Webster Financial Corp (WBS) 2004 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Webster Financial Corporation's fourth quarter and year-end earnings 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 conditions, results of operations and business and financial performance.

Webster has based these forward-looking statements on current expectations and projections about future events.

These forward-looking statements are subject to risks, uncertainties and assumptions as described in Webster 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.

Good afternoon, everyone.

Welcome to Webster's fourth quarter 2004 investor call and Web-cast.

Joining me today are Bill Bromage, our President; our Chief Financial Officer, Bill Healy; and Terry Mangan, Investor Relations.

Others are here as well to respond to your questions after our formal remarks which we guess will take about 25 minutes.

We will break this presentation into two parts, first a report on Q4 and full year 2004 results and then a discussion of what to expect in 2005.

Given the number of unusual items in Q4, Bill Healy will provide some detail on them in his remarks.

As you have seen in our earnings release, we reported $16.3 million in net income for Q4 and 30 cents per share in EPS.

The fourth quarter and full-year 2004 net incomes reflect $32.5 million in after-tax cost or 60 cents a share for the quarter and 63 cents for the year, related to the $750 million balance sheet deleveraging that we announced in October and completed during the quarter.

Excluding the deleveraging cost, resulting in -- this would result in $48.8 million of income and 90 cents per share for the quarter.

Two other items of special note in the quarter -- gains on sales of securities unrelated to the deleveraging were $1.6 million, down from $2.7 million a year ago and $5.8 million linked quarter, and gains on sale of loans were 2.5 million, down from 2.9 million a year ago and 4.5 million linked quarter.

Combined gain on sale of loans and securities declined 1.5 million year-over-year and 6.2 million linked quarter.

The unusual items in the quarter that Bill Healy will discuss netted out to about 2 cents positive to earnings, including a positive tax adjustment.

Pre-deleveraging, return on average tangible equity improved to 22.4 percent in the quarter from 20.6 percent a year ago while cash return on average tangible equity was 24.4 percent compared to 22.4 percent a year ago.

The benefits that we expected to realize when we decided to implement the deleveraging program are readily apparent in our fourth-quarter results.

In particular, our net interest margin improved to 3.25 percent compared to 3.06 percent in the third quarter.

About 14 basis points of the improvement relates to the deleveraging, with the balance given by rise in interest rates.

The deleveraging contributed to the 29 basis point improvement in our tangible capital ratio (technical difficulty) 2 1 percent at December 31, as compared to the linked quarter.

We expect tangible capital to reach 5.5 percent by year-end '05, excluding acquisition activity.

And the deleveraging provides important protection to us going forward against potential shocks from rapidly rising interest rates.

The deleveraging also significantly reduced our securities portfolio and borrowings.

We have shifted to a slightly asset-sensitive position, thereby improving the ongoing quality of earnings.

Focusing now on year-over-year results, noteworthy aspects of our fourth-quarter performance includes strong organic growth in loans and deposits, meaningful improvement in the net interest margin, continued exceptional asset quality and ongoing progress in our efforts to tightly manage expenses.

We continue to make measurable progress in pursuit of our strategic plan and our vision to be the leading regional financial services provider in an expanding geographic footprint.

In fact, we are today the largest independent bank headquartered in southern New England soon to take that title for all of New England.

We believe the attendant competitive advantage could be significant.

Our loan portfolio has gone grown by $2.5 billion or 27 percent over the past year and now totals $11.7 billion.

FIRSTFED added 1.5 billion of this amount, with no change whatsoever to our overall loan mix.

We saw a 20 percent plus growth in every loan category over the past year, partly reflecting first FIRSTFED.

Loan growth aside from FIRSTFED was 11 percent, with commercial -- including commercial real estate and consumer loans each growing by 14 percent.

Commercial loans now total $4.3 billion or 37 percent of the total portfolio.

The depth and breadth of Webster's commercial product offerings combined with our local roots gives us a distinct competitive advantage resulting in identifiable market share gains.

Total deposits grew by 2.2 billion, or 26 percent over the past year.

Deposit growth apart from FIRSTFED was strong at 8 percent.

One out of every $8 at FDIC-insured institutions in Connecticut is now in deposit at Webster.

Total revenues excluding securities gains and the effect of FIn 46R (ph), grew by 14 percent compared to the fourth quarter year ago.

Spread revenue grew by 23 percent, primarily on the basis of FIRSTFED.

Our double-digit organic loan growth and a 17 basis point improvement in the FIN 46R adjusted net interest margin.

Core fee revenues, consisting of deposit services, insurance, loan and loan servicing and wealth management grew by 12 percent including FIRSTFED and slowed to 4 percent without.

Securities gains apart from the deleveraging amounted to less than 1 percent of total revenue in the quarter.

This is the lowest level in at least two years and an early indication of the higher quality earnings streams that our deleveraging is meant to deliver going forward.

Core expenses, adjusting for noncomparable items and $3.4 million of non-recurring expenses in the fourth quarter of '04, grew by approximately 5 percent for both the fourth quarter and full year '04, compared to the year ago periods.

Included in this growth are continuing investments in personnel technology, and de novo branches under our strategic plan for growth.

Net de novo expenses after revenue contribution increased by $2.1 million in '04 compared to '03.

Webster's asset quality is strong and remains among our most critical success factors.

Our charge-off ratio is significantly better than our peer group.

When we looked at credit risk adjusted net interest margin, Webster is gaining fast on the peer group average.

To put our first-quarter into perspective, I'll briefly recap some year-over-year financial achievements against what Webster and FIRSTFED would have looked like, if combined a year ago.

Net interest income is $10 million higher in Q4 '04, than the two organizations added together Q4 '03.

That is considerable topline growth of 8.6 percent and superior to most of our peers.

Our net interest margin of 325 in Q4 '04 would compared to a combined 2.98 percent a year ago, strong results in a key metric.

Our combined securities portfolios have declined by almost $1.5 billion, now representing 22 percent of assets compared to 30 percent a year ago and lower than our commercial bank peer group.

And our combined securities gains would be lower by $6.2 million, representing .9 percent of total operating revenues in Q4 '04, compared to 4.3 percent a year ago.

These metrics underscore our considerable progress in pursuit of our strategic goals.

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

Thank you, Jim, and good afternoon to all if you joining us today.

Some of the key trends and highlights of the quarter that I will focus on in my comments are continued strong loan and deposit growth, although true commercial loan growth was masked by seasonal runoff in the ABL portfolio during the quarter.

Solid asset quality ratios, NPAs down both on a linked quarter and from a year ago and reserve coverage were also very strong, successful completion of our deleveraging program, improved margin -- 19 basis points higher in the quarter that in the last quarter.

Expense management in the quarter -- adjusting for the deleveraging and the 3.4 million of non-recurring items, noninterest expenses were up about .5 percent from the third quarter.

Since Jim commented about our year-over-year comparisons, I will focus my comments for the most part on our linked-quarter performance.

Also, I realize we have many non-recurring items this quarter.

So, to avoid confusion, I will try to highlight and explain them for you as we cover each affected area.

Total revenues, excluding security gains, were 179.1 million in the fourth quarter compared to 174.6 million in the third quarter, a 2.6 percent increase or 10 percent annualized.

This increase was driven by net interest income which totaled 127.6 million in the quarter and grew by 5 percent from the third quarter.

This increase reflects an improvement of 19 basis points in the net interest margin which was 3.25 percent compared to 3.06 percent in the third quarter.

The margin increase was mostly related to the positive effects of our deleveraging program.

The impact of rising rates on asset yields benefited our commercial and our home equity credit line portfolios in particular.

Fee revenues were down in the linked quarter, primarily as a result of $2 million decline in gain on sale of loans.

Other changes were deposit fees were essentially flat, insurance revenues declined by 600,000, though we typically do see this fourth quarter cyclicality.

Wealth management revenues declined by 800,000, investment products had an exceptional third quarter sales performance that followed a strong first half of the year.

So we anticipated some decline in the fourth quarter.

Gain on sale of loans was down due to lower mortgage origination volumes.

Other income was up by 800,000 and included 1.7 million of non-recurring insurance claim proceeds.

Noninterest expenses were 154 million for the quarter and included 45.8 million of debt prepayment penalties from the deleveraging and 3.4 million of non-recurring items.

Excluding these items, expenses were 104.4 million for the quarter, up $600 million from the third quarter.

The 3.4 million of non-recurring expenses consisted of 1.2 million relating to an earnout accrual to an acquisition for exceeding its profit goals, $900,000 relating to Sarbanes-Oxley costs during the quarter, and 1.3 million of other expenses consisting of a loss of $800,000 on the sale of a building and 500,000 from terminating a hedged transaction.

The effective tax rate for the quarter was 11 percent.

This rate was impacted by two items, a deleveraging benefit of 17.4 million and 2 million on the settlement of prior year tax audits.

Our combined measures of asset quality remain very strong, NPAs declined by 2 present compared to September 30th and totaled 39.2 million.

And our allowance represents 416 percent of nonperforming loans compared to 400 percent at September 30th.

Net charge-offs totaled 2.7 million in the quarter, for an annualized net charge-off ratio of 9 basis points.

This compares to 8 basis points in the third quarter, significantly better than that of our peer group.

The provision for loan losses was 4 million and exceeded net charge-offs by 1.3 million.

The ratio of the allowance to total loans was 1.28 percent, the same as at September 30th and remains strong, given the risk profile of our loan portfolio.

Turning to a review of Webster's balance sheet, total assets at September 30th were 17 billion for a growth of 17 percent compared to a year ago and flat compared to September 30th because of the deleveraging program.

The securities portfolio is down 766 million from September 30th and now represents 22 percent of total assets.

We continue to position the portfolio to benefit from rising rates and concentrate on our efforts on purchasing short-duration securities like hybrid ARMs that will have minimal extension risk as interest rates rise.

The average duration of the available-for-sale portfolio was 2.1 years at December 31st, compared to 2.7 years at September 30th.

For the entire portfolio, including 1.2 billion of held-to-maturity securities, the duration was 3.0 years, same as at September 30th.

The portfolio yielded 4.39 percent during the quarter, up from 4.18 percent in the third quarter.

Unrealized losses at December 30th were 3 million, compared to a loss of 15 million at September 30th.

Our exposure of tangible capital to a shock in interest rates of plus-200 basis points is 32 basis points at December 31st.

This has been cut by more than half compared to the exposure of 80 basis points, prior to our deleveraging.

We have posted solid loan growth compared to the third quarter.

Residential mortgages were flat and continue to represent about 41 percent of total loans.

Commercial loans were also flat, largely due to seasonality in the asset-based lending portfolio.

The retailing trade typically pays down their lines during the fourth quarter, resulting in about $70 million of decline in that portfolio during the quarter.

On an average basis, commercial loans were up almost 3 percent for the quarter, reflecting the underlying growth in the portfolios during that period.

We saw particularly strong growth in our equipment finance and small-business portfolios.

Commercial real estate loans were up 95 million or 6 percent, while commercial -- while consumer loans increased by 42 million or 2 percent.

Deposits during the quarter increased by 131 million or 2 percent.

We saw good growth in our demand and NOW accounts.

We see consumer balances starting to disintermediate from MMDA accounts to money market accounts and CDs, in order to get higher yields.

Our borrowings were down during the quarter $991 million, primarily related to the deleveraging program.

Now I will turn the program back to Jim for his overview, as we look at the full year 2005.

Thank you, Bill.

We'd like to give some background on expectations for 2005.

While it's not our practice to provide specific earnings guidance, we try to provide you with good information that facilitates your efforts to make projections, particularly in this case as regards gains on sale of securities.

I'll focus on some guiding principles we adopted internally which may be useful in this regard.

These principles are important to state because they represent a transition in strategic thinking that accompanies our nearly-completed transformation to a commercial bank financial services provider.

They reflect our belief that we should decrease our capital leverage, in order to strengthen our balance sheet.

Our tangible capital goal of 5.5 percent is a key financial metric and will act as a governor on balance sheet growth.

For example, loan growth may be funded in part through loan sales or participations or possible securitizations.

Wholesale borrowing growth will be limited with most on-balance sheet loan growth funded by deposit growth.

Expanding the margin will be a high-priority against which balance sheet growth will be measured.

Even as we earn out the charge from the deleveraging, we will not releverage at current spreads.

Our $750 million deleveraging represents foregone income going forward of about 10 cents a share at current spreads.

Income from gain on sale of securities, which amounted to 27 cents a share in 2003 and 24 cents a share in 2004, will no longer be a significant contributed to earnings, given the reduced securities portfolio and the outlook for interest rates.

Therefore, you shouldn't expect much in that regard from a run rate perspective going forward.

We will be focusing on the higher-quality components of the earnings stream.

One other point I'd like to make for '05 analytical purposes -- while it's not a guiding principle -- is that Webster will undertake a core infrastructure conversion in '05 which will give us the best commercial banking systems available, including significant scalability.

We expect to incur one-time charges related to the conversion of about $5 million, most in Q2.

Also, the impact of our de novo branching program, defined as net expenses after revenue contributions from branches open less than two years is projected to approach $8 million in '05 versus about $4 million in '04.

Given the success of our de novo expansion program to-date, we expect to expand our branch banking system by about 5 to 6 percent per year.

We recognize that what I've just spelled out may cause a reduction in your '05 earnings estimates, particularly given the current consensus estimates of about 14 cents a share in securities gains.

The bottom-line is that we expect a stronger balance sheet, solid organic growth, and a higher quality of earnings going forward and will continue to invest in our future as the primary drivers of improving returns.

I will now ask Bill if he will provide more detail on the '05 plan.

Thank you, Jim.

I will now provide some specific comments on our overall expectations for 2005.

As you know, we do not give or confirm estimates or ranges, but instead speak to our overall trends and expectations.

As I give ranges for our growth rates in 2005, you should remember they will reflect the full-year impact of FIRSTFED and the inclusion of First City for the full-year and HSA Bank from mid-February.

There's always uncertainty with any interest rate forecast.

Our current base-case expectation is similar to the forward yield curve, where we assume another 100 basis points of Fed tightening over the course of 2005.

We also expect the yield curve to flatten as loan rates rise by less than one-half of the short end.

Overall, we expect to see 6 to 7 percent growth in earning assets next year with the growth coming almost entirely in the loan portfolio.

We expect low-teens growth in the average loans off the full year 2004 average of 10.7 billion.

Most of that growth will come in the commercial and consumer portfolios, while residential mortgages will grow in the mid-single-digits.

Security should remain fairly close to the year-end 2004 level of 3.7 billion and remain in the low 20s as a percent of total assets.

We expect deposit growth will match loan growth in 2005.

Aggressive increases in low-cost core deposits will lead that growth. (technical difficulty) products, our de novo branching initiative and HSA Bank will continue to drive deposit growth faster than the market.

The net interest income will increase, mostly as a result of volume and should match the expected growth in loans.

We expect the net interest margin in 2005 to be modestly higher than the 3.25 percent in the fourth quarter of 2004.

The short end flattening of the curve will limit any meaningful margin expansion in 2005.

Total non-interest income, excluding security transaction, should show growth in the low teens.

Overall, our core fee revenues of deposit services, insurance, loan fees and wealth management should increased by more than that.

Leading the way will be deposit service fee, which will increase and reflect the full year impact from the sale of our HPC Checking products in the Massachusetts/Rhode Island market, as well as fees from HSA Bank.

Gain on sale of loans should go almost double-digit as we roll out new products to our national wholesale mortgage offices.

In connection with Jim's earlier comment that security gains will no longer be a significant part of our earnings, you should not expect to see much, if any, security gains in 2005.

In projecting our expenses, you should annualize our current fourth quarter run rate and grow it at about 4 percent.

To that, you should add the impact of our newly-acquired First City and HSA bank.

We would expect to continue our strategic investments again next year by adding an additional 8 de novo branches at an incremental cost of approximately 4 million.

And as Jim mentioned, we expect to incur about $5 million of one-time charges, related to our IT infrastructure project and FIRSTFED conversion.

Most of these expenses will come in the first half of the year, with the second quarter bearing most of the cost.

Our provision expense was 18 million in 2004 and the full-year loan charge-off ratio was 10 basis points.

You can expect similar performance in 2005.

Overall asset quality measures are expected to remain strong.

Our effective tax rate is expected to be around 33 percent during the course of 2005.

Diluted shares for all of 2005 are expected to be only slightly higher than the fourth quarter level of 54 million, essentially representing the full quarter effect of shares issued in December under the First City acquisition.

In conclusion, we believe these growth rates will give us a higher quality earnings stream and balance sheet going forward.

Now let me turn the program back to Jim for his concluding remarks.

Thank you, Bill.

We entered 2005, our first full year as a commercial bank, with a solid foundation, ambitious plans and confidence in our ability to achieve our goals.

Webster competes as the largest independent bank in Southern New England, headquartered in southern England, and a homegrown and trusted local provider of financial services.

Every day, we find a way to help individuals, families and businesses achieve their financial goals.

Our retail footprint was virtually confined to Connecticut one year ago.

Today, we have a four-state presence.

Our strategic efforts in 2005 will position us to function over the next few years as a leading commercial banking in the attractive geography that stretches from the suburbs of New York to the suburbs of Boston.

We are making strategic investments in our future through such important initiatives as our IT infrastructure upgrade and expansion of our de novo branching program.

We remain committed to eliminating the valuation doubt that exists between Webster and our Mid-Cap banking peers, nearly three multiple points today, through ongoing performance and to the substantial benefit of our shareholders.

Thank you for your interest in Webster and for participating in today's call.

We'd now be pleased to respond to your questions.

(OPERATOR INSTRUCTIONS).

Matthew Kelley, Moors & Cabot.

I guess the bottom line for me here is when I look at full-year EPS growth, from '03 to '04 was about 3 percent.

And when I kind of bake in no buybacks, no securities gains, and modest average earning asset growth, I do not think it is unreasonable to see mid-single-digits to low-single-digit growth '04 to '05.

It's -- my first question -- is this an acceptable level for you as a management team?

And I have two other follow questions?

Without commenting on the level of earnings for '05, I think we try to do the best we can, Matt, to give you some information that will be useful to you in making your projections.

We think under the principles of operating with a higher tangible capital level and less leverage, when you look at it in that context, that our '05 projections are sound.

Laurie Hunsicker, FBR.

Great detail on your call.

Just wondered actually, if you could take us through a couple of things.

As it pertains to expenses -- and I've just kind of been double-checking my notes here -- with Fidelity System, we initially have that you all would have costs in '05 of about 3 million and now you're saying now 5 million.

Is that correct?

Yes, we are saying, Laurie, that we are going to have $5 million of one-time expenses in connection with the Fidelity conversion and also the item processing conversion, you know, FIRSTFED and Webster into the Fidelity System.

And you said most of that will come in the second quarter?

Yes.

Most of those expenses will come in the first half of year, with the bulk of that coming in the second quarter.

And do you plan to sort of back that out of your operating number, when you report that?

Well, we are very limited in what we can say in our press release.

But certainly, we will talk about that and report on that in our earnings calls as we go through the year.

We will definitely call attention to it.

Well, I think if you take our 90 cents and you add back the 3.4 million of unusual items and the 1.7 million of insurance claim, you are coming to 1 cent.

And you're talking about 3 cents for the $2 million of settlement that we had on the tax line.

So, as Jim said, our net unusual items for the quarter was a plus 2 cents.

Bill, can you just run me through just the line items that you have, again, on the 3.4 million?

I got 1.2 million was the earnout accrual on the acquisition, 900K was the Sox.

There's Sox.

And then there was another 1.3 million in other.

And of that 1.3 million, about $800,000 represented a loss on the sale of one of our buildings and another 500,000 represents a charge that we took on the termination of one of our hedge transactions.

And how much Sox expense do you project having in 2005?

I think that we went through a transition year here, in, you know, 2004.

And as we went through the year, there was a lot of changes in the rules and as a result, there was a lot of work that we had to do that we did not anticipate that needed to be done.

And I think that as we go into 2005, a lot of the documentation and the control documentation need not to be done.

So I would think that our expenses as we go forward in 2005 certainly are going to be a lot less than the charge here that we had to take -- or the additional expenses that we had to take here in the fourth quarter.

Okay.

And then just one other question -- the deleveraging -- what date did it actually occur?

Well, it occurred at varying dates through the fourth quarter.

Most of the debt deleveraging was done probably closer to the end of October while the security sales occurred all through the month.

And I guess you could say that on average, they probably would have all been done by late November.

Okay, so the security sales went through October and November?

And December.

And December.

But I'm just saying, on average, a lot of them occurred in November and December.

So on average, it's probably more like the end of November when most of them would've been done.

Okay.

So it's not unreasonable that theoretically we could actually see your margin bump up by another 15 basis points, 20 basis points this next quarter?

I think that when we originally did the transaction we talked about margin expansion of 15 to 20 basis points.

And I think Jim, in his comments said we've already seen 14 of that.

Okay.

But I guess given that it was only partway through the quarter, it would seem that we would still see then the impact flow into --

The think that there will continue to be some positive impacts in the first-quarter.

But we've got the flattening of the yield curve next year that we are going to be dealing with to, you now.

Got it.

Okay.

Perfect.

Thank you.

Laurie, I just want to comment, that -- to Bill's point as to how the deleveraging was handled.

Most of the impact that would affect the margin occurred through the repayment of the borrowings in October.

And so I don't think that you should expect deleveraging-related, significant, incremental improvement in the margin.

I think Bill's comment earlier, that we are looking for a marginally higher, modestly higher margin in '05 should be the guide.

Tom Doheny, Sandler, O'Neill.

I guess my first question is on deposits and deposit costs.

It looked like, and I wonder if you can give me a little clarity on this, end of period deposits were, if you take out First City, were basically flat in the fourth quarter.

I wonder if you could comment on how many -- if you had a branch opening in the quarter, and if that is actually true that deposits were flat?

And then if you could -- with regard to your outlook for '05, I guess you said deposit growth is going to match loan growth.

So, you'd be looking to low-to-midteens there.

What would really be the driver of deposit growth in '05?

Is that the HSA deposits or continued de novo.

What do you see as the drivers there?

It's Bill Bromage.

Let me take stab at that from a deposit perspective.

First, with respect to the fourth quarter, I think that clearly the First City acquisition had an impact, in terms of the totals for deposit for the quarter.

I think getting beyond that, that is particularly true, in terms of -- we've had, as Bill said, some switching between our money market accounts and CDs, as people sought higher rates.

We've had some movement out of our savings account.

But we've had some very strong growth -- internal growth, in our NOW and DDA, largely driven by our higher performance checking.

And you can see that over the course of the year.

When you look into next year, I think what we're -- and in terms of de novo branching in the fourth quarter, we opened two in the fourth quarter.

But they were in the second half, at mid-December on.

So there was not a lot of deposit growth.

It came in that quarter out of new branches that weren't -- that we did not have prior.

When you look into next year, the deposit growth, I think will come principally from two areas.

One is the continuation of our high performance Checking.

That program has continued to deliver performance for us, both in terms of DDA growth, numbers of accounts and dollars, as well as in NOW accounts.

And we also offer that program to small businesses.

And we have seen some significant growth in our small-business deposits associated with that.

So that's an area that we're looking for.

In addition, we will be opening 8 more branches -- de novo branches -- in '05.

And add those to the two that we opened at the end of December and items that will provide some growth in deposits for us as we go forward.

I want to add that -- this is Jim -- that one of the highlights in the quarter was that deposit costs remained flat in Q4, as compared to Q3.

And in fact if you look at simply the relationship between deposit costs and yield on loans, that that improved to 4 percent in the quarter from 382 in Q3.

And I guess I'd follow-up on that -- as you look at net deposit costs for next year, as you look at what the margins are going to be next year, what is your outlook on deposit costs?

Obviously, it's been pretty flat the last two quarters.

But, are you baking in, you know, conservatism there?

Or at least is the outlook that the deposit cost will start to rise significantly, starting in the first-quarter?

Well, if we are looking at 100 basis points in the short end, it's likely we will get some increase in our deposit costs.

And of course, the plan would be that loan yields would rise at a marginally faster rate, particularly given that we are modestly asset-sensitive from an earnings perspective.

This gets back to the discipline that we were talking about.

And there may be at some point, a modest trade between growth rate in deposits and yield cost of deposits as we focus on the tangible capital on the one hand and improving the margin on the other.

Great.

And then actually, on your loss of sale on a building this quarter, that wasn't a branch?

What kind of a facility was that?

It was an office building that we had acquired through one of our earlier acquisitions.

And we had used that as a facility to house some of our operations people.

And with the new Slater Road operations facility in New Britain that we opened up, it made this expendable and we found a buyer for it.

I just wanted to mention, just to follow-up on Bill's point, you know, with High Performance Checking, as I had mentioned in my comments, that's something that we have just begun to roll out into the Massachusetts and Rhode Island market.

So, we expect to see similar benefits and growth that we saw in our early programs there.

And also, we expect to see some benefits from growth in the HSA Bank, you know as they add accounts during the year also.

So, that money will be reflected in the deposits of Webster Bank here.

James Ackor, RBC Capital Markets.

Real quickly, I'm was surprised Laurie didn't ask it, for crying out loud.

But any thoughts on the buyback?

Sure, at the appropriate time Jim, we would always be interested in the buyback.

You know, our history has been that we always have taken advantage of relatively low valuation, as compared to what we believe the intrinsic value is to mount buybacks.

And that is why we have completed 15, I believe, in our history.

But we have to balance the buyback against the other uses of capital, as you know, one of which is to boost the tangible capital level.

So what that in mind, and with other considerations as well, the possibility of acquisitions, we will consider that as one of the uses of capital.

I wouldn't be strongly encouraging you to consider that as a near-term possibility.

Okay.

Fair enough.

A couple of house cleaning questions.

Just in terms of what Bill was going over -- I didn't quite catch everything.

The OCI number, Bill, I'm sorry?

Jim, help me with OCI.

The comprehensive income -- I'm sorry -- the unrealized loss on the bond portfolio --

It was $3 million this quarter, compared to 15 million last quarter, September 30th.

And then the -- that's the last question I had -- the stat seed one over on -- with regard to the 200 basis point interest rate shock?

I completely missed all of those numbers as well.

I apologize.

I think that, in terms of the shock on our tangible capital, I think I said that it was down 32 basis points at December 31st.

And that compared to an 80 basis points decline at September 30th before we did the deleveraging.

Remember that one of the benefits of the deleveraging was that our expectation is that that would cut that exposure in half.

Okay so that 32 bips (sic) was the impact on tangible capital.

And that is on top of the forward curve, Jim.

Jared Shaw, KBW.

The expenses, when you had said that if you annualize the fourth-quarter and add 4 percent to that, are you excluding the 3.2 million of the one-time charges from that?

Or are you saying include that in the fourth quarter number?

I'm excluding them, Jared, because they are one-time charges.

Okay, so excluding that, looking at the operating fourth quarter, (Multiple Speakers)

That's correct.

And I did that only because you've got first set in there.

So I think gives you a basis to work from.

Right.

And then, are you including any options expense?

Or expense for -- expensing for options in the 2005?

We already do expense for options.

We adopted that back over two years ago.

Okay.

And then, if you look at the average loan yield this quarter, quarter-over-quarter it wasn't up about 19 basis points, on fairly modest loan growth for this quarter.

How were you able to see such growth in the yield there?

Was that mostly a lot of repricing on the commercial and the consumer side?

Or was that new loans coming in and replacing older loans?

A little bit of both, but primarily repricing.

And most of our consumer loans are variable as are our C&I loans.

Okay, so as we see the short end may continue to grow up into '05, we should expect to see continued growth in the yield on the loans there?

Yes, you should.

(OPERATOR INSTRUCTIONS) Karen Lamark, Merrill Lynch.

I've got a few.

Going back to the question about uses of capital.

Could you prioritize for us how you might use it?

Obviously, the tangible capital is number one, from what you've said.

But, could you go bit further?

Yes, tangible capital is number one.

Tangible capital is number two.

The funding our loan growth would be three.

Balancing between buyback and dividend increases would be four.

And that would depend upon our valuation at any particular time.

You didn't mention acquisitions.

Where does that fall?

Acquisitions falls -- excuse me -- I mentioned it earlier in the call.

But acquisitions falls as a use of capital that would be competing against the others.

We would look at acquisitions most desirable as being primarily stock-based combinations.

And then also, as I look toward the line items in your non-interest expenses, understanding part of the comp increase was the earnout.

But if you look at comp, occupancy and furniture and equipment, they were actually pretty material increases.

And I'm wondering if there is any specific efforts or anything you can do, going forward, to maybe -- to moderate those increases -- or if there is anything we need to know about.

I think that, Karen, a lot of those increases that you talked about in furniture and equipment had to do with the new infrastructure project that we are bringing on.

And a lot of what's going to be required by the new applications that we are bringing in is that we update a lot of the computers.

And right now, all of our branches are not compatible and have PCs.

Part of the new software that they will be using on the platform will require them to have PCs.

You've got service contracts on that.

The increase in facilities -- basically our -- not only the de novo branches, but we built up an inventory of de novo branches.

So, we've already got a number of locations that although we haven't opened them, we are paying rental on.

And then you get a certain amount of cyclicality.

When you start getting into the fourth quarter, we start to run up on utility costs.

Then we get into snowplowing.

Things that you don't get in the summertime.

So there's a little but of cyclicality built into that also.

Okay.

And then as a follow-up, did the sale of the building that you mentioned have any material beneficial impact on any of the expenses?

Well, I think that it does, inasmuch as we weren't going to be using the building anymore.

So from the standpoint of the cost to carry and the related taxes on it and the ability to take that money and put it back into an earning asset, it's got those benefits as we go forward.

Yes.

Extremely modest, though.

Matthew Kelley, Moors & Cabot.

Just a follow-up on the commercial real estate growth.

Wondering if we could just get a little bit more detail on where the sequential growth came from?

Sure.

The growth in commercial real estate that you see in our financials, I should point out, is about 50 percent of that increase -- I want to say it was like $90 million for the quarter. 50 percent of that increase is attributable to actual investor/developer/commercial real estate activities.

And it happens across the breadth of the products that we offer and the breadth of our franchise, which includes all types of investor products, as well as we have an excellent residential development unit.

And then, the other 50 percent that you see in commercial real estate loans actually are more middle market loans or small-business loans to customers that we do business with.

And because those loans are secured by real estate, they are categorized in the commercial real estate line on our financial statements.

But in reality, they represent more C&I-nature risk, if you will and that we're looking to the operations of the Companies that occupy them to pay us back.

Okay.

And just in light of expectations for commercial loan growth going forward, I was what if you could just kind of touch upon desired levels of reserves, relative to total loans over the next kind of 12 to 18 months, if provisions are going to stay in roughly kind of the same type of area here -- what your comfort level is, in terms of how far -- how low you might be willing to go on reserves to total loans?

As Bill Healy and Jim both reported, obviously, we're quite pleased with our asset quality statistics and performance at this point.

We are about 128 loan loss reserve to our total loan portfolio.

We feel comfortable at that range.

If it were 125, we would still be comfortable.

So somewhere in that range.

We don't expect credit costs to be materially different from what they are in '04.

So we think that is a positive outlook and think the range that we are in is about the right range.

Okay -- the 125 --

125, 130 -- that kind of range.

Ladies and gentlemen, there are no further questions at this time.

I would like to turn the floor back over to management for closing comments.

Thank you very much for being with us today.

Look forward to talking with you again soon.