair up very strong senior credit officers with the business lines to make sure that we’re doing appropriate credit positioning. We have a culture of credits with respect to the line managers who have come from a banks with their philosophy as the first line of credit, so the originators have a credit bias, and then we have strong loan review function, and obviously we feel aggressively risk rate and manage our portfolios on a periodic basis and then get special assets involved consulting on credits very early in the process so that we can appropriately react and react prospectively to credits as they migrate down the risk chain. I don’t know if I can give you any other additional granularity I am happy to, but I hope that gives a sort of context of our philosophy.

[James Abbott:]

That helps. Can you may be give us a sense on what the loan valuation with you on equipment and then also an asset based lending, and then also frequency of monitoring, and how quickly can you collect the financial statements of the companies?

[Bill Bromage:]

Yeah this is Bill and I will be with he equipment piece first. On the equipment side we would tend to finance relatively high percentage going into the particular asset, and then we would have an amortization casual that would match the depreciation of the realizable value of the underline collateral such that we are in balance and in fact grow the equity and the equipment relatively, quickly so that we’ve got a good strong position in the collateral and I think that we’re in If you look at our track record overtime in terms of the loss in that portfolio, it’s been quite good, meaning it’s been particularly, relatively low versus the industry and I think it is the underwriting of the individual collateral, as Jim pointed out, we are underwriting collateral that has a specific revenue generating purpose, and we understand that purpose going in. So early payment default is a typical of that, so we grow into an equity position and it works out well over the life of the loan. In ABL the loan to value tends to vary depending -- as Jim said, it’s principally receivable inventory financing and other that in the retail segment which we have a subsegment of it has performed well overtime, it tends to be skewed even in that case to receivables. The receivables will be dependent upon -- the advance rate will be depended upon the individual assessment of that underlying collateral, it’s typically in the 80% plus perhaps range, and the inventory would be dependent upon realizable value, and retail side we’re typically looking at going out of business sale values. So you are looking at a net realizable value if you had to liquidate that inventory in lending a relatively high percentage of that number, but a low percentage of the overall statement value if you will of the inventory. So there a very disciplined process there. That business is very much of a cash demonian business. So receivables are collected directly by us. And so, we’re monitoring that business daily in terms of monitoring, controlling the cash for those borrowers and we do regular audits when we go and we have monthly statements in that case and obviously receivables aging and the like. When you get into more of our -- what John was talking about in terms of our commercial middle market and small business lending we get quarterly statements, we typically have covenants on all of those and we’re tracking the covenants and doing covenant compliance, and if there are violations of covenants that get escalated up through the credit process, so there is a review of what the violation maybe and the determination of the wisdom of wavering or looking to secure our position more strongly if that is the appropriate action. So I think the active monitoring of the portfolio is pretty strong.

[James Abbott:]

Thank you for expanding on that. Thank you.

[Operator:]

There are no further questions. I will now turn the conference back over to management for any closing comments.

[James C. Smith:]

Thank you very much for being with us today. We appreciate your interest in Webster. Have a good day.

[Operator:]

Thank you. This concludes today’s conference. All parties may disconnect now.