Webster Financial Corp (WBS) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Webster Financial Corporation’s fourth quarter and year-end 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.

If anyone should require assistance during the call please press the star, followed by the zero on your touch-tone telephone.

As a reminder, this conference call 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, 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 & Exchange Commission, which could cause future results to differ materially than 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.

Good afternoon, everyone.

And welcome to Webster’s fourth quarter and full year 2002 earnings call.

With me today are President Bill Bromege, and CFO Bill Healy, and Senior Executive Vice President Peter Mulligan.

We’ve blocked-out about 25 minutes for our presentation, and we’ll look forward to your questions and comments.

As many of you have already seen from our earnings release, the fourth quarter and year 2002 were marked by significant accomplishment for Webster, including solid loan growth, deposit growth, revenue growth, and earnings growth. 2002 was a busy year for non-bank acquisitions, for strategic investments to strengthen the platforms of existing businesses, and for the expansion and strengthening of our Executive Management Team.

Our progress in implementing our strategic plan for growth has contributed to another strong performance for our shareholders.

From a strategic perspective Webster continues to make progress on our primary objectives of transforming the balance sheet by improving our loan and deposit mix, growing fee-based revenue, and maintaining asset quality.

In fact, Webster has nearly completed its transition to a commercial bank profile.

Using the [Lehman] mid-cap bank index as a benchmark Webster’s loan mix, deposit mix, revenue mix, loan loss reserves, and coverage ratios, EPS compounded annual growth rates, and ROE are highly correlated with the benchmark.

And while our total shareholder return also approximates the benchmark our price earnings multiple at 10.5 times ’02 earnings is still a good two multiple points below the peer group average.

We believe that our proactive efforts to cultivate sponsorship among bank holding company buyers over the next 12 to 24 months combined with our continuing strong performance will wear-out that gap for the significant benefit of our shareholders.

With regard to specific accomplishments, revenues grew at double-digit rates for the year and the quarter as loan growth and core deposit growth helped offset the impact of some margin compression.

Our loan portfolio grew 16 percent during the year with commercial loans growing 32 percent aided by the third-quarter acquisition of [Whitehall Business Credit Corporation], an asset-based lender.

And our consumer loans almost exclusively home equity lines of credit continue to grow rapidly, increasing 55 percent during the year as originations increased 60 percent to $1.3b.

Our first mortgage origination volume reached $1.1b in the fourth quarter, double last year’s quarter, and $2.6b for the year.

Our fourth quarter acquisition of the financial planning firm, Fleming, Perry, and Cox, is part of our strategy to develop financial planning based investment management services built around the customer rather than the line of business, so as to tap into the full revenue potential of thousands of existing relationships, and help to generate very significant revenue growth over the next four years.

And our recently announced acquisition of Mathog & Moniello, an $11m revenue insurance agency specializing in risk management commercial services rounds-out and strengthens our insurance platform, creates significant cross-selling opportunities within the insurance group and across the bank, and increases pro forma revenues from insurance agency operations to about $40m in ’03.

Core deposits continue to grow smartly, up 19 percent year-over-year, while total deposits increased eight percent overall.

Our [Denovo] branch expansion program is gaining traction, contributing $100m in new deposits.

And our high-performance checking program is exceeding expectations in capturing new customer relationships in existing markets.

As you know, a centerpiece of our strategic plan is to better balance our revenue between net interest income and fee base revenue.

Revenue from fee based services reached 30 percent of total revenues in the fourth quarter, and were up 21 percent quarter-over-quarter as we saw growth in mortgage banking fees, insurance revenue, and deposit fees, which combined grew 31 percent in the fourth quarter and 17 percent for the year.

I am especially pleased to discuss Webster’s strong asset quality and the positive impact of the decisive actions that we took in the fourth quarter to eliminate our exposure to classified telecommunications and cable loans.

The result of those actions with incremental loan loss provisions being fully offset by securities gains was to boost our coverage ratios significantly without impact to the earnings stream.

As of year-end our non-accrual loans are down almost a third from the end of the third quarter to .37 percent of assets.

Our classified loans are down a full third to 1.4 percent of loans at year-end, while our coverage ratios are quite strong at 1.48 percent of total loans, and at 270 percent of non-accrual loans.

By taking this action we demonstrated our commitment to maintaining high credit quality through economic cycles, consistent with our history as a careful lender and active risk manager.

We expect that specialized loans which excluding investment grade CLOs declined by $63m in 2002 to around $300m will continue an orderly decline in 2003.

The bottom line for Webster is continuing earnings growth in a challenging operating environment both quarter-over-quarter and year-over-year.

Our cash operating return on equity was 16.4 percent for the quarter and the year.

Our book value increased 11 percent to $22.70 in ’02, while tangible book value grew 16 percent to $16.18 a share.

We acted upon our conviction that Webster represents an attractive investment by buying back eight percent of our float during the year.

And specifically to that point, and I think this puts our valuation in perspective, Webster today sells at about one-and-a-half times stated book value and less than 2.2 times tangible book value.

If we achieve compounded annual earnings growth of eight percent, and we hope to do better, and if we maintained a 25 percent dividend pay-out ratio we would earn-out the difference between today’s market value and tangible book value in less than six years.

As compared to our peer group’s earn-out timetables we believe this makes a highly compelling case for price earnings multiple expansion and higher valuation.

Let me now ask Bill Healy to present the financial report.

Thank you, Jim.

And good afternoon.

We are pleased once again to report increased earnings for both the quarter and the full year.

As Jim noted in his comments, this was yet another year of accomplishments for Webster despite the challenging economic and interest rate environment in which we operate.

Some of the highlights for the quarter are per share earnings were up almost 20 percent for both the year and the quarter.

The loan portfolio continued to show strong growth, specifically in home equity credit lines, and in the commercial portfolio and asset-based loans, and in equipment financing.

Total deposits were up 540m or 7.6 percent for the year, with half of that growth coming in the fourth quarter.

Fee-based revenues were up 9.3 percent for the year, with deposit fees, loan fees, and insurance revenues up collectively 17 percent for the year.

Asset quality improved dramatically as non-performing assets and classified loans declined significantly from the prior quarter and the prior year.

With this, we continue to maintain our strategic focus of transforming the balance sheet by improving our loan and deposit mix, growing our fee-based revenues, and maintaining asset quality.

Let me start by reviewing the balance sheet.

The total assets at December 31st were 13.5b, up 1.4b over a year ago.

Most of the growth occurred in the loan portfolio.

Total loans grew by 1.1b year-to-year.

Commercial loans increased $431m.

Of this growth $578m occurred in asset-based loans and equipment finance.

This was offset by some weakness in middle market and small business loans.

Consumer loans grew 55 percent, increasing 604m to $1.7b at year-end.

All the growth occurred in floating rate home equity products.

Looking at loan trends on a linked quarter total loans excluding the [household] sale portfolio declined 78m.

Residential loans are down $152m due to prepayment activity.

Commercial loans are down 85m due to seasonal pay-downs in Whitehall’s loan portfolio and planned reductions in the specialized portfolio totaling $58m.

We continue to have great success at increasing our consumer loans.

Specifically, home equity credit lines.

Most of the growth comes from within our footprint, and most loans are to Webster customers.

Over 70 percent of these loans are Connecticut based.

Loans originated outside our footprint are predominantly in contiguous States.

We underwrite all credits to our own standards and fund all production.

With this growth we continue to improve the loan mix.

All commercial and consumer loans now represent or comprise 50 percent of the loan portfolio, compared to 50 percent a year ago.

Loan sales for sale amounted to 405m, 400m of which are first mortgages originated in-house and awaiting delivery against forward contracts in the 2003 first quarter.

During the first quarter we saw record origination volume of 1.1b, double that of a year ago.

For the full year originations were 2.7b, compared with 1.3b for 2001.

Gain on sales during the quarter were 2.3m, compared to 1.8m in the third quarter, and 115,000 in the fourth quarter of 2001.

For the year gains totaled 5.8m, compared to 2.8m in 2001.

These gains are included in loan and servicing fees in non-interest income.

On the liability side we experienced significant progress in both growing our deposits and changing the mix.

For 2002 total deposits grew 450m.

Core deposits increased 766m, or 19 percent during the year, and now comprise 65 percent of total deposits compared to 59 percent at December 31st a year ago.

On a linked quarter deposits increased 250m, or 16 percent annualized.

As Jim indicated, part of this growth can be attributed to our Denovo Branch expansion, and also, to the high-performance checking program launched in August of this year.

Turning to the income statement, per share diluted earnings for the fourth quarter were 85 cents, up 20 percent from the prior year.

And for the full year diluted earnings were $3.31, also up 20 percent over the prior year.

Of course, we’ve benefited during the year from the implementation of FAS 142.

Driving the earnings for the quarter was the growth in revenues which were up 12 percent compared to a year ago.

Net interest income for the quarter increased 8.8 percent over the year-ago period due to increases in loans and the loan held for sale portfolio, and were funded in part by a growing low-cost core deposit brace.

The net interest margin was 3.39 percent for the quarter, compared to 3.61 percent in the fourth quarter a year ago.

On a linked quarter net interest income grew 1.5m, or 5.8 percent annualized, and the margin declined 13 basis points to 3.39 percent.

Overall, the growth in loans and loans held for sale helped to partially offset this margin compression.

Like peer financial banks Webster is experiencing margin pressure due to the decline in mortgage rates.

As a result, our residential mortgage portfolio and mortgage-backed securities have experienced acceleration in pre-payments.

And the proceeds are being reinvested at significantly lower yields.

Non-interest income, total fee based revenues continued to show strong growth demonstrating our ability to broaden and deepen the sales and marketing of Webster products to our customers.

For the quarter fee revenues were up 21 percent over the same quarter a year ago, and on a linked quarter were up 31 percent annualized over the third quarter.

Commenting on some of the line categories in fee income, deposit fees continue to be up as a result of higher collected NSF fees and growth in cash management fees.

Loan and servicing fees increased due to line usage fees at Whitehall, higher loan modification and pre-payment fees, and increased gains from the sale of mortgages originated for sale into the secondary markets.

Insurance revenues are up due to increased premium rates by insurers in this hard commercial market, and improved sales and cross-selling efforts throughout the company.

Revenues in our trust and investment services continued to be negatively impacted by the stock market performance, and Duff & Phelps is impacted by the lack of merger and acquisition activity although revenues from its evaluation business continued to grow.

Expenses are up $12m for the quarter compared to the prior year.

Predominantly all the increase, about $10m, is in salaries and benefits.

About $4m represents new employees to support growing lending and fee-based businesses, our Denovo expansion, as well as our investments in technology and operations staff to support the growth.

About 1.5m relates to the full-quarter impact of our acquisitions, 2m is commissions and incentives relative to revenue growth, and 1m relates to higher benefits cost for pension, medical, and taxes.

Expenses on a linked quarter rose $5m with about 3m occurring in salaries and benefits.

Again, 1.5m relates to acquisitions, 1.5m is commissions and incentives related to revenue growth, and about 800,000 represents one-time severance and reorganization expenses for a business unit.

Jim covered asset quality in his comments, let me cover the impact of our actions on a loan loss provision for the quarter.

In the fourth quarter we took an additional provision of $11m which increased the provision for the quarter to $16m, compared to $5m in the third quarter of this year, and $4m in the year-ago period.

The higher provision was fully offset by gains on the sale of securities.

For the year the provision was 29m, compared to 14.4m in 2001.

I would now like to make a couple of comments on our trends for 2003.

As many of you that have followed Webster know, we do not follow the practice of giving or confirming estimates on our earnings.

Rather we have offered our comments on how we see growth trends in our businesses, how we would expect the margin to trend based upon interest rates, business mix, and our reinvestment policies, and the trends in non-interest income and non-interest expenses.

Needless to say, the current economic outlook is not very clear.

In building our plan for 2003 we have based it on the consensus economic outlook that calls for recovery in the second half of 2003 with interest rates beginning to rise in that timeframe.

We are prepared, however, to manage to any economic and interest rate environment.

With that said, let me give you an idea of our outlook for 2003.

Overall, next year looks a low double-digit growth in the loan portfolio.

We expect that our loan portfolio will increase as a result of the growth in consumer and commercial portfolios.

The consumer portfolio will achieve higher growth rates than the commercial in this current interest rate environment.

Growth in commercial will be in a low double-digits, and will come from asset-based lending and equipment finance.

Middle market and small business loans will grow modestly.

Commercial real estate loans will grow in the low double-digits, also.

Consumer loans will grow strongly, but slightly less than at the current growth rate.

Residential loans will continue to run-off, but at a slower rate than in 2002.

On the deposit side you will see growth at the current market rate plus three percent.

With the growth coming particularly in low-cost core deposits as we implement our Denovo growth strategy in Fairfield County and continue our high-performance checking program in all of our markets.

Covering the margin, we have positioned the balance sheet to be asset sensitive.

This comes with the growth in home equity credit lines that are tied to prime, and the addition of Whitehall loans most of which float with LIBOR.

We believe that there is a reasonable possibility that rates will rise in the second half of next year.

We believe the margin will continue to compress over the next two quarters, though not as much in the fourth quarter of 2002 as mortgage assets continue to repay and proceeds are reinvested at lower yields.

In the second half of 2003, as the economy improves loan volumes should increase and interest rates should rise.

Although loan yields should improve, there may still be some downward pressure on your margin into the third quarter, as higher fixed rate assets continue to re-price of lower yields.

We believe margins will begin to recover late in the second half.

Overall, the dollar amount of net interest income should grow, as the volume growth for loans and core deposits help to offset this compression in our margin.

The growth in [C] revenues should be in double digits as well.

Deposit fees should grow slightly more than our deposit growth.

Loan fees should grow with loan volumes for pre-payment penalties and amendment fees should slow down.

The gain on sale of mortgage originations should be steady to higher next year, as our regional offices realize their potential.

Insurance revenue should continue to grow, particularly with the new revenues from our recent acquisition.

Wealth management should reverse its trend, as the market recovers and our new financial base model takes hold.

Duff & Phelps should grow in the low double digits.

We would expect to invest in our businesses again in 2003.

And we will monitor our expense base and expect efficiency ratios to be in the low 50’s.

With those comments, I’ll turn it back to Jim.

Bill, thank you very much for that thorough report, including what we think the year is going to shape up to look like, consistent with our objective of providing to our shareholders the very best information that we can, as we believe that the more you know about us, the more confidence you’ll have in us and our ability to achieve our goals.

I would like to take just a minute to reaffirm Webster’s profile and our mission.

We are a financial services provider with a commercial bank profile, serving individuals, families, small businesses and mid-market businesses in our primary markets, where we generally have number one or number two deposit market share.

We provide consumer banking, mortgage banking, commercial banking, investment management and insurance services with the goal of attracting and building strong customer relationships leveraging off of our leading competitive position and good reputation as a trusted local advisor.

We also have specialty businesses, such as leasing, wholesale mortgage banking; asset-based lending and commercial real estate, which operate in our markets and on a broader geographic scale.

We have strategic initiatives in place, which enable us to assert, with confidence, that our deposits and loans will grow faster than the market, which will contribute to revenue growth which is not overly reliant on acquisitions for it’s achievement.

We are poised to benefit from rising interest rates, which will likely coincide with economic growth, some time later in 2003.

Our tag line, “we find a way”, defines us well, both as a competitor in our markets and as an institution committed to delivering strong shareholder returns.

We appreciate your confidence and support, as we look forward to further growth and progress in the year ahead.

Thank you and we’d like to take your comments and questions.

Thank you, Mr. Smith.

If you have a question or a comment, at this time, please press the 1 key on your touchtone telephone.

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Again, if you have a question or a comment, please press the 1 key on your touchtone telephone.

One moment.

Our first question or comment comes from Eric [Connerley] of Boston Partners.

Please go ahead.

Hi.

What was the unrealized gain on the securities line of the equity portion of the balance sheet?

We have about $85 million of total gains at the end of the year.

Okay, and I assume, from your ’03 guidance, that you, absence a material change, you intend on continuing to draw down that balance by it’s own securities in realizing those gains?

Yes, in the past we’ve taken about 2 to $3 million a quarter and we would intend to do that throughout next year.

So that implies something like 900 basis points improvement in the efficiency ratio, or are you – because the most recent securities gains were $14 million.

Well, part of the $14 million, Eric, was $11 million that we took in relation to the additional provision for the actions to take care of the sale of the telecomm credits and the cable credits.

So you’re anticipating a very low formation rate as bad credit, essentially?

Next year?

Yes.

Yes.

Okay, thank you.

Christopher, your line is open.

Just one question, alluding to – you’ve mentioned in Duff & Phelps there’s the valuation business.

Can you get into that a little bit, with how that is growing and what exactly does that business entail?

Yes, Duff & Phelps provides valuation services and had a very strong practice when we acquired it two and a half years ago and continues to.

It provides ERISA and ESOP specialty valuations, as well as fairness opinions in some tax work.

In the past 12 months, it began to do valuation services involving FAS 141 and 142 and has acquired a number of people out of the major accounting firms, as the accounting firms no longer can do that for audit clients.

So that’s created some opportunities for some growth and they’ve seen some solid growth coming from that business sector.

And it has been a relatively stable sector in the investment banking field, albeit impacted somewhat by economic conditions, but held up much stronger than the merger and acquisitions side, and we’re hopeful that that will continue to grow and that the new practice will add to it’s future.

Is that the – what component of, I guess, financial advisory revenue, does that business consist of?

The valuation piece, in aggregate, would be approximately 80 to 85% of the financial advisory.

The line on the income statement for financial advisory is almost exclusively for Duff & Phelps revenues, which amounted to about 19 million for the year.

Okay.

The other – and this may relate to the prior portion, I didn’t quite catch all that was said there, with the clean up on the credit side in the fourth quarter, charge-offs running about 2 to $3 million, is there a possibility of lowering the provisioning expense this early on in 2003 from the $5 million quarterly run rate?

I’ll just comment that it’s not likely we’d lower the standard provision of say 4.5 to $5 million over the immediate term, in part because the commercial portfolio is growing rapidly and we want to make sure to retain an adequate reserve coverage against all loans, as well as against the non-accrual assets.

But, I think you’ve seen that our performance over the years has resulted in a relatively low level of charge-offs as compared to our peers and we’re highly confident that we have a very well reserved loan portfolio.

And it is possible, especially given the potential for economic improvement some time later in the year, that we might reconsider that view.

Okay, thank you.

Our next question or comment comes from Laurie Hunsicker of FBR.

Please go ahead.

Good afternoon.

Actually, just looking for three numbers within your C & I portfolio.

I was looking for the balance on the business banking, the Whitehall; the specialized industry, the [snick] and also the leasing.

If you have that, just to correspond with the non-performing categories.

I think the ABL loans, Laurie, were $477 million.

The Whitehall – the syndicated credits from [jazcor] were 389 million and the leasing was 420 million.

The leasing was 429 –

Four twenty.

Four twenty, okay, and I’m sorry – the first one you gave, the 477, that was –

That was the asset-based lending.

That’s total, including our own asset-based lending operations here in Connecticut.

Okay, I guess I’m comparing that to about a billion dollars last quarter?

No.

I think the billion is probably the commitments.

Last quarter would have been about 435 million.

Well, your [ceiling] is about a billion eight, right?

Maybe I’m adding something else into that?

Laurie, it’s Bill Bromage.

I think what you’re adding to that is that we have exposure to the middle market and the small business here in Connecticut.

Okay, that’ probably – you’re right.

I’m probably adding two – I can back into it with the 380, 389 420, great.

And just one last comment.

I know I ask you this every quarter, but just, from the standpoint of your stock being cheap in here, can you just generally comment on the standpoint of share repurchase, where you stand?

And then, also, for this quarter, we calculate you right around the million shares that you repurchased?

For the quarter, yes.

And where you would stand going forward into ’03?

Right now, going forward, we’ve got about 780,000 shares remaining to be repurchased under our most recent announced plan.

Could we expect to see you potentially reload and be as aggressive as you were in ’02?

I guess I would just say that we continue to believe that our stock represents compelling value at these prices.

And that, as you know, we look at our capital plan, always with the idea of making the best investments that we can, whether it’s buying back our shares, considering acquisitions, leveraging our internal growth, or looking at the possibility of a higher dividend somewhere along the line, based on the earnings that we are delivering.

So I will say that an additional share repurchase program will be a consideration, but it’s premature to make a commitment.

Okay.

Thanks again.

Our next question or comment is from Jack [Mithinkel] of Lehman Brothers.

Please go ahead.

Hi guys.

Actually, the first question is just some specifics from Bill Healy.

I couldn’t write as quickly as you were going through some of those 2003 forward-looking thoughts.

Can you clarify what you had said on net interest income, as well as non-interest expense for ’03?

And then the second question, more broadly, we heard last week from one of the larger banks in the market, that it sounds like they’re backing away from bank and thrift deals of 2003, given what pricing has been.

What are you seeing, and what are your thoughts on that?

Let me just cover your questions, Jack, on 2003.

As far as the dollar increase, I did make a comment on that.

All I said was that the dollar amount should grow with the volume of loans and that should offset some of the compression in the margin.

I guess in terms of – what I was looking at, was that the margin would compress over the next two quarters, though not as much as the 13 basis points that we had in the fourth quarter of this year, and that I would still see it going down into the third quarter, but rebounding later in the third quarter coming back up through maybe the end of the year.

Did you give any color on the G&A line, I’m sorry?

And that’s only on the premise, Jack, that rates will go up in the second half of next year.

And did you have a question on the income, too?

No, G&A.

I was wondering if you gave any color toward where the efficiency ratio heads from here?

Well, only that, you know, we would expect to manage it into the low 50’s during next year.

Jack, I’ll take your other question, which is to say that we have said before that we thought prices were pretty high for bank acquisitions and while we continue to look at the possibility because there may be opportunities for us, it’s always within the disciplined approach that we have had to making acquisitions.

We have found that there’s been significant opportunity for us in the non-bank area.

We have significantly bolstered our insurance operation as a result of that.

We’ve added a financial planning firm, and of course, we added Whitehall last year, as well, and what we think are very strong transactions that are going to contribute meaningfully, to shareholder return in the future.

As far as the bank acquisition fund is concerned, it may well be an opportunity for us to be talking with relatively smaller institutions that may decide to join up with a partner, like us, that has a similar view of what the organization can accomplish in the future.

Great.

Thank you.

Our next question or comment is from Richard [Fiery] of Delphi Management.

Please go ahead.

Good afternoon.

Can you just give us an update on the [snick] portfolio?

Have you added to that at all?

Have you made any more syndicated loans, and what’s your philosophy about that, going forward?

We have been very reticent to make any more [snick] loans over the recent past.

That portfolio is down, I think, $389 million and our expectation, over the next couple of quarters, is that portfolio will continue to decline.

And, we may find an opportunity or two that we might make to see in that area, but we are in a mode where, when we look at that portfolio, we see that the – clearly over the near term, if not beyond that, we should be shrinking that exposure and that’s our intent as we go into next year.

Do you have buyers for those loans?

Do we have buyers for those loans?

As you know, there’s a active secondary market, some credits traded more actively than others, and we keep close tabs on the value of all the credits in our portfolio and from time to time, have exited credits both from a time year concentration perspective, as well as from a credit perspective and pre-empted some credits that subsequently have deteriorated.

So we follow that very closely.

There is an active market and there’s a natural churn in that market.

A good portion of what’s in our portfolio, originally, was acquired in the secondary market and we take advantage of that as the opportunity presents itself.

Richard, let me add, that there’s a lot of very high quality loans in that portfolio, for sure.

And, as was stated earlier, somewhere close to $90 million is in investment grade CLO’s for example.

And, as you know, we eliminated our exposure to all classified telecomm and cable loans in the fourth quarter.

Thank you very much.

Our next question or comment is from Bernard [Horn] of [Polaris].

Please go ahead.

I’d just like to ask if you could give us an idea of the organic, or same-store growth figures in both loans and the various components of fee income – looking to try to get an idea of what the effect is without acquisitions.

And, also, with respect to the forecast you had on low double-digit earnings, is that – a similar kind of question.

What do you expect organic to be?

Were you talking about forecasting low double-digit earnings? --

I’m sorry.

You were talking about the loan growth being in the kind of low double-digits, if I heard you right?

That’s correct.

We are forecasting recently strong growth in the area of equipment financing, asset based lending, commercial real estate, consumer lending, even possibly in the loans held for sale, which includes the wholesale mortgage business.

I want to say, specifically, that when you're looking at the relative performance, that the acquisitions in ’02 were Whitehall, which was acquired in the third quarter.

The Fleming Perry & Cox Financial Planning Group that was acquired in the fourth quarter, there were no bank acquisitions in 2002.

There were four or five new branches opened as part of the [noble] branching program.

So, most of what you see in ’02 is organic.

Okay, so the –

And I think one of the primary points that we have wanted to make is that when we’re talking about projections going forward, we are not including acquisitions in those projections.

Okay, because it sounds – because if we look at the total banking market in Connecticut slash New England, it’s obviously not growing at double-digit rates, so you’re either taking a lot of share or making a lot of loans that somehow are not coming out of GDP related growth.

I was wondering if you could try to reconcile that for me.

The reconcilement is to say that we believe that we will be able to take some modest share.

We think that our small business banking and middle market banking will start to grow as demand increases and as opportunities for new customers increases, as the market gets stronger.

We expect that our consumer lending volume will continue to be strong and then in addition to what we have in our market, we’re also expanding that market contiguously and we have the asset based lending, the wholesale mortgage, the equipment leasing business and commercial real estate business, that make loans in and outside of our markets, where we expect to get some of that growth as well.

And just the Whitehall acquisition, what was – what did that bring in?

Wasn’t it like 450 million, plus – well 60 million of letters of credit, so it was like 510 million in credits?

And I assume that’s reflected in year-end balances?

That’s correct.

So, if you just divide that by your prior year balances, you’ve got about 500 million on about a $4 billion loan balance if I’m getting my numbers right.

It’s about a 10% growth in total loans, just due to the acquisition.

Am I getting that right?

The total loan portfolio is about $8 billion altogether.

Yes, but it’s prior year.

The numbers that I gave in my comments, Richard, were all [gropes] off of the year-end balance.

It wasn’t meant to be averages.

Right.

So I’m just saying that if you’re talking about – the loan growth figure that you talk about, as far as balance-on-balance, a good part of that was due to the Whitehall acquisition.

That’s true.

So what you said was that most of the loan growth was organic, but it doesn’t look like it was all organic.

It was partly due to acquisitions, so I’m trying to get an idea what the real organic -- so you just take out the Whitehall figures and then you get a –

You’re looking for ’02?

Right, ’02 to ’01.

Okay.

In ’02, most of the growth in commercial would have come as a result of – you could say net would have been Whitehall.

Other than that, all of the other growth was organic in the balance sheet.

And let me say we intended to try to make that clear in our comments based on the third quarter acquisition of Whitehall and Bill’s specifying the growth in the individual portfolios.

And as you think of Whitehall, going forward, Whitehall is a business that lends on receivables in inventory and it’s balances, as of December 31, naturally decline, as inventory is sold off.

So you’re correct in the 450 number that upon acquisition, in terms of outstandings, but the actual balances at year-end were somewhat lower.

Okay, thanks.

Again, if you have a question or a comment, please press the 1 key on your touchtone telephone.

Our next question or comment is from Jared Shaw of KBW.

Please go ahead.

I have a question, if you could just break down a little bit more for us, the loan and loan servicing fees.

You did give us 2.3 million as the gain on sale of loans for fourth quarter.

Can you tell us what portion is attributable to Whitehall and if you could show us the growth, I guess, third quarter to fourth quarter?

Jared, I’ve got that all kind of mixed up.

Can you call me and I can give you that?

Absolutely.

I’ll give you a call afterwards.

Thanks.

General comment, though, Bill?

Yes, I think I said that, you know, we looked at the gains there included in loan and loan servicing fees, that, you know, for the fourth quarter, we had 2.3 million of gains that were included in the loans gains and servicing, compared to a million eight in the third quarter, compared at 115,000 last year.

When we look at it year to year there’s $5.8 million in total loan fees and servicing this year that are related to gains compared to $2.8 million last year.

The rest of the gains, you know, really, come for the most part, from Whitehall and our commercial activities and there are, you know, very little fees in there from our retail operations because most of those fees are deferred under FAS 91.

Our next question or comment is from Jim Ackor of RBC Capital Markets.

Thank you.

Good afternoon guys.

I was wondering, Jim, if you might be able to just make a broad comment on – you mentioned that, obviously, the non-bank acquisitions have been a fairly sizeable strategy for you guys over the last couple of years and you really haven’t been all that active on the traditional bank and thrifts acquisition front.

I mean, in terms of looking at sort of the long term going out over the next three to five years, what level of importance do you put on your ability to get back into that game I some way, shape or form?

Or is it really not a critical factor in your mind?

Well, it’s a great question.

Over the years, you know, it’s been a central part of our strategy and of course what’s happened is that the price of acquisitions has risen gradually, and ever so gradually to get to higher and higher levels.

We have a particular acquisition discipline, which in our view, means that we ought to be able to earn out the intangibles that we create within some finite period of time, and that there’s a tricky balance, I guess, between the amount of earning secretion you may gain on one hand, and the impact it has over the long term on tangible book value.

But, what we think is, it’s very important that we be able to face our shareholders and say that we’re going to generate growth in revenue, and growth in profit without having to rely on acquisitions because we can do it based on internal growth, penetration of our markets, continuous growth as well.

And then because we have a broader suite of products and services, we can enhance the revenue potential within the markets that we are serving.

Then, on top of that, we believe we will have continuing opportunity to acquire, in the non-bank area, and what we think are favorable prices over the near term and then we will also be able to build partnerships with banks, as well, particularly as our valuation increases.

And one of the things that’s most important to us is that we get a stronger of multiple that reflects our true position as a commercial bank like financial services provider.

Then I think that we’d be able to move forward with additional bank acquisitions.

I also believe that within our markets, especially given the cost save opportunities that we may have, that we may find some willing partners who would like to join with us sometime in the next year or so.

So we don’t want to create the impression that we will not have the opportunity to make bank acquisitions, but we do acknowledge that the market is tougher in that regard than it has been in recent years.

Fair enough.

I appreciate the time.

If there are any questions or comments, please press the 1 key on your touchtone telephone.

One moment.

There are no further questions or comments at this time, gentlemen.

I’d just like to thank you all for being with us today.

We look forward to a challenging and productive year.

Look forward to speaking with you after the first quarter.

Thank you, Mr. Smith.

Ladies and gentlemen, this does conclude today’s conference call.

Thank you for your participation.

You may disconnect at this time.

Have a good day.