Webster Financial Corporation (WBS)

Q3 2010 Earnings Call Transcript

October 15, 2010 9:00 am ET


Jim Smith – Chairman and CEO

Jerry Plush – Senior EVP, CFO and Chief Risk Officer


Damon DelMonte – Keefe, Bruyette & Woods

Eric Berg – Barclays Capital

Gerard Cassidy – RBC Capital Markets

Bob Ramsey – FBR Capital Markets

Matthew Kelley – Sterne Agee

Collyn Gilbert – Stifel Nicolaus



Good morning and welcome to Webster Financial Corporation's third quarter 2010 results conference call. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations, and business and financial performance.

Webster has based these forward-looking statements on current expectations and projections about future events. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statement is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the third quarter of 2010.

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

Jim Smith

Thank you, Claudia. Good morning, everyone. Welcome to Webster's third quarter earnings call and webcast. You’d find our earnings release that was issued earlier this morning along with the slides and the company’s supplemental information in the Investor Relations section of our website at wbst.com. I'll provide an overview, and Jerry Plush, our Chief Financial Officer will provide a more granular look at the quarter. And then we will invite your questions.

Net income grew to $0.22 a share in what I will characterize as a solid quarter. Operating results continued to strengthen, driven by improvement in credit and net interest margin. Regarding credit, recent positive trends remain enforced. Non-performing loans declined slightly in the quarter. The provision for loan losses and net charge-offs, each declined to the lowest level in more than two years. And net charge-offs exceeded the provision for the first time in ten quarters, which gives you some insight into our current thinking with regard to credit quality.

We continue to be encouraged by the stable to improving risk migration across the loan portfolio. The net interest margin increased by 9 basis points due primarily to a 10-basis point decline in cost of funds, driven by pricing discipline. As a result, core revenue grew 2% year-over-year and about 1% on a linked quarter basis.

Regarding our regional economy, its relative stability is again supported by Case-Shiller data, which shows that home values increased slightly in our footprint in Q2 and it now increased in three of the last four quarters. This most recent increase in home values improves the current loan-to-value ratio in a continuing residential portfolio to about 59% and the current combined loan-to-value ratio in a continuing home equity portfolio to about 69%.

We commented on last quarter’s call that we might begin to see some overall loan growth in Q3 from our increased business development workforce and corresponding strength in the pipeline. Loans did in fact grow by $52 million from June 30, with reasonable strength in residential mortgage and commercial middle market, despite relatively high prepayment rates in most loan categories, along with a combined decline by design of $72 million in our national equipment finance portfolio and the res dev and liquidating portfolios.

Loan originations overall rose by 11% from Q2 to $644 million and totaled just over $1.6 billion for the first nine months of the year. Residential and consumer originations rose 27% to $351 million. And while commercial and non-mortgage originations declined by about 10% to $178 million from Q2, the pipeline increased by 20% to $851 million. Originations are shown by loan segment in the supplemental slides.

On the capital front, in slide four, our ratios continue to track higher. Tangible common equity rose 12 basis points to 5.91%, the highest in three years. And Tier 1 common to risk-weighted assets, a ratio that we believe is becoming increasingly improvement, rose 7 basis points to 8.19%, the highest in over six years.

Turning to slide five, we reported last week that we would repurchase the second $100 million of US Treasury Capital Purchase Program preferred stock. That repurchase occurred this past Wednesday. Just as with the initial $100 million repurchase in March, there was no accompanying regulatory requirement to raise additional capital. So we now repurchased half of the original $400 million investment without any capital raise. We believe this accomplishment is further testament both to the overall strength of Webster’s capital position and to our improving credit metrics and profitability.

As you know from our prior comments, our CPP repayment strategy has been guided by our objective to raise as little common equity as is absolutely required in order to fully exit CPP even if it takes a little longer to complete the process. That objective continues to guide our thinking as we look to repay the balance.

In recent investor presentations, we’ve estimated that an eventual common equity raise in the range of $100 million to $150 million might be a reasonable expectation to facilitate full repayment of CPP and would also solidify our resulting capital ratios from the perspective of Basel III, as we know it today.

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