Webster Financial Corp (WBS) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Webster Financial Corp.'s third quarter earnings conference call. [OPERATOR INSTRUCTIONS] Later we will conduct a question and answer session.

As a reminder, ladies and gentlemen, this conference is being recorded.

Also this presentation includes forward looking statements within the safe harbor provision of the private securities litigation reform act of 1995 with respect to Webster's financial condition result of operations in business and financial performance.

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

This these forward looking statements are subject to risk , uncertanties asumptions as described in Websters financial public filings with the securities and ex-change commission which could cause future results to differ materially from historically performance or future expectations.

I would like to introduce your host for today's conference Mr. James C. Smith Chairman and Chief Executive Officer.

Please go ahead sir.

Good morning everyone.

Welcome to Webster's third quarter 2005 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 the questions after our formal remarks which will take about 25 minutes.

I will provide the highlights in the strategic context for the quarter.

And Bill Bromage and Bill Healy will provide detail on our performance.

As you seen in the earnings release we reported $0.86 in diluted earnings per share down $0.06 per share from a year ago.

Cash EPS of $0.95 a share were down a nickel a share.

The $0.09 difference between cash and GAAP EPS reflects stock base compensation of $0.03 a share and intangible amortization of $0.06 a share.

Items of special note in the quarter and their affect on EPS compared to the reported amounts that I just mentioned are EPS this quarter included only $0.01 of securities gains compared to $0.07 a year ago.

So net of those gains EPS were flat year-over-year.

Also note that Q3 '04 netted interest income benefited from the larger wholesale borrowing and securities portfolio in place during that quarter.

And at a wholesale spread 55 basis points higher than Q3 '05.

The '05 quarter also included $0.03 per shares of one time cost related to our core systems conversion project.

The net expenses related to de novo branching program were $0.02 a share greater in Q3 '05 than a year ago.

The net interest margin of 326 in the quarter is 20 basis higher than a year ago.

Much of this improvement is due to our deleveraging in Q4 ' 04, which strengthen our balance sheet reduced our expose to rising rates and improved our earnings quality.

While we're clearly in a stronger position, we're not immune to the current yield curve environment and so at 6 basis points of margin compression from the second quarter as cost of liabilities rose 22 basis points compared to 15 basis points increase in the yield on earning assets.

Credit performance remains strong with a 6 basis point charge off ratio in the quarter.

The provision of $2 million once again exceeded net charge off of $1.8 million which resulted in a slight increase in the allowance for loan losses from June 30.

Bill Bromage will cover the uptake in non performing assets.

Our loan portfolio totals $12.2 billion and has grown by 5% over the past year.

Commercial including commercial real estate and consumer loans are growed at a combined organic rate of 9% over the past year while resee have increased as planed by only 1%.

As a result resee now comprise 39% of total loans compared to 41% a year ago.

Our C and I portfolio rank us number 35 among US commercial bank and further validates are successful transformation to a commercial bank.

Our deposits totaled $11.7 billion at September 30, and grown by 12% from a year ago.

DDA and Now account balances are grown organically 6% and 14% respectively while CDs grown by 29% as consumer preferences have shifted to this higher cost end product category.

HSA Bank represented $200 million in deposits for us on September 30 and already proven to to low deposit premium acquisition.

HSA Bank balances and accounts each have grown by 28% since we closed this acquisition on March 1, of this year.

Our total core revenues consisting of the net interest income and non interest income and excluding securities gains were $184 million in the quarter up 6% from the year ago aided slightly by the HSA Bank acquisition.

Net interest income increased by 7% compared to a year ago due to our net interest margin improvement and 1% growth in interest earning assets despite a 13% reduction in the average level securities portfolio.

The core fee revenue categories of deposit service fees, insurance, loan and loan servicing and wealth management have grown by 3% over the past year somewhat below expectations.

Our willingness to invest in our future by incurring expenses today has helped to make Webster a leader in the market.

This helps to explain how Webster gained another 61 basis points of Connecticut deposit market share according to the FDIC update for June 30 '05, just released yesterday.

We solidfied our number 2 state ranking and now have almost 13% share of deposit.

We gained 167 basis points of market share since June ' 02 , which is the largest increase for any of the top ten banks in Connecticut and twice as much as the next closest competitor.

I've spoken often in the last year about guiding operating principles.

You may recall that we cover these principles in depth in our 2004 annual report in the Chairman's letter.

So let me discuss the third quarter performance in the context of the principles.

Our tangible equity ratio has improved 53 basis points year-over-year to 5.45% at September 30.

We're almost at a year end '05 goal of 550 and well on the way to our ' 07 goal of 6%.

We've also reduced by half our tangible capital exposure to sharply rising rates.

Tangible capital levels will continue to govern balance sheet management which illuminates releveraging gains on sale of securities as meaningful earning source going forward.

Looking ahead should rates continue to rise in the yield curve continue flatten, as we expect, we'll use the cash flows from our securities portfolio to pay down wholesale borrowings,.

We expect that these cash flows will total close to $1 billion through the end '06, resulting in about $55 million of freed up capital during that period.

Our intent is to -- on EPS on cash flows not reinvested will be offset nearly or entirely by the benefit of shares repurchase under Webster's buy back program.

Will have the added benefits of a further significant reduction in the level of our wholesale borrowings as a percent of total asset.

A gradual move of asset sensitivity and a positive impact on the net interest margin.

Which continue to favor commercial and consumer loan growth which obviously will result in continued reduction of residential mortgages as a percentage of total loan.

While some might consider our 5% total loan compared to a year ago uninspiring we see 15% growth in commercial loans, 6% in consumer loans and a 2% reduction in ressee as a percent of total loans.

We continue to favor deposits over borrowings as the primary funding source for new loans.

We reduced borrowings from 32% total asset s a year ago to 25% at September 30.

Under just discussed securities portfolio reduction program this percent level would be reduced to well under 20% by year end '06.

Commenting briefly on strategic investments, I want to be clear as I was in the chairman letter, that we will continue to invest in our future by incurring expenses today that will drive future revenue and earnings growth.

Our de novo branching initiative as high costs in the early years leading to solid returns down the line.

Near term expenses related to this initiative ,$3 million in the third quarter alone represent a valuable investment that we believe will sustain organic growth for years to come.

Your total de novo program deposits were $497 million at September 30 compared to $263 million a year ago.

De novo branching has become such a core competent at Webster, that we our considering expanding the program from its current rate of 6% annually of the existing base.

Another important strategic investment for us is comprehensive upgrade of core banking systems which has resulted in about $7 million of one time cost sofar this year.

We completed the Massachusetts/ Rhode Island conversion in July and implemented the Connecticut/ New York conversion earlier this month.

We now have enterprise technology systems that will enable us to expand product features, increase speed and reliability and give us scale for significant growth.

We're very pleased with the outcome to date and pleased to of have the associated operating risks and resource demands nearly behind us.

Managing our business by the guidelines that I have just spelled out in the context of our third quarter performance puts your longer term horizons in perspective and if that differentiates us from the peers so much the better.

We invest confidently in the franchise and future.

Ever mindful that each investment must create value for customers and our shareholders.

I'll now ask Bill Bromage to comment on overall asset quality who will be followed by Bill Healy on the financial report.

Thank you, Jim.

Bill Healy will taking you through our loan portfolio progressions from June 30 to September 30, as part of his financial review.

I will discuss your loan origination performance compared to year ago and also speak to asset quality.

Let me begin with the loan origination data as it provides useful bench marks to help overall drivers of how our commercial and consumer loans increased 15% and 6% respectively from a year ago.

Commercial orgination including commercial realestate were 522 million in the quarter compared to 424 million a year ago.

And a commercial pipeline was 668 million in September 30, compared to 577 million a year ago.

With that commercial pipeline we continue to have strong forward momentum.

Consumer orginations were 297 million in the quarter compared to 266 million a year ago.

Mortgage originates were 977 million compared to 644 million a year ago.

We've seen nice -- in each of these categories in each successive quarter in 2005.

Turning to overall asset qualities non-performing assets went up by 16 million from June 30. 30 to 60 million or 34 basis points, well within normal ranges.

This increase was principle due to four commercial credits that were added to non-accrual status during the quarter.

The more troublesome of the four is the middle market company that has filed bankruptcy due to cash flow problems.

We have taken a charge off of approximately $ 1 million dollars this quarter.

Developments in bankruptcy procedings will drive the timing of resolution.

Two middle market companies replace non-performing status due to company operating difficulties.

Each of these is to be resolved without loss over the next two quarters.

Interest payments are current on each of these two credits.

The fourth credit is a commercial real estate loan secured by multiple family property.

This credit is involved in a fraud.

We are well secured, our legal position is sound and we expect to be paid in full.

We feel comfortable saying that this quarter's [tick-up] up does not represent a trend if our portfolio and we remain very comfortable with our overall credit profile.

Now we'll the program over to Bill Healy.

Thank you Bill and good morning to all of you.

This was another quarter of solid performance in a challenging interest rate environment it was highlighted by continue strengthening of balance sheet and high quality core earnings.

In fact, if you look into our earnings and exclude from all periods, security gains and one-time core infrastructure expenses per share earnings would of be up $0.03 for the quarter and $0.13 year-to-date.

This morning I will focus comments for the most part on our late quarter performance.

Total revenues excluding security gains were 184.5 million in the quarter an increase in an annual rate of 4%.

Growth in the core fee categories provided all the revenue increases as net interest income of essentially flat.

Well average earning assets grew 2% compared to the second quarter that volume increase was offset by 6 basis points decrease in the net interest margin.

This margin decline was consistent when what we projected in our second quarter conference call, back in July.

During the quarter our cost of funds increased faster than the yield on earning assets.

Impacting the funding side, were higher interest rates paid on deposits to maximize or maintain our competitive market position, together with a shift in a deposit mix to a higher costing retail CDs.

At the same time, fixed rate loans and investments yields continued to be a affected by the flatter yield curve.

We expect to see continued pressure on the net interest margin again in Q4, assuming further fed tightening of 50 basis points and no change in long rates, our best guess is that the margin could continuing to further decline into the range of 3.15 to 3.20% for the quarter.

Non interest income excluding 1.1 million in security gains grew almost $2 million.

For the quarter core fee categories of deposits service fees, insurance revenues, loan and services fees, and wealth management grew at an analyzed rate of 7%.

We saw -- quarter increases in deposits fees, loan servicing fees and insurance, while wealth h management declined from the strong second quarter.

The deposits service fees continued to rebound from the depressed level in the first quarter which reflected the industry wide reduction in NSF fees.

Part of the list in these fees from Q1 comes from HSA Bank which added to fee category since their acquisition in March this of year.

But the growth this quarter comes from entirely from an increase in NSF fees.

Insurance revenues increased by 4% from the second quarter, however we continue to see pressure on renewals due to the competitive environment.

Loan and servicing fees increased mostly as a result of the mortgage servicing written down of almost $472,000 in the second quarter.

Otherwise income here was flat for the quarter.

Wealth management fees decreased also 500,000 and incurred entirely in our retail broker dealer.

This decline is result of lower fixed annuity income and other investment product sales in a difficult market.

Gain on sale of mortgages was up in the quarter as result of higher origination volume but spreads to continued under pressure due to competitor pricing and flattening of the yelled curve.

On the expense side our core rate of growth remains around 5% owing mostly to the continued investment in our future.

Non-interest expenses in the third quarter were 114.9 million and compared to 113.5 million in the second quarter.

Adjusting each quarter for acquisitions, investments and de novo branch expansion and one time infrastructure conversion course core expenses were approximatley106.8 million in Q3 and grow 1.7 million from Q2.

This increase reflects higher employee related cost and investments of our new core infrastructure systems.

Incremental amounts for the third quarter for the various investments is compared with the second quarter are as follows -- the de nova expenses were 3 million in Q3 compared to 2.6 million in Q2.

One time core infrastructure project expense were 2.2 million in the third quarter compared to 3.5 million in Q2.

Expenses the HSA Bank were 2.7 million up from 2.0 million in Q2.

As we continue to invest in their infrastructure and business development in anticipation of higher year-end enrollment activity.

Now turning to review of the balance sheet.

Total assets at September 30 were 17.8 billion.

Like compared to a year ago and up 2% from June 30.

Loans increased by 3% from June 30 while securities were flat.

As a result, the securities portfolio represent a 21.5% of total assets on September 30 compared to 22% at the prior quarter end.

We are continued to hold the portfolio flat in light of yield curve and rising short term funding rates.

We continue to concentrate our efforts on purchasing defensive securities with short durations and strong cash flows that will have minimal extension risks as interest rates rise.

The average duration of the available for sale portfolio was 2.0 years at September 30, the same as June 30.

For the entire portfolio including 1.2 billion of health and maturity securities, the duration of 2.8 years again the same as June 30.

The portfolio yielded at 4.68% during the quarter is up from 4.62% the prior quarter.

The available for sale unrealized losses, pre taxed at September 30, were 29 million compared to a loss of 13 million at June 30.

Loan growth was strong for the quarter although the growth materialized more slowly than we anticipated.

This was particularly true on the commercial portfolio.

As a result, total loans grew on average 248 million compared point-to-point growth of almost 390 million.

Commercial loans increased by 200 million by June 30.

We saw particular strength this quarter and asset base lending along with solid growth in middle market and equipment finances.

Commercial real estate loans were flat compared to June 30.

We continue to experience prepayment pressures again this quarter as borrower refinance in more favorable rates and terms primarily in the capital markets.

Residential mortgages increased by $122 million and represent 39% of total loans compared to 40% at June 30.

The increase came as we decided to add loans to the portfolio of this quarter.

We would expect to see no growth in this loan portfolio for the balance of this year.

Consumer loans increased at annualize rate of over 10% for the second quarter.

Growth of 69 million in the quarter came in fixed rate second mortgages.

As interest rates increased we have seen prepayment speeds increase and higher yielding floating rate credit lines as consumers appear to have refinance into lower costing fixed rate first mortgages.

Total deposits increased by 1% or $83 million.

Our funding diversification strategy where we issue Euro dollar in large domination CDs represent all the increase.

We typically see seasonal softness and retail deposits in the third quarter and this year was no expectation as these deposits were flat for the second quarter.

The higher rate environment continued to result in a clear shift in favor of CDs by consumers during the quarter.

These deposits grew by 8% from June 30, while most other not categories declined.

The shift to higher costing CDs contributed to 19 basis point increase the cost of deposits compared to second quarter.

Our tangible capital ratio increased by 7 basis point to 5.45% at September 30, and reflects tangible equity growth of 30 million or 3% during the quarter.

The 7 basis point improvement represents 21 basis points from net retained earnings a decline of 9 basis points from assets growth in the decline of 5 basis points from the negative Phase 115 Mark during the quarter.

Our exposure of tangible capital to an upward shock in interest rates of 200 basis points is 41 basis point at September 30.

This has been cut in half compared to the exposure before our releveraging program.

There has be no significant can't change in your sensitivity this quarter.

From an overall perspective we continue to be relatively neutral to rising rates.

For any -- change of interest rates of plus 100, 200 or 300 basis points the impact on the EPS would be minimal.

Our impact outgo committee regularly reviews the impact on non parallell shifts in the curve which described the current environment.

The most likely scenario is the further flattening with the short end of the curve rising faster than the long end.

In the scenario, of the short end of the curve of 50 basis points from here with no movement in the longer end EPS would be reduced by about 2% over the next 12 months compared to a scenario with no change in rates.

Again these scenarios assume no corrective action.

Our ability to execute on our business plan to attract and grow low cost deposits through your de novo branching and HSA Bank will unable us to partially offset the impact of changes in the yield curve.

Let me turn the program back to Jim for closing his remarks.

Thank you, Bill.

What really stands out in your performance in 2005 is the quality of earnings.

Similar to the first two quarters of this year securities gains represented only 1% of earnings compared to about 8% a year ago.

We gave up spread income in favor of building and protecting the tangible capital ratio and we invested in our future.

Our results represent a meaningful improvement in the quality of core earnings.

Webster is today largest independent bank based in New England.

We have great customers, employees and market shares.

We got scale and salability, a good strategic plan, and momentum for the future.

We will well positioned a strong, growing financial services providing with competitive attitude that drives us to increase shareholder value by helping individuals, families and businesses achieve their financial goals.

We look forward to seeing many of you during what will be a very busy quarter for us from the investor marketing perspective.

Many good things are happening the Webster and we look forward to telling the investment community about them in person.

Thank you for joining us today.

We will now be pleased to take your questions and comments.

[OPERATOR INSTRUCTIONS] Your first question comes from Jared Shaw with KBW.

Good morning.

First questions on the non-performing assets on the commercial side are you seeing that in any particular business segment or are those four companies in the related to each other at all in terms of their business lines?

Jered it's Bill.

None of them from the same business line Three of them are local middle market companies.

So they're local Connecticut based companies.They're all in different business activities.

Is there any segment of the economy that you're worried about right now any particular?

There's no segment of the economy that's represented in your portfolio.

We don't have an auto industry exposure for example.

There is no segment or industry specific that we see in your portfolio that we are concerned about from a credit perspective.

Can you give an update on IT conversions and expenses that you feel you should go forward.

I think last quarter we were thinking you would see about 1.7 million into fourth quarter is that good estimate now?

Let me take the IT expenses and I'll let Jim make comments on how the conversion went.

You know I think that the conversion was completed in October.

I would see that we're going to have some residual one-time conversion expenses in the fourth quarter probably no more than $0.5 million dollars.

Looking at the expenses going forward for the conversion, obviously we converted from a main frame system that really cost us very little it was an old outdated system.

As we go look at this quarter, you'll notice your equipment expense of up about a 1.2 million million and that represents really the continuing cost that we're going to be paying almost on a quarterly basis for servicing going forward.

Down in other expenses we have other item processing costs and we also changed our processor from two fidelity during the quarter and realized a savings there of about $800,000.

The run rate increase in expenses this quarter Jared, was about 400,000.

As you look out into a fourth quarter, we're going to start depreciating some of the development costs that we had in relation to the conversion.

I would say that the incremental costs going forward from the third quarter would probably be somewhere in the area of $900,000 to $ 1 million.

Looking at the $2.2 million charge separated out this quarter.

500,000 in the fourth quarter approximately.

Okay, great.

Generally on how the conversion went.

I'll say as Bill pointed out there as higher run rate cost associated with the new systems which over time will be offset by some efficiencies as well as opportunity for revenue growth that we believe we wouldn't have if we didn't move to commercial banking systems.

Now thats complete Fidelity National as a partner and provider of the systems to most of the major commercial banks in the United States.

I can't tell you how proud I am of all the people the Webster that did a great job in this conversion.

We made a wise decision early on to separate the mass Rhode Island conversion off of one set of systems from the Connecticut /Rhode Island conversion off of another.

We learned a great deal of experience with the smaller conversion that we did in early July in Mass/Rhode Island.

And put those learnings to use so that we had as smooth of a conversion as you possibly could imagine.

It has been better than your best exceptions--expectations.

This were high.

It's been absolute minimal disruption from the customer perspective the people performed well, the ATMs are working well, the branch system and call center and we were staffed up to estent that we couod handle all the inquires that came in pretty much without missing a beat.

A real team effort.

All of the partners across the business lines and support units of Webster and all the people in all those units putting in time and effort make it very, very successful conversion I just can't overstate how pleased we are.

Thanks.

On the home equity lines you were saying you saw payoffs there has people shifted do the fixed rate products.

What's a utilization right now on the heed locks?

The utilization.

I don't know that we can get you the exact rate.

I'm not sure what it is.

It has come down slightly from what it had been.

We're seeing reduction in the utilization rates.

Ink the comment there is we saw a lot of the prepayments going into first mortgage loans not second.

Doing a full refinance out--refinance out.

Yes just doing a full refi.

It's where in the vicinity of 50%.

I have to jump off for a quick second.

You may have addressed this your thoughts on acquisition here as your capital stays at a decent level if you don't do acquisitions would you look at buy backs or management.

I did say Jared as we used the cash flows from securities, maturities to repay wholesale borrowings will free up capital and that one use of that capital maybe to use the buyback program to neutralize the EPS impact of giving up modest spread income.

But I do want to say a word about acquisitions, as you know your growth while primarily organic comes in part through acquisitions to the extent there are like-minded partners in the market, we are very interested in teaming up with them.

A partner would have to see the value in your currency because we think that most acquisitions we would do, we would want to use your stock for.

At a time when we're selling at a little over 12 times earnings and the market is demanding 16 to 18 times that is a stretch unless the partner sees the intrinsic values of your shares.

Tha's part of the reason that the buyback looks so attractive paticularly where were selling in a market where we're selling at a PE discount of 20% as well as tangible bookvalue per share discount of 20% or so as well.

We find the use of the capital at this point in time given where your evaluation the buy back may be the highest and best use.

Thank you very much.

Next question comes from Laurie Hunsicker with FBR.

Good morning.

Just a couple of questions to follow up with Jared's.

I guess if we can go to credit for a second, Bill.

The four credits you talked about can you give us more color on terms of absolute balances and where they stand?

You know Laurie I think we covered that pretty well.

The four credits the increase was 16 to 18.

It's pretty granular.

We're looking for portfolio where Webster is 35th largest commercial bank in the United States.

We had a little up particular in non-performing loans nothing serious as Bill reported.

I guess I'm looking just for a second if we look at the commercial real estate portfolio your numbers went from 15 million to 20 million.

Let me amplify a little on Jim's comments.

I think up from 25 basis points was kind of win the normal range that we would expect to operate in.

We're comfortable from ta per specific With respect to the four credits in aggregate to 18 million dollars the net increase for the quarter was about 16.

The real estate increase that you saw represents two credits.

One of the middle market credits I discussed which is a local company we lend to secured by real estate.

That lon gets aggregated into commercial real estate from a financial reporting perspective.

As we have your discussions we talking about operating business in nature of the entities we lend to is commercial credit driven the performance of that company, which has not been good.

All three companies are local Connecticut companies as I said.

One's filed a bankruptcy and other two have credits we have monitored very closely for an extended period of time.

It's not something we are surprised at.

The current developments are not what we would like to see.

We would like it when we manage credits be aggressive in terms of how we account for them.

Even though they are current we are treating them as problem credits that need resolutions and dealing with them as non-performer tas we do--as we do and done that in the past.

That's consistent in terms of how we handle them.

It's also consistent to say local lender who is looking to establish a strong-market relationship.

We work with your borerers who are difficult and help them bridge through a successful turn around.

Some make that and we think that ba hooves us in terms of your relationship in the market and we earned that by being disciplined in the person in which we work with problem credits.

Orlandohan hand we--the fourth one that's a real estate credit I would resist going into the technicalities of the fraud.

We are well protected, legal rights are strong.

It's a borrowers problem but not ours.

We're confident in the outcome of that credit.

In terms of the absolute balances though the one that filed bankruptcy, how big is that?

That is the largest of them.

Your current balance is slightly in excess of $8.5 million that's in net of the charge off of around $1 million that we took.

That's one that I say is the most troublesome we monitored that very closely it's early so we're comfortable with the disposition today.

It's in bankruptcy you don't me the outcomes until you're there.

We're secured in a credit.

What is it secured by?

The operating assets of the business.

Which is?

The inventory receivables.

What type of business?

We're not going to get into the types of businesses of the individual credits.

Okay.

And the two middle markets that are currently in terms of payments to should be resolved shortly how big are those?

The remain three credits are all under $5 million and they are all secured.

We expect no loss in any one of them.

The other three credits.

Okay.

And the one that is secured by real estate as well you said that is multiple family real estate?

Yes.

That is also around $5 million?

No, they are all less than $5 million.

You can't give us exact balances on those three?

No.

Okay can you talk a little bit--i am clearly overall your asset quality looks good when people look at you non-performing assets to assets 34 basis points looks very clean I think the trend commercially going from 77 basis points non-performing in the commercial up to 102 is pause for concern.

Can you talk a little bit about your forward thoughts in terms of credit and how you might be changing things?

Yeah, I mean I would be happy to talk about the forward thoughts of credit and conditions of the portfolio I would be however remissive if I didn't say we done see it as cause of concern because we do not.

It's normal flows as it turns out we had more in flows than outflows this particular quarter so you see the number going up.

The absolute level are well win control.

As you heard us in making our presentations in various investor days we work much to portfolio As you heard us in making our presentations in various investor days we work much to portfolio thorey as we've built business we have multiple areas. as we've built business we have multiple areas.

May look relatively large like a trend.

We don't see it as a trend.

Two of them are in commercial real estate for example.

We couldn't be prouder of the performance of your commercial real estate portfolio over an extended period of time even recognizing that it's been a benign commercial real estate environment we have been very, very disciplined and have an outstanding track record.

When you look at that market generally, we find that that market is significantly overheated, the terms and conditions under which real estate loans are being granted generally are of a concern to us.

The low cap rates are of a concern to us.

We've seen some compromise in terms and conditions.

We have not gone along with that.

You can see as consequence an area that has been a strong growth area for us over the past few years has been relatively flat for the past several quarters.

Not to say we're not finding good opportunities to lend to good borrowers but we are being very selected and disciplined in in that.

But we feel good about what we're booking but concerned about particular portfolio.

We're disciplined in the middle market, the credits that are having difficulty are well secured.

We cont see a trend if your portfolio.

While we don't talk about your substandard or disclose absolute numbers of substandard loans for example those numbers are down.

We are not seeing a magnitude shift in your portfolio.

Very -- this is a overheated environment and pay attention to it.

You said that in terms of may be you didn't say this may be you did.

In terms of your commercial loan growth that you're expecting going forward somewhere in the magnitude of 6% annually.

Did I hear that right?

I think we're growing right now about 15% annually.

I would expect it to be somewhere around 10 to 12%.

10 to 12%.

How does that split between C and I commercial real estate?

Well I think it's hard to talk about what the growth rates going forward and commercial real estate are going to be.

As you've seen we're flat quarter to quarter.

We're done from the end of the year.

We're seeing a lot of prepayments in the portfolio.

Maybe now that rates are starting to kick up, we'll see less of that.

But I see more strength right now in the commercial portfolio than I do in the preportfolio.

So in terms of how this all translate in loan loss provision I think it would be something north of the 2 million run rate we saw this quarter.

Eventually it will be Lori but now something in 2 to 3 million dollar area in the next quarter.

We don't want to try to look too far out but that would be reasonable.

If I were to add the charge office have be relatively low and absent the one credit we took the million dollars on this quarter we don't see a lot of charge offs coming so we feel good about that side of the business as the expense drives your reserving.

Laurie if I can comment there's one more distinguishing feature about Webster is we have reserved more quarter after quarter than your net chargeoffs have been.

We can't promise we can all does that we are mindful of the changing loan portfolio and the reason we continue to build reserves.

Right.

Okay.

Greated and then if you could--if we could go back a little bit in terms of core expenses.

If we just look at this quarter, 115 million we back out the 2.2 million in the conversion infrastructer cost obviously you already said next quarter and it's 500 and then one time costs are gone.

I want to make sure I have the ongoing right before we make adjustments to de novo.

If I take your core expenses or reported expenses of 115 this quarter less 2.2, then I'm down to 112.7, plus you said we had additional on going somewhere in the magnitude of $1 million per quarter, or did I miss here?

No that's correct.

I think I mentioned in response to Jared the run rate going forward would be million dollars higher on the infrastructure systems.

In terms of the conversion infrastructure system one cost 0 adjustment most likely for 2006 and beyond?

That is correct.

Is there anything else non-recurring as we look at the 114.9 million?

How low do you want to go?

What you mentioned.

The largest item was about $400 thousand that was in other income that represented a gain on one of the sales of your branches.

That was probably kind of the largest most significant.

As I said that is the largest.

You know there are a number of other things that I could go through, but we have these things each quarter, Laurie, that go through and they tend to net out.

Right, okay.

Just lastly can you give us an update again in terms of where you are on the de novo branching?

I I think we thought it would be 10 in '06 and 10 in '07 is that the plan?

Yes I think by this year we would have opened 8 or so.

I think the plan for '06 was originally around nine and basically ramping such that we up the replenishment rate of franchise is 6% a year.

I made a comment in my remarks and specifically it means that in the fourth quarter of '05 we would expect to open more offices.

Sometimes it could be a little lumpy we expected to only more in the third quarter.

That will get us to 8 in '05.

Then at a rate of 6% of the exsisting base each year I made a comment that the program was so successful is so successful that there's a possibility we will increase that rate from 6% to some higher level.

Okay and you would continue to be focused on Fairfield county.

We'd focus on Fairfield county, Hartford Springfield area and Providence and route 95 from eastern Connecticut up into Rhode Island and focus on other opportunities in the Mass Rhode Island franchise.

One last question for Jim.

You mentioned freed up capital I'm calculating just over $ 1 million shares.

Sure.

your current authorization is about 2.8 million?

That's about right.

I want to say that's what we're saying in terms of freed up capital.

You can take that a step further and say win the tangible capital guidelines that we set there's room for the in tangible capital builds to increase the size of the buyback if we elect to do that.

That's why I careful said the buy back would be used for the intent of eliminating entirely or nearly the negative EPS impact of giving up.

Right, right.

Thanks.

Okay, Laurie, thank you.

Your next question comes from Kevin Timmons with C.L.

King and Associates.

Hi.

Most of the questions were answered bottom line.

The guidance that I think you guys gave on the margin for Q$, I know it'd tough to fin it down It seems to be 7 to 12 basis points down side versus Q3 where you think it places out.

We gave a range of 315 and 320.

As you know we came in 326 for the third quarter.

That's about right.

That's about right, yep.

Then you're going to add about $1 million of expense in the amortization or depreciation of the equipment from you had ongoing.

That's correct.

I normalize gains on loon sails sales is that more of $2 million number instead of almost the $4 million?

That's a difficult number you know particularly it's driven a lot by the yelled curve going forward.

I think you could take your best guess on that.

I wouldn't want to give you one.

If I factor these things in together I'm working for my number for Q4 appearing to be down about a nickel or so from Q3.

Am I missing something there?

Is that where we are likely to be?

I don't want specific guidance.

I don't want to Geoff you specific guidance but I don't know if you factored in the growth on the earnings's asset side.

I have growth there the giveup of the net interest income on the margin side is partially offset

Could be.

Directionally are we looking down for the Q4 or are you holding it steady?

I don't know if we want to comment on that, Kevin.

We'll give you your outlook but I don't I think I want to get to any bottom line driving projections.

I appreciate the comments you gave on that.

Thank you Kevin.

Your next question comes from Matthew Kelley with Moors and Cabot Capital Markets.

Hi, guys.

Getting back to the quarterly provision when I look at the last six quarters you provided a excess provision beyond chargeoffs of 1.3 million to $3 million over the last 6 quarters and now the quarter in which NPA, tick up and access provision went to 200,000 bucks.

I wonder why you choosen to reduce your excess provision in terms of outlook on the credit quality.

I think there's other components you look at there.

One is that the professions were the--provisionings were the same as quarter and looking at the loan portfolio over time and making sure we were properly reserved and fell that was right number.

As we pointed out still it exceeded the amount of net chargeoff.

I do commend you for holding the line higher in terms much sequentially runoff ratios.

I'll ask it again it seems like we're at a reflection point where were going to have to see provisions creep up higher rate than we've seen historically the last couple quarters.

If it turns out we are at that inflexion point in there for it is appreciate to increase reserve we will.

Thank you.

I think William Bromage pointed out and I think it's important comment that he made we're not looking at in your case at this point as trend that's one of the reasons that we provided as we did.

If it did become a trend, you could expect us to increase the provision.

Right, thanks.

Our next question comes from Tom Donnie with Sandler O'neil

Turning to the expense side I know we went over the IT costs.

On the HSA business you get to the fourth quarter and that's obviously the season where you're looking to bring in a ton of the HSA deposits.

Are we going to see ramp up of expense Ms. Regard to HSA in the fourth quarter?

I don't think so, Tom.

Part of what we've been doing here in Q2 and Q3 has been building up the infrastructure of that operation.

So I think that you know we're doing this in anticipation of the business come in.

I think we're well staffed and equipped to handle the volume that will be coming in in the quarter.

We have added staff for business development.

So we now have a national business development effort going on for HSA.

We're making investments just beyond the next quarter.

You know we're looking forward go you know the next year on that.

On the de novo side as well you mentioned you opened four branches in the fourth quarter so we'd see a particular up there in the related expenses?

I think you will we'll open them in the fourth quarter so obviously more of that will come threw probably in '06.

I think you remember in '04 it was four branches too later in the year and you saw the impact coming in '05.

Your turning to the deposit side you give commentary to the fact that you see increased customer preference for the CDs is that across the whole franchise?

And where are you positioned with your competitors in CDs pricing and de novo markets and Fairfield county as well.

I guess we are seeing the trend across the franchise.

We're seeing the preferences consistent to Massachusetts and Rhode Island and Connecticut here.

So from tra vainsh from that vain, yes, it is something that happening across the company.

In secondlyyour question on rates, I think we're competitive.

I wouldn't say we are particularly at the high end of your pricing.

We will probably be at the lower end of the core tile and higher end of the second core tile.

Great that's all I have.

I want to add something as rates have risen the amount of premium we've paid for de novo phots have declined.

As a result of that we indicated last quarter we changed projection from 550 million at the end of the '05 which we originally thought would be as high as 600 million but thought it would be the same because we were pricing more conservatively.

The other thing I want to say as rates have --risten only recently have we moved up on the CD side.

I thought the last quarter you brought down the go from de novo from 650 to 600?

No it was 600 to 550.

Your at 50 now.

Yeah--you're 50 now.

Thanks guys.

Next call Collyn Gilbert with Ryan Beck

A follow-up to the de novo points you made and success you're seeing in that venture.

Are you defining that success primarily because of deposit balances or how are you sort of characterizing that?

I think that it's really across the spectrum of the activity that we've had some success.

When I refer to it as a core competency, we're talking about the ability to identify good markets that have good demographics that we find to be desirable where we can find continuity winhin a market it's no question of opening a branch or two where you have the meaningful presence in the market and finding areas of relatively high deniesty and have it payoff relative to the projections that you made.

Your statistical significance shows as we measure your results against projections that remember very, very high in terms of how we will be able to predict how we will do in a particular market.

We are measuring when he talk about break evening in 15 to 18 month we're looking deposits and all other services that we can provide that will generate revenue in the market.

Twal the--actually the de novo plan will be more valuable than we look at in total purposes.

The success we have had in selecting, manage, marketing and managing the offices to date that gives us confidence that we're onto something here that will add significant can't value for Webster over the longer term.

In terms of the markets you identify for de novo, would you i-- them in--priority them in my way?

I think we would prior Tice.

We initial said we are going there and we would like it continue that.

We would like to take the greater Springfield market which is adjacent to the Hartford market and add that to it, if you will, and get the benefit of the branding that we do within the Hartford, Springfield core door.

We'd like to do that as well.

In the mass Rhode Island franchise is a target area that we are looking to grow.

I would offer to you over time there would probably be more branches put in those locations in absolute numbers over on the eastern side of your franchise simply because the opportunity to expand in that market at the moment appears to be the greatest to us.

So we look at that as a real growth area for us and we will to capital lies on that with the great presence we have with FIRSTFED.

I would like--there's a desire to fill in the south eastern Connecticut if you're familiar with that aspect of the market.

There's not a lot in the eastern of the market in your franchise and providence it will be hard to accomplish.

We will be opportunistic and little in the discipline in market in the disciplined in terms of site selection.

We pursue all the markets and go with the best sizes we find.

We may find in any given quarter we may be in western mass as owe partly cloudy skies to south eastern mass and driven by site selection.

I want to point out one point that Jim made that's critical for us we talk a lot about the calls in investor presentation Ms. De novo branching in the importance of that in the consumer perspective and management in deposit growth Jim pointed out the other products that we sell.

It would be neglect gent not to say we have a commercial real estate offerings in Fairfield and west Chester county and in Massachusetts and Rhode Island.

We look at it as de novo banking, if you will, where we look to open market for all business activity and we've hired outstanding people in the markets and your exceptions are to capital lies on that and drive incremental revenue.

That's not typically what we talk about because it's hard to measure it's not directly tied to a branchment your performance in those markets has been strong.

Okay great thanks very much.

Thank you.

Your next question is from Laurie Hunsicker.

One quick follow up can you talk about link quarter and compensation benefits going from 58 million to 621 million.

Sure one of the small things in there Laurie, its up somewhere around $2.5 million . 400,000 of that is acquisition of de novo.

The balance of that again depending on how gradually you want to get there's 1 extra payday that costs us about $700,000.

Over time temp help could be related to the infrastructure but couldn't specifically identify it.

Was $400,000.

Your capitallized salaries and technology groups and projects they work on a lot of them were focused more on the conversion these last couple of months than you know internal development so we capital lies less of their salaries onto development projects.

You know recruiting, you know at all levels throughout the company it was up some $300,000.

You know I can go lower than that if you want but that gives a good sense of you know how granular these changes are.

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