Webster Financial Corporation (WBS) Q2 2008 Earnings Report, Transcript and Summary

Good morning, everyone. Welcome to Webster's Second Quarter 2008 Investor Call and Webcast. Joining me today are Jerry Plush, our Chief Financial Officer, who recently took on the Chief Risk Officer mantle as well—congratulations, Jerry—John Ciulla, our Chief Credit Risk Officer; and Terry Mangan, Investor Relations. I will provide some overview and context for the second 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. The cash and non-cash charges that are part in today’s earnings release reflect the challenging environment for financial institutions. Let me address, right up front, the increase since our preannouncement a couple of weeks ago in impairment charges against available for-sale securities. The higher non-cash charges reflect Webster’s determination, subsequent to the preannouncement, that market conditions for pooled capital trust securities rated triple-B are now such that we should take a charge as of the end of Q2. We have impaired all pooled capital trust securities rated triple-B, whether the pools are deferring payments or not. The charges have no impact in our tangible capital positions since we have already taken the mark against equity and our strong regulatory capital ratios position us well to absorb the charges. To the extent we can recognize potential losses in our securities portfolio in the most timely manner, we intend to do so. I encourage you to go to our website at www.wbst.com to see a granular view of our securities portfolio and the actions we have taken. You’ll see that the only held-to-maturity securities in the portfolio are high-grade munies and 15- and 30-year agencies. All other securities and AFS in quarter end have been marked to market. Broadly speaking, you can expect us to be very conservative in our judgments as we navigate through the current financial environment. We are focused on isolating the problems of today and improving performance tomorrow and we aim to provide our investors with financial reporting that is the most transparent, granular, and comprehensive that you will see from any company in our peer group. Overall, the cash and non-cash charges aggregate $0.98 in diluted EPS and consist of write-down of investments to fair value totaling $0.66 per share, goodwill impairment representing $0.16 per share, and One Webster program cost and other charges totaling $0.16 per share. Jerry will discuss these items in more detail. Unfortunately, the charges detract from solid improvement in Webster’s core operating results turned in during the second quarter. While we reported the loss of $0.56 per diluted share in Q2, core operating results were $0.42, as indicated in the EPS reconciliation and the earnings release. The $0.42—which before the $10 million or $0.12 increase in the loan-loss provision would have been $0.54—was above analysts’ estimates, as net interest income benefited from a stable margin and modest earning asset growth. Core P/E categories rebounded nicely from the first quarter and we contained expenses. Our narrow strategic focus on in market direct core franchise activities is a major positive for strategy development and resource allocations. There are no distractions from the task at hand. The solid core operating performance in the quarter supported the Boards’ decision to declare the regular $0.30 quarterly cash dividend that will be paid on August 18. This is the eighty-fourth consecutive quarterly dividend since Webster first paid the dividend in 1987. We plan to balance the desire to maintain the current dividend against Webster’s capital needs in the quarters ahead. As indicated in our July 10 preannouncement, the provision for credit losses in the continuing portfolios is $25 million in the quarter, driven by the $68 million spike in non-performing loans. Since net charge-offs in the continuing portfolio declined to $11.2 million, credit reserves in the continuing portfolio increased nine basis points from March 31 to 1.30%. We deem this increase essential given the increase level of non-accrual loans and the need to build reserves given continuing economic uncertainty. Again, as with the impairment charge against the securities portfolio and our decision to raise capital for that matter, we want to be aggressive in recognizing the current environments’ potential impact on future performance. The reason for the unusually high increase in NPAs was primarily because four residential development loans went non-accrual in the quarter, as slow sales took a toll on the performance. Most investors know that we have had an outstanding asset quality record in this business unit over the years and we remain confident that our underwriting and work out capabilities will serve as loss mitigators. I don’t want to make predictions in this environment, I have to take that the magnitude of the increase in non-performing assets was more likely an aberration than a trend. A few bolstered by the sizable Q2 reduction of $33 million in 30- to 89-day past due loans. There is no doubt we are living in extraordinary and uncertain economic times. To an increasing degree, those circumstances shape our priorities as a company while our vision, mission and values guide Webster people everyday as we find a way to help our customers achieve their financial goals. Our operating principles are the driving force behind the management process, and our primary focus of our report today. We understand that during a period when confidence in the banking system ebbs, banks must adapt their operating principles accordingly. So, we’ve spent considerable time and effort in recent months building capital and liquidity, and bolstering our credit-risk management capabilities, focusing inwardly as we prepare for the quarters ahead. Let’s start with our capital position. In early June, we raised $225 million of tangible capital through the issuance of convertible preferred stock. Its purpose: to enable us to build a fortress balance sheet, to capitalize our judicious future growth, and to guard against the unforeseen. Tough as it was to dilute our shareholders, we knew it was the right thing to do in today’s uncertain financial world. We believe our shareholders will benefit ultimately from our timely move. Tangible capitals stood at 6.8% as of June 30, up from 5.8% linked quarter and after net securities marks of $67 million in the quarter. We absolutely believe strong capital levels are critical given the current economic environment, and we wanted the certainty of having capital ratios well in excess of the regulatory levels required to be well-capitalized, which we do. Our Tier 1 leverage ratio of 8.9% at June 30 is well above our publicly stated goal of 8%, and the 7.9% we reported at March 31, and our projected total risk-based capital ratio is 13.2% at June 30, also well above the 12% goal we publicly stated and compared with 11.4% at March 31. We think that Webster’s strong capital position is a huge asset as we pursue our vision to be New England’s bank. We are flush with liquidity and more than able to meet our cash needs. Our reduced reliance on borrowings compared to a couple of years ago; our decision to issue brokered CDs as a source of funding; our improving core deposit ratio which now stands at 62% and was boosted by growth in demand now and savings accounts in Q2, all our evidence of our exceptionally strong liquidity. In a clear shift in emphasis from loan generation to credit quality management in recent quarters, our loan personnel are focused inwardly. Asset quality is multiples more important than asset growth in today’s environment. The growth in loans in Q2 isn’t likely to repeat in Q3, as we are demanding higher hurdle-rate returns, concentrating on building out and strengthening existing relationships, rewarding early identification of credit issues. Moving promptly to downgrade where deterioration is evident. Moving people from lying to workout to insure timely resolution of credit problems, aggressively resolving non-accrual assets and reducing exposure credit by credit where we see the need. We are also aided on the credit quality front by the resilience of our primary market’s real estate values and economy. Connecticut, for example, created 3,400 jobs last month. Not a big number, but its positive. And in New England market, outside of Boston, was not built-out as aggressively as many other areas in the U.S. which may bode well for regional real estate values, especially our sizeable in-market home equity portfolio, and our modestly-sized residential development portfolio as we weather the national recession. Before I turn it over to Jerry, I will comment on the One Webster earnings optimization initiatives. We announced the results of this comprehensive revenue enhancement and cost-reduction initiative on June 24, and we posted slides on our website in conjunction with today’s earnings release. We expect to save $40 million annually in expenses and achieve an additional $10 million in incremental revenue growth on a run-rate basis, compared with 2007, when the program is fully implemented in 24 months. This is just great news. We still foresee reducing the efficiency ratio to 60% in Q4 ’08 with additional sustainable improvements in 2009 and beyond. Webster people generated over 3,500 ideas during the discovery phase earlier this year. Over 2,500 of these ideas were evaluated, and 850 or about 35% were approved. Ideas generating 50% of expected results will be implemented by the end of this year. About 40% of the $40 million in expected proceeds relate to reduced personnel expenses and the other 60% relates to reduced vendor expenses. One of the major successes of the effort was our ability to realize efficiencies equal to 10% of our cross-base, while 97% of our employees remain minimally impacted. I will now turn the program over to Jerry, so he can provide more detail on Q2 financial performance.

: We will start today first with loans and growth in the quarter. Commercial loans consisting of C&I and CRE loans totaled 6 billion and grew by 8% combined from a year ago. Commercial loans now comprise 47% of the total loan portfolio, compared to the 44% a year ago. Total loan portfolio growth was 3% compared a year ago, primarily the result of the planned reduction of 4% residential loans. The C&I portion of our commercial portfolio totaled 3.6 billion in June 30 and grew 65 million from March 31, primarily in the equipment finance and asset-based landing. The entire C&I portfolio yielded 552 for the quarter compared to the 632 in the first quarter. Equipment financed outstandings were just over 1 billion at June 30 compared to 983 million at March 31. The portfolio continues to stay very granular with no single credit representing 1% of the portfolio and the average deal size being less than $100,000. Asset-based lending outstandings were 842 million at June 30 compared to 831 million at March 31. Current asset coverage is generally solid with approximately 92% of the outstandings secured by Accounts Receivable and Inventory. The remaining 8% of outstandings consist of equipment at 7% and real estate at 1%. The commercial real estate portfolio totaled to a 2.3 billion at June 30 and grew at 180 million from March 31. We closed 18 deals during the second quarter that had a combined funded amount of a 127 million of June 30, against total commitments of 150 million. This growth reflects deals that we have always sought but were not able to compete for until the conduits went on the sidelines. These loans are primarily institutional quality real estate with five-to-ten year loan terms representing stabilize properties with good debts service coverage and LTVs under 75%, generally well under 75% in many cases. The total CRE portfolio yielded 561 in the quarter, compared to 630 in the first quarter. Our consumer loan portfolio totaled 3.2 billion and it consisted of 2.9 billion in the continuing portfolio and 310 million in the liquidating home equity portfolio. We had an overall increase of 39 million in the continuing portfolio from March 31. This is all direct-to-consumer retail based in-market growth, our branch originations were 344 million in Q2 compared to 148 million in the first quarter. Our home equity lines now represents just over 50% of the total with home equity loans being just under 50%. Our consumer portfolio yielded 532 in the quarter and comparison with 609 in the first quarter. Let me make a comment on yields. The decline in yield in certain assets classes within the loan portfolio reflects the effect of the Fed reduction to 75 basis points on March 18th and 25 basis points on April 30th have had on the floating rate home equity lines, CRE and C&I. Sixty-eight percent of our CRE portfolio was floating. Eighty-eight percent of our C&I is floating, and our equipment finance is 98% fixed rate. Turning out the residential loans, they totaled 3.6 billion, down 41 million from March 31, worth 3.5 billion and you exclude the 63 million on the liquidating portfolio which relates to the indirect residential construction loans. Our resi loans now comprise 28% of our loan portfolio at June 30, compared to 29 % at March 31 as we have now for some time de-emphasized our residential loan growth. The resi portfolio yielded 567 in the quarter compared to 570 in the first quarter. Turning out of the investment portfolio, Webster recorded write- down some of the investments to fair value rather than temporary impairments, certain investments securities that are classified as available for sale. The 53.7 million, or $0.67 cents per share, and another 1.2 million, or $0.01 per share, for a rate-down on the value of direct investments. I want to note that while we have been consistently providing granular disclosure regarding the composition of our investment portfolio and our SEC filings and our investor presentations, what we have done today, in the supplemental schedules that we have posted to our Web site is providing in greater detail about the corporate bonds and notes, as well as our equity securities holdings particularly in light of the added-in temporary impairment charges that have been taken in the second quarter. First, it is important to note that all the securities where we have taken impairment charges are classified as available for sale. You can also see the supplemental slides, the unrealized last portion across the specific investments in the portfolio at both June 30 and March 31. These unrealized losses are recognized to the other comprehensive income adjustments to equity, so for any securities classified as AFS where market vales are lower than cost the difference would be reflected in tangible capital. So subsequent to our pre-announcement on July 10th, we have done a significant amount of additional analysis on our available for sale securities portfolio. We have concluded that we should impair certain BBB rated pool trust preferred securities where cash flows have become in doubt, specifically where the issuers have announced they will defer payment for some period of time. In addition, excuse me, we then—we evaluated the rest of our BBB rated pool of securities classified as available for sale and then determined that based on the best estimate of cash flows that a market participant would use in determining the current fair value of the beneficial interest, i.e. the securities we own, there is an implied adverse change in expected cash flows. Therefore, the appropriate accounting is to impair these securities as well as of the end of the last quarter and write them down to fair value. This is the primary reason our impairment charges announced today exceeded what we previously announced. Also, given the recent uncertainty related to the GSEs, specifically Fannie Mae and Freddie Mac, subsequent to quarter end. We also elected subsequent to our pre-announcement to impair the combined $15 million preferred stock holdings we have in Fannie and Freddie Mac and write them down to fair value also as of June 30, 2008. Finally, we also elected to recognize the loss positions specific to one New England-based common stock position we have in portfolio and recognize impairment before the prescribed twelve consecutive months at a loss timeline that we have been following. Even though these determinations were subsequent to June 30 and subsequent to our July 10th pre-announcement, we have also determined to take these charges as of the last quarter end. We will turn now to goodwill. We have discussed in various context that Webster has, like many other financial services entities, experienced stock declines during the first half of the year. This creates a significant gap between book value and market value and accordingly, subject to the results of testing, could result in a reduction in the value of goodwill and require an impairment charge. The 8.5 million or $0.16 per share of goodwill impairment charge we reported today relates solely to Webster’s insurance finance—premium finance subsidiary which was acquired in 2003. This charge is non-cash in nature. It does not affect Webster’s liquidity, tangible equity, or regulatory ratios. The balance of our testing did not result in any impairment charges being required at this time. We utilize the services of an independent national firm with expertise in valuation that we engaged in second quarter. They have evaluated our methodology, our business segment goodwill allocations and arrived independently in an overall evaluation. We indicated today in our release that Webster will evaluate the goodwill associated with its reporting units again specifically in the third quarter as part of a regularly scheduled annual review. Next, let me provide an update on deposits. Our loan-to-deposit ratio increased to 106% for June compared to 104% of March 31 and 97% a year ago. Allowing this ratio to increase is consistent with what we stated of late, specifically that we intended to reduce our reliance on CDs due to the higher cost, focus on growing core accounts and reduce the use of brokered CDs as funding source. We have been diligently working to improve this ratio as evidenced from the recent past, but this ratio included brokered deposits which have been committed to significantly reducing as a source of funds and therefore a rise in the loan-to-deposit ratio would occur as a result. Brokered CDs totaled 897 million as of September 30th of 2006 and by design; we have declined them since then including over 231 million from a year ago. And our brokered CDs now total only a 170 million as of June 30. Our intent is to continue to evaluate further reductions over the next two quarters as over a 100 million in brokered CDs mature. We have also made concerted efforts to change our deposit mix and lower the cost of deposits with increased emphasis on growing checking accounts across our retail commercial and municipal lines of business. Certificates of deposit in total have declined including brokered CDs from a year ago and we have been focused on increasing our core deposits which are higher as a result by 38 million. Our quarter deposit total ratio is now 62% compared with 60.7% in the first quarter, and 58.1% in the year ago period. Additionally, our cost of deposits declined to 2.1%—2.01%, excuse me, for the second quarter compared with 2.49% for the first quarter and 2.88% a year ago. Let me now take the opportunity to also give you an update on our De Novo program and then on HSA Bank. We opened 29 branches since 2002 which represents 16% of our total retail branches. The De Novo branches had total deposits of 756 million of June 30 in comparison with 797 million of March 31 and 781 a year ago. Although total De Novo deposits have declined from a year ago and in the most recent quarter, this is in large part of planned de-emphasis on higher costing CDs. Core deposits in the De Novo program have grown 2.8% over the past year and now a total of $115.5 million. We will plan to open a new office in North Kingston Rhode Island during the month of August of this year. We will soon be announcing locations where we will open two more branches in the Rhode Island market in the first six months of 2009. Our De Novo branching in the future will not be primarily a retail consumer-reliant strategy as it has been in the past. We plan to open branches specifically where we see broader company-wide opportunities for growth and place less emphasis on just consumer. HSA Bank, which provides us with low-cost stable deposits, had 504 million in health savings deposit to June 30, an increase of 128 million or 34% from a year ago. We also have 66 million in linked brokerage accounts compared to 51 million a year ago. HSA Bank average cost to deposits for this past growing category was 2.1% in Q2 which is down from the 2.46 reported in Q1 and slightly lower than our overall deposit cost. As we have indicated before, HSA Bank expands our reach for core deposits and allows us to tap into a national deposit market with significant growth potential. At the end of June, HSA had 214,000 accounts compared to 208,000 accounts of March 31 and 176,000 accounts a year ago. The average deposit balance per account now is over $2,350 compared to over 2,140 a year ago. This growth continues to show the viability and acceptance of the consumer-directed healthcare model in the United States. Turning now to borrowings, they increased by 170 million from March 31, primarily an increase in the use of HFLB [ph] advances. We've relied on borrowings to off-set planned declines in retail CD and brokerage CDs. Our cost of borrowings declined to 3.38% into the second quarter down from 414 in first quarter and 523 a year ago. Note again that our focus is on organic deposit growth which should reduce – result in reduced usage borrowings in future periods. Turning now to asset quality, the provision for credit losses was 25 million for the second quarter as in comparison with 15.8 in the first quarter and 4.25 million from a year ago. The increased provision in the second quarter reflects increased levels on non-performing loans and management's determination to build reserved levels given continued economic uncertainty. Our total allowance for credit losses per total loans was 1.52% as of June 30 as compared with 1.51% at March 31 and 1.23% a year ago. What is important is our allowance for the continuing portfolio was up to 1.3% in comparison with 1.21% in the second quarter and 1.23% in June of 2007. Net charge-offs in the second quarter for 2008, total of 11.2 million for the continuing portfolio and 9.2 million for the liquidating portfolio compared to first quarter charge-offs of 15.8 million for the continuing and 7.8 million for the liquidating portfolio. We are currently updating collateral values for the liquidating portfolio and we continue to assess reserved adequacy to ensure that coverage is appropriate. Our total non-performing assets increased to 224 million at June 30 in comparison with 154 million at March 31.. NPA's in the continuing portfolio were 182 million in June 30, compared with 130 million at March 31. C&I and CRE represented 63 million of the 69 million increase as a result of the six credits mentioned in our preannouncement on July 10, reflecting continued challenging residential housing market. Poor residential development credits aggregating approximately 36 million represented all the increases in CRE. Within these credits, approximately 26 million is secured by properties located in New England, 7 million by a property in Pennsylvania, and a balance of 3 million with a property in Arizona which is related by sponsor to 9.5 million of the New England-based exposure referenced above. The 27 million net increase in commercial was largely driven by 24 million in two credits, a publisher and a diversified manufacturer. NPA's were 1.47% of loans plus other real estate owned and the net charge-off rate was 36 basis points annualized in Q2. Credit metrics in the $2.8 billion continuing home equity portfolio performed with normalized levels, with the delinquency rate declining slightly to 0.62% at June 30 from 0.72% at March 31, while the non-accrual rate increased to 0.72% from 0.6% at March 31. I will now provide some detail in the liquidating portfolios which consist in direct out-of-market home equity and national construction loans. We had $373 million of outstanding [inaudible 32:14] portfolios of June 30, in comparison with $395 million at March 31, and $424 million when the liquidating portfolios were established at year-end 2007. The total of $373 million consists of $63 million in construction loans and $310 million in home equities. Liquidating portfolio charge-offs of 9.6 million in the quarter consisted of 4.2 million in gross charges for the construction loans, and 5.4 million in gross charges for the consumer home-equity loans. As with the first quarter, charge-offs from the liquidating portfolios were taken against the special reserves established in the fourth quarter of 2007. As a result, we now have reserves of 9.1 million, and 23.8 million against the respective June 30 portfolio amounts, or 32.9 million in total reserves against 373 million in total balances. Turning now to One Webster. We have posted slides, as Jim noted, outlining the benefits we expect by quarter and by year. In summary, this program was very successful. We also anticipate that there will be additional benefits once we include on the over 100 study ideas that are now being worked on, as well as the continuous improvement team efforts. There are also growth opportunities that we have not highlighted here, that will show benefits in 2009 and 2010. This initiative has positively changed the culture here at Webster. We now have a much stronger focus on team work than ever before. Turning now to second quarter results. That interest income total of 125.7 million in the quarter. An increase of 0.8 million from the first quarter, as average earning assets grew 112 million from the first quarter and at that interest margin was relatively stable. Our securities portfolio totaled 2.9 billion, in comparison with 2.8 and 2.4 from a year ago. The yield of the portfolio was 543 compared with 575 in the first quarter and 578 in the second quarter. Non-interest income includes the impact of the previously discussed write-downs and certain investment securities. While, non-interest income in the first quarter included a $709,000 loss in the write-down of a direct investment to fair value, a $544,000 write-down of equity securities to fair value, and a $1.6 million gain from the VISA IPO. Our deposit service fees totaled 29.9 million, up from 28.4 million in the first quarter and 28.8 million in the year ago period. Our loan-related fees were 7.9 million in comparison with 6.9 million in the first quarter, and 7.9 a year ago. Our wealth management was up to 7.6 million in comparison with the 7 million dollars we reported in the first quarter, and flat with the 7.6 million we reported a year ago. Other non-interest income was 0.6 million for the quarter, in comparison with 1.8 million in the first quarter and 2 million a year ago. Our revenues from mortgage banking activities were only 100 thousand for the quarter, compared to 700 thousand in the first quarter and 0.4 million in the second quarter of last year. The reduced income in mortgage banking activities over the prior period reflects the closure of national wholesale mortgage lending in the fourth quarter of 2007. Net gains from security sales in the quarter were 126 thousand. Flat to the first quarter and reduced from 503 thousand recorded a year ago. Our total non-interest expenses were 137.7 million in the second quarter, in comparison to 116.1 million for the first quarter and 128.9 million in the second quarter. Our second quarter of 2008 results included a total of 21 million dollars of items specific to the quarter. It is inclusive of 8.5 million of goodwill impairment charges and 12.5 million of other costs, consisting of 7.7 million of previously disclosed amounts related to one Webster earnings optimization. Another million six in severance and other expenses related to early retirement and other executive changes and 3.2 million dollars of other charges. Let us look forward now to the third quarter. It is clearly shown the effects of increased nonperforming asset levels that ramped up in the second quarter and in addition, we would expect a pause of pricing pressures will increase, as many competitors have and continue to aggressively price CDs for liquidity purposes. So, accordingly, we will expect pressure on the NIM in third quarter. But, we still anticipate maintaining and seeing some slight improvement in the NIM in third quarter. Provision for the quote in today’s release, we believe it is very prudent to be building reserves and covering charge offs, given current economic uncertainties. So, therefore, you could expect that provision levels would be at least similar to levels in quarter 3 as well. Otherwise, we would anticipate our core operating results would continue to show improvement in the third quarter. Particularly, in light of the One Webster results that we believe will begin to show in the third quarter. At this point, I will now turn it back over to Jim for some concluding remarks.

Thanks, Jerry. We have been hard at work over these past three highly unusual months for the banking industry, as we continue to execute our strategic plan and take aggressive and timely action to manage effectively through this economic cycle. We raised capital for the long-term benefit of our customers, our shareholders, and our employees. We announced the results of our One Webster Earnings Optimization Program, that will make Webster more efficient while also improving our ability to deliver top quality customer service. And we announced important organizational changes, as we look to our future as New England’s Bank. Outside of the non-accruing loan increase and the special charges, our operating performance is on the upswing, and I hope that it is not lost in the moment. Webster’s second quarter operating results reflect the positive results from our narrowed focus on doing well, what we do best. The One Webster initiative will have a meaningful, positive impact on our future operating results. We know that today’s challenging economic environment will one day give way to calmer times. And we remain confident that our narrowed focus on core franchise activities will lead us to success as a regional commercial bank, helping individuals, families, and businesses across New England, achieve their financial goals. Thank you for being with us today. We will now be pleased to respond to your questions.

Thank you. Ladies and Gentlemen, we will now be conducting a question and answer session. (Operator instructions) Our first question is coming Andrea Jao of Lehman Brothers

Hello? Jim Smith Hello Andrea. Andrea Jao – Lehman Brothers: Hello. Good morning!

Andrea Jao – Lehman Brothers: Earlier during the call, you mentioned that you were in the process of getting updated collateral values for your liquidating portfolio. I was wondering how closely you looked at collateral values in the continuing portfolio, and if you could give us an update?

Sure. This is Jon Ciulla, the Chief Credit Risk Officer. Andrea Jao – Lehman Brothers: Hi John.

Good morning! At the end of, in the fourth quarter of 2007, we did a complete evaluation on the consumer and residential portfolios, both continuing and liquidating, using Kay Shiller. We are in process of updating that across the portfolio at the present time, and expect those analytics to be back to us within the next 2 weeks, by the end of July. In the interim, however, Andrea, we have been as part of our line management process, in reducing unused line commitments, in the home equity portfolio, both in the continuing and the liquidating. Based on a risk based approach, I have looked at updating evaluations using ABM Models for those lines that we have deemed to be higher-risk lines. So, to date, in between the fourth quarter of 2007 and our current update on the whole portfolio, we updated about 2000 properties, representing what we have identified as the higher risk lines, as part of our line management and line reduction activity.

Will you be able to share some of those details with us, in a couple of weeks when you are done?

Yes.

Perfect! Thank you.

You are welcome.

Thank you. Our next question is coming from Mark Fitzgibbon – Sandler O’Neill.

Good morning, and thank you for taking my question.

Good morning, Mark.

First, Jerry, just to clarify, you said, I think you expect NIM pressure in the third quarter, but you still expect it to improve?

Yes.

Okay.

Mark, specifically, you have to take into account the fact that we issued the convertible preferred, so you would see naturally some improvement, in terms of that funding, show up through the NIM. So, the way I look at it is, we also believe that the NIM was really suppressed given the high level of nonperforming assets we added in. And, accordingly, you can see the trends that we have got, in terms of our costs to deposits, or costs to borrowings. So, given all those different factors, I think we feel comfortable saying that we think it will be stable, and actually begin to show some improvement.

Okay. And then secondly, the nonperforming and delinquency trends in the liquidating portfolio look pretty good this quarter. Do you think that we have seen the high-water mark for nonperformers in that liquidating portfolio, or the two liquidating portfolios?

This is John Ciulla again. Obviously, we are hopeful. We do not think that necessarily a month over month or quarter over quarter in this environment makes a trend. But, we are obviously optimistic that the performance has stabilized. With respect to the continuing portfolio as well, we are seeing strong metrics. We are outperforming other industry home equity lenders. We think because of underwriting, relatively conservative underwriting programs, as well as Jim mentioned earlier, the geography where we are located. And we are hopeful that the behavioral patterns of the borrowers that we have seen, short of the early strike and weeded out some of the weaker borrowers, and we hope that the trend continues to stabilize over time.

Okay, and then also John, could you put these would be the utilization rates are on the in footprint home equity portfolio? And are those rising, or falling, or stable?

Yeah, they are stable. They are actually stable in both. You know, our utilization rates are a little higher in the liquidating portfolio, as you would expect. But with respect to period over period timing, in both continuing liquidating, we are seeing stability in utilization rates.

Thank you, and let me just comment that those utilization rates probably are a little less than 50% in those portfolios. Mark, I just want to say that sure, the stabilization is encouraging, but the way that we are viewing the current environment is, there is credit deterioration pretty much at least nationally speaking, across all asset classes. We do not want to suggest that we think that it is going to be any different here. And until we see the difference, as some kind of sustainable trend, we would not want to be projecting that that will occur. Much as we hope for it.

Thank you.

Thank you. Our next question is coming from Ken Surp of Morgan Stanley [ph]. Ken Surp – Morgan Stanley: Thanks. You made a comment on your dividends, both on the call and in your press release, that you plan to balance the desire to maintain your current dividend against your capital needs. Now, given the fact that you just basically reaffirmed your dividend and you just raised capital, I was a little confused by this statement. Are you trying to indicate anything? That you may need to raise additional capital or what did you mean by that?

No. We are trying to be absolutely neutral in terms of our intentions to pay the dividend without predicting that we would absolutely continue the dividend in future periods. So, we will base the desire to pay the dividend. We will balance that against the capital needs for the company. Now, we were not in any way suggesting that we had any need to raise additional capital. Ken Surp – Morgan Stanley: Okay. And then the other question that I had, on the One Webster Initiative: I know you have gone into a lot of detail there. I am just still plugging in the numbers into my model, but I am still not quite getting to that 60% by year end. I mean, even if you take 17% of the run rate, which you expect to get in 2008, apply that to this quarter. So, your expenses go down by say 7 million or so, you are still looking, sort of, at the low 60s, but not at 60%. I guess maybe, I would have thought that NIM would help that out a little bit by year end, but it doesn’t seem that NIM is going to be a big benefit here. What else were you missing? How were you getting to that 60%?

You are going to have to take into account that with the assets that we just put on, you will have a higher earning asset base with—again we are being cautious in terms of our views on the NIM, just given the uncertainty in the market and the impact, obviously that we saw this quarter, as it relates to some nonperforming assets and the impact that is had to the NIM. So, while we think that there is, the trajectory is that there would be that there is improvement, we are obviously being cautious in the commentary that we are providing today. We also believe that you see a very good trend as it relates to other fee income and you have got to take that into account when you factor in the 60%. Ken Surp – Morgan Stanley: Okay. Great.

All right. Thank you very much. Ken Surp – Morgan Stanley: Sure.

Thank you. Our next question is coming from Collyn Gilbert of Stifel, Nicolaus.. .

Thanks. Good morning guys. Just a couple of housekeeping items. What should we be using for the diluted share count for the third quarter?

Jerry is actually gone. What I am going to do is ask him to send to you and to everyone else the absolute number that we are using.

Okay, and then, what about on the tax rate?

You know, I think in terms of the tax rate, we will give you some guidance on that as well. I will be consistent on the individual calls, and I know that we have got lined up to provide some commentary on that.

Okay, all right. And then, in terms of you all thinking that the impairment on the Freddie and Frannie preferred this quarter, you said that it was a 15 million dollar impairment that you took? Or was the 15 million dollars the overall exposure that you had?

Collyn, we have 10 million in Frannie, I believe, and 5 million in Freddie preferred stocks. They were deals, part of the issuance that both organizations issued in the fourth quarter of 2007. The impairment was just below, I believe a million dollars, when you looked at the mark, as of June 30. We believe, just given the subsequent events, since that point and time, that there will be some other than temporary impairment, in those securities, and therefore, made the management judgment to recognize that. So, they are carried at fair value given the mark as of June 30th,. and we will continue to monitor that. Obviously, there has been a lot of volatility in the value of those particular stocks and, you know, given the uncertainty over the last couple of weeks, you would see market values up and down on those. But our view was, as of the reporting period, it was appropriate to go back and reflect those as the carrying value, meaning, or have the carrying value being reflected at fair value at that date.

Okay,

Collyn, this is Jim, I just want to say, you raise a very interesting point, and I think that it is important that everybody look at their banking coverage, bank by bank, to really understand what the individual bank is doing, in terms of its accounting. It is important to note that we did take the impairment against Freddie and Frannie Preferred, and we did take the impairment against the BBB Capital Trust Securities that were pooled, as well, for all of them. Where, you may find that there are significant differences amongst filers.

Yes, absolutely, especially on those Frannie and Freddie sides. Which is why I asked the question, because it was interesting that, because the reporting period of June 30, it wasn’t a huge event. Although, I guess it depends on the issuance, because I think there were, if you guys had a 4Q07 issue, and I think some other banks had an earlier issue where the impairment wasn’t as great. So, anyway, that is kind of why I asked the question. Jim Smith Collyn, if I could, let me come back. You know, we have for planning purposes, and I had said that we would send this out separately, but for the 3rd quarter I would use 60 million 300 thousand shares and for a tax rate we would estimate 30%.

Okay. And then one final thing Jerry, and I apologize if you said it when you were talking about the One Webster Initiative, did you give guidance as to a normalized run rate, quarterly run rate, on the expenses?

I did not.

Can you?

I think in terms of you will continue to see some improvement in the third and the fourth quarter when you sanitize our results for the charges that we have taken here. I think Collyn, candidly, the one area where we know that we are going to see some increase in expenses is the fact that we are working out a much more sizable nonperforming asset portfolio, and therefore, that—if there is an area that I would tell you why I put some caution to wanting to say that you will see improvement, is because we believe that it is really important right now to build out the balance of our credit-risk management capabilities. Really work the portfolio hard. So, I think John and I and Jim are all of the mindset that that is our top priority from a risk perspective and I would expect that to the extent that that may cost some dollars in the short term, that is money very, very well spent.

Gotcha! Okay, that is all. Thank you.

Thank you. Our next question is coming from James Abbott [ph] of FBR Capital Markets. James Abbott – FBR Capital Markets: Good ,morning! A couple of quick questions on the CDO Portfolios. I was wondering if you could just give us a sense of how many issues there are in the CDO Portfolios, in total?

And James, I just want to ask, in terms of specifics, why that is an issue for you? James Abbott – FBR Capital Markets: I am just curious as to how diversified it was. I talked to several companies and some have a small number of issues within the CDO Portfolio, others have a thousand or more.

No, it is fairly diverse. I don’t think we are talking in the thousands, but I’ll give you a number in a second here. Let me just dig that out. James Abbott – FBR Capital Markets: Okay. And on kind of a related note, is how many of those are differing and defaulted, and if you do not have them right now, maybe that is something that you could get back to us.

Yeah. I want to be clear. We do not have defaults. This is a question of, if you look at the accounting, which is outlined under EITF 9920, it is pretty clear that if there is any type of expected change in the cash flows, it raises the specter of doubt around your ability to continue to uphold these or not at the carrying value, and as to whether or not you should be writing them down. So, obviously, we have elected to take the fair-value charges accordingly. You know, we have done it where we have seen specifically that there were deferrals, in the pools, and we have done it where when we have looked at cash coverage, on pools that we felt that basically anything within the BBBs that we owned, there was more likely than not, concern that gets raised. James Abbott – FBR Capital Markets: Okay. Which I applaud by the way.

James, it is Jim. I just want to say that the significant majority of the impairment was against pooled securities that have no deferral. James Abbott – FBR Capital Markets: Just to be clear, so all pooled, BBB Capital Securities have been impaired, whether they are deferring or not? And none of them are in default?

And I think what we would encourage you to do is apply the same standard to your universe, as we are applying to ourselves. And James, just to clarify, we have got several dozen issues within those CEOs. You know, specifically, there is between 10 and 12, I believe, in the BBB category.

You have got several dozen issues and each issue is pooled.

Correct. James Abbott – FBR Capital Markets: Okay. Right. Okay, that was what I was curious. So, 10 to 12 total issues within

The BBB and essentially overall. James Abbott – FBR Capital Markets: Okay. And each issue has 20 or 30 issues within it?

It depends.

Whatever…

Right. Each of these securities is different. James Abbott – FBR Capital Markets: Okay. And is the face value of the BBBs change at all from the prior quarter? It shows 87 million of BBBs in the prior quarter as amortized cost. And I assume there was no OTC on the prior quarter. And then now, it is showing 49 million.

That is reflective of the write-down. James Abbott – FBR Capital Markets: Well, there is no purchase or sale other than that of the write-down?

There has been no purchase of BBBs for several years. I think that you would have to date back into the ’02 through end of possibly, maybe early ’07 time frame for the last time that we purchased anything in the pooled BBBs. James Abbott – FBR Capital Markets: Okay. So, let me make sure that I understand this then. And I apologize for trying to do the analysis at the same time as the conference call, we just didn’t have a lot of time. The BBBs were impaired at about a 56% rate then. Is that right, or about a 45% haircut then, approximately? If I am doing that math right.

I would say you are in the relevant range. James Abbott – FBR Capital Markets: Okay. And then, looking up through the other tranches [ph] the AAAs are sitting at about a 78% and the AAs are at 88%. Could you give us some color behind the disconnect on that? I am not a bond specialist, so, maybe some help on that.

No. I would say that, you know, all of the securities, in terms of valuation, have been looked at. I think, to the extent that you look at the, what tranche that you are in, your coverage ratios are significantly higher, therefore, in terms of the question of whether they are somewhat in there that could potentially differ or not, doesn’t become as great a risk as it does obviously, as you move down to the various tranches, to look at the BBBs or even the capital notes. You know, one of the reference points that we have made is we also wrote down the income notes, which are the unrated securities to fair value. So, when you look at the components, we have basically taken anything BBB or anything in the income note categories and written them down to fair value. It is also important to note, that when we look at fair value, we go out for indications of value from a number of firms that are the specialists in the field specialists in the field and we take all of those into account in determining fair value. James Abbott – FBR Capital Markets: Okay, so the AAAs might have more exposure to some banks that are greater at risk or lower capital levels or whatever that we want to use. But the AAs may have less exposure. Is that the –

I think you would have to look at. I think again you have to look at pool by pool. And this is much more complex I think to your point. There is not an easy way to do this. You have got to look at it by pool and each of these securities is valued again independently by three firms. We get indications of value based on their views of the market. In terms of, obviously we also get the cash flow modeling on each of these to ensure that we have got appropriate coverage. James Abbott – FBR Capital Markets: Okay, I appreciate – I apologize for all the –

And obviously we will be happy to take post the earnings call. James Abbott – FBR Capital Markets: I did have one other quick question on the C&I loans that you mentioned, the publisher and the diversified manufacturer. Were those—you have your C&I portfolio broken out in past presentations—where did those fall? Were they small business, middle market asset based, or equipment financing?

One was middle market and one was asset based. James Abbott – FBR Capital Markets: Okay. And any of those national or were they more in footprint?

The asset based which as you know is a regional and national business for us actually has operations in our footprint. The publisher is in our footprint. James Abbott – FBR Capital Markets: Okay. Thank you very much for time.

Thank you. Our next question is coming from Matthew Kelly of Sterne, Agee & Leach. Matthew Kelly – Sterne, Agee & Leach: Yes, just a follow-up question on the investment portfolio and the CDOs and the trust preferred. For each of the buckets from AAA on down the fair values that are presented in the table here. Are those driven by the quotes from the broker dealers in each category or is it a cash flow modeling? Which factor drove the process in terms of the final value that you guys are carrying these on?

The final value is by security or by pool view of market values or indications of value from three different firms. The cash flow modeling is to ensure is that we also have the support to believe that there are no issues with the ability to recognize value in securities; i.e., not to impair them. Matthew Kelly – Sterne, Agee & Leach: So I mean when you put your AAA—your $50 million in AAA out for bid—it came back saying they would purchase those for $0.80 on the dollar.

It came back indicating value. I want to be clear. We send this out for indications of value for each of those. Matthew Kelly – Sterne, Agee & Leach: But is that where they actually trade.

You know in terms of trading or non-trading of securities. The liquidity in the marketplace basically for all financial assets – the ability to easily trade securities at this point and time it depends on the class. If something is obviously readily quotable. You look at assets like these, they do not fall into that Level 1 category. They are much more of a Level 2, where there is more subjective factors that are brought into play. Matthew Kelly – Sterne, Agee & Leach: I mean are the three dealers saying to you, this is where we think these pieces would actually trad,e or are they saying to you, this is where we think there is value from a cash flow basis—which is essentially the same type of analysis that you guys can do on your own without getting a quote.

Of course that is what they do Matt. I think it is important to note they do their own cash flow analysis in terms of how they get to these indications of value. They have got to use that. That is part of the view that they do. Matthew Kelly – Sterne, Agee & Leach: But there is still a disconnect between that cash flow analysis that you guys are doing or they are providing for you versus where these pieces are actually trading. I mean AAAs are trading lower than $0.80 on the dollar.

Yes, we agree with you. No question. Matthew Kelly – Sterne, Agee & Leach: So at what point would the auditors make that switch to force evaluation at those levels versus the cash flow? Or could that happen?

Well, let us be clear. We are one of the institutions that remains committed to hold this stuff and available for sale. And recognize the fact that market values are depressed for these securities and therefore are taking up tangible capital. So as opposed to avoiding the fluctuations in these, we believe it is appropriate as we have classified them to hold them as available for sale and continue to deal with the fact that there is going to be some volatility in terms of people’s views on depressed values here. So our view is one way or another, whether there is truly impairment and it is recognized as other than temporary or whether there is temporary impairment due to market, we are very open. Obviously, I think you could stack up our transparency of disclosure with anyone and our view is that whether we are holding capital against these one way or another. And still even with that, the ratios that we reported today I think we are just trying to provide as much as granularity to you and to others to evaluate in terms of where we are on point of value basis.

Hey Matt this is Jim. Let me—I will be way out over my skis on this. But I think your question about the accountants. First they likely now more focused on the lower rate of tranches and they generally would be saying that they would go with the market quote, unless the filer can demonstrate that the cash flows are strong enough that there is no need to impair. They are more focused on the BBBs right now because the amount of the coverage is probably closer to one to one than it is on any of the higher rate tronches. Matthew Kelly – Sterne, Agee & Leach: Okay. So the BBB pieces those are quotes where those would actually trade.

No what we are saying that what we have these are indications of interest which may or may not—

Be where they would ultimately trade. Matthew Kelly – Sterne, Agee & Leach: Okay. And the income notes that is the lowest piece of the stack here. It is just surprising to see those carried at 83% of amortized costs when the BBBs above those are now written down to 55% of amortized costs.

Right, but you need to look behind that and see what those income notes were purchased at as to whether they were purchased at par or at a discount. So I think Terry could give you some color on that as it relates to—as we produce additional information about this, which sounds like it would be helpful. We will add a little bit of that granularity. Matthew Kelly – Sterne, Agee & Leach: Okay, all right. Thank you.

And our last question is coming from Andrea Jao of Lehman Brothers. Andrea Jao – Lehman Brothers: Just a broader set of questions on the balance sheet. Securities increased this quarter: Should we expect more stability or continued growth in securities portfolios in coming quarters?

Andrea it is Jerry. You should expect we will not add to the portfolio, and that you would see paydowns in the third and fourth quarters of this year. It is not our current intent to add to the portfolio. Andrea Jao – Lehman Brothers: What base of cash flows out of the portfolio?

Yes in terms of the proceeds.: One thing to recognize, the proceeds from the issuance some piece of that was responsible for the increase in the securities portfolio and that was primarily in a combination of some secured arm [ph 01:05:11] product and also some additions to our munie portfolio. Andrea Jao – Lehman Brothers: Okay. Average to process decreased this quarter. I recognize you are running down broker deposits, but how much more would you want to rely on borrowed funds to support good loan growth and kind of what is the impact of that on your interest rate sensitivity.

Yes in terms of our plans for borrowings. We are also, as I had commented planning to reduce our alliance on borrowings as much as possible. Obviously, liquidity is a key concern for everyone in the industry so there are no absolutes to what I am going to say here. But we are of the mindset that, as we continue to get cash flows in from loans and investments, to emphasize paying down some of the short-term borrowings that we have got. Andrea Jao – Lehman Brothers: Ok, and I assume as deposits in total ramp up you will also pay down.

Absolutely. I think the focus, and I just want to take on Jim’s comments earlier, our focus is on direct lending, organic deposit growth. We believe the diversified sources that we have between commercial, municipal, retail, and HSA really are a key differentiator. And we just plan to continue to emphasize the transaction accounts across the broad spectrum of all the lines of business that we have. That is slow going, but we believe it is incredibly critical for us as an organization when we look and think about our cost of funds. That has been something that clearly we knew was one of the other big changes we needed to complete the commercial bank from thrift to commercial bank transition. And I think with the cash management products and services that we have we can effectively do that in commercial and municipal and our retail folks are very, very focused on building out transaction accounts. Andrea Jao – Lehman Brothers: Last but not least, what is your interest-rate sensitivity at the moment?

Neutral. Andrea Jao – Lehman Brothers: Perfect. Thank you so much.

There are no further questions. I would like to hand the floor back over to management for any closing comments.

Thank you all for being with us today. Good day.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time.