Webster Financial Corporation (WBS)

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Webster Financial Corporation (WBS)

Q4 2008 Earnings Call Transcript

January 23, 2009 9:00 am ET

Executives

James Smith – Chairman & CEO

Jerry Plush – Senior EVP & CFO

John Ciulla – EVP & Chief Credit Risk Officer, Webster Bank, N.A.

Analysts

Ken Zerbe – Morgan Stanley

Mark Fitzgibbon – Sandler O’Neill

Collyn Gilbert – Stifel Nicolaus

Matthew Kelley – Sterne, Agee & Leach

John Pancari – J.P. Morgan

Damon Del Monte – KBW

Gerard Cassidy – RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation’s fourth quarter 2008 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a 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 Reform Act of 1995 with respect to Webster’s financial condition results of operations in 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 Financial’s 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. Please go ahead, sir.

James Smith

Good morning, everyone. Welcome to Webster’s fourth quarter 2008 investor call and webcast. Joining me today are Jerry Plush, our Chief Financial Officer and Chief Risk Officer; John Ciulla, our Chief Credit Risk Officer; and, Terry Mangan, Investor Relations.

We’ve got a lot of ground to cover, say 35 minutes or so let me get right to it. Normally I’d lead with more strategic comments, but I think the focus today should be primarily on asset quality and capital. I’m sure you’ll agree. So I’ll discuss the strategy in my closing remarks.

We’ve taken strong steps to address credit quality and securities marks and other than temporary impairment. And this call enables us to explain our actions and to highlight our strong capital structure and our asset quality. I’ll take them in that order.

Our regulatory capital is way beyond the requirement for well capitalized. And our tangible capital is higher than it was a year ago. In terms of regulatory ratios, bear in mind that Webster was in the 80th percentile or better at September 30 for Tier 1 leverage, Tier 1 risk based capital, and total risk based capital ratios, compared to the Federal Reserve’s peer group of Webster and 65 other bank holding companies with assets of $10 billion or more. At 12/31, the leverage ratio at 9.6% is about double the requirement for well capitalized. Tier 1 risk based at 12.7% is more than double the requirement, and total risk based at 15.2% is 50% higher than required. And all are significantly higher than our internal targets of 8%, 10%, and 12%, respectively.

Two ratings agencies noted as much in the recent reviews. S&P just affirmed our ratings despite the negative outlook, noting that our non-performing asset levels our no worse than many of our regional peer banks. I think of that as faint praise. And noting as well, that we raised $625 million of preferred equity capital via our $225 million convertible preferred and our $400 million capital purchase program allotment. S&P’s qualifier is that we have a high level of preferred in the capital base and lower tangible common equity levels.

It’s clear, and we get it, that gone are the days when an efficient capital structure was a plus. DBRS commented that Webster’s investment grade ratings are underpinned by our solid Connecticut based franchise that provides stable and low cost funding, solid and augmented capital, and adequate liquidity. And my edit here, not to mention scarcity value.

Webster has always had a keen focus on tangible capital as a primary capital ratio. Our ratio was 7.7% at year-end, up189 basis points from a year ago after the Q4 charges. This important ratio continues to compare favorably with the peer group media. We estimate that our adjusted tangible common equity ratio, as measured by Moody’s, was 6.07% at year-end. And our adjusted tangible equity ratio, as measured by S&P, was 6.65%. In both cases, up significantly from a year ago. These rating agency estimates underscore emphatically the depth and quality of Webster’s capital structure.

We recognize that the playing field has changed and the tangible common equity is the ratio garnering the most attention in today’s risk fraught environment. But we want to be clear that we’re comfortable with our tangible capital levels. We have a variety of leverage we can pull to build those levels, including tangible common equity. And I want to highlight some of them here.

Reducing the dividend is one such option. We announced this morning the reduction of the quarterly cash dividend to $0.01 per common share to reflect the Board’s desire to preserve capital given this extended period of unprecedented economic uncertainty. This move could preserve approximately $60 million in common equity in 2009. Or said differently, it could add 33 basis points to tangible common equity by year-end, and another eight basis points per quarter thereafter, at least until such time as the Board deems it prudent to revisit the dividend level.

The next phase of One Webster we announced this morning should add about four basis points to the tangible common equity each year primarily through lowered expenses. We know that we have to operate more efficiently in this environment. We can build TCE [ph] by using all the cash flows, including maturities from our securities portfolio, to pay off borrowings. Not an option we’d be anxious to pursue, but an available lever, nonetheless, that could produce 14 basis points of TCE growth in 2009.

Our efficient capital structure presents another option. As we would not be opposed to considering ways to move capital down the structure to tangible common should the opportunity arise to do so under favorable terms. While we view that as moving existing tangible capital from one bucket to another, when you do the math, we gain about 55 basis points in TCE per 100 million of convertible preferred stock that might convert to common.

Less assured, but another possible contributor to TCE, is the potential recovery of securities marks should the market turn and liquidity improve. Speaking of securities, it should be noted that the investment portfolio contain $2.7 billion of AAA agency mortgage backed securities at year-end. This portfolio creates very little capital risk, yet reduced our TCE ratio by almost 80 basis points.

In total, the levers I’ve just described, excluding recovery of securities marks, could add over 100 basis points to TCE by the end of 2009 without any need to consider outside capital. Our strong capital position gives us added cushion if there is further economic deterioration in 2009 as well as help protect the company should there continue to be losses or a need to reduce our deferred tax asset. So no, we don’t feel pressured to raise common equity. Even though we understand it’s important to keep all of our options open in this environment.

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