Webster Financial Corp (WBS) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Webster Financial Corporation's fourth quarter and year end conference call. [OPERATOR INSTRUCTIONS].

Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

With respect to Webster's financial condition, results of operations and business and financial performance.

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

These forward-looking statements are subject to risks, uncertainties, and assumptions as described in Webster's financials public filings with the Securities & Exchange Commission which could cause future results to differ materially from historical performance or future expectations.

I would now like the 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 investor call and webcast.

Joining me are Bill Bromage, our President;

Jerry Plush, our Chief Financial Officer; and [Jim Sitro], who many of you know from past experience when he previously worked in Investor Relations.

Jim is filling in for Terry Mangan, who is out on medical leave.

We know you're listening in on the call, Terry, and want to wish you a speedy recovery.

I'll provide the highlights and the business context for the fourth quarter, and Jerry will provide details on the financial performance.

Our formal remarks should take about 25 minutes, and we'll then be pleased to respond to your questions.

In our earnings release this morning we reported $0.67 in diluted earnings per share in the fourth quarter.

This includes previously announced charges related to the balance sheet repositioning actions we have taken as well as acquisition expenses associated with NewMil Bancorp and several other items.

Excluding these adjustments noted in the earnings summary, EPS would have been $0.77 per share.

Our press release also outlines the accomplishment of several significant items this quarter.

The balance sheet repositioning actions, the positive effects of which are already being seen in our net interest margin this quarter.

Continuing strong organic growth in commercial and consumer loans, the opening of two de novo branches, one in Waterford, Connecticut, and one in Westerly, Rhode Island, for a total of 6 de novo branches in 2006.

The successful completion of the NewMil acquisition in October which strengthens our Connecticut retail franchise and substantial improvement in our tangible capital ratio which I am please to do report is 6.46% at year end.

I will now review each of these items in more detail starting with the net interest margin.

For several quarters, and for all of 2006, the interest rate environment negatively affected our results and has masked the considerable progress and growing contribution from our core franchise activities.

The impact on our net interest margin was sharply higher short-term borrowing costs as compared to yields on our securities portfolio and to a lesser extent our residential loan portfolio, coupled with the heightened consumer preference for higher yielding deposit products significantly impacted revenue and earnings.

I am pleased to report today that as a result of our repositioning actions and our efforts to increase our commercial and consumer loan outstandings, our margin improved dramatically in the fourth quarter to 3.23%, up from the 3.01 we reported for the third quarter and slightly higher than the 3.22 we reported for the fourth quarter of '05.

Speaking of commercial and consumer lending, we believe Webster poses strong underlying business momentum which is evident when looking at the growth we've experienced in those loan categories.

Aside from NewMil, commercial loans including commercial real estate and consumer loans grew at a combined rate of 11% from a year ago as we continue to place the highest emphasis on building these portfolios.

Commercial loans including commercial real estate loans now total more than $5 billion and grew by $440 million, or 9% from a year ago.

Commercial growth was led by C&I loans, which were up 17% from a year ago.

Webster is now the 31st largest C&I lender among publicly traded banks, which underscores our successful transformation to a commercial bank profile.

Our C&I portfolio is by design about twice the size of our CRE portfolio.

We emphasized direct lending over buying participations in transactions originated by others.

The portfolio yielded 7.46% in the quarter compared to 6.52% a year ago.

The C&I portfolio is balanced, diversified and granular.

These characteristics underpin our favorable charge off experience and overall asset quality.

Our consumer real estate portfolio totals $1.9 billion, consists of $1.1 billion of institutional quality real estate with longstanding relationships.

While the other $800 million represents owner occupied and non-owner occupied loans from middle market and small business lending.

NewMil added 147 million of commercial real estate loans in the fourth quarter.

The total CRE portfolio yielded 7.21% in the quarter compared to 6.62 a year ago.

As with the C&I portfolio, credit performance has been strong with virtually no CRE charge-offs in the past decade.

The consumer loan portfolio now totals over $3.2 billion, and excluding NewMil grew 14% from a year ago.

Consisting primarily of home equity loans and lines, the portfolio yielded 6.93% in the quarter compared to 6.02 a year ago.

The annualized net charge off ratio was 6 basis points in the quarter and 4 basis points for the year.

Excluding the 300 million of RESI loans received from NewMil, resi loans declined 15% from a year ago, in part due to the $370 million in securitizations that took place in the fourth quarter, as well as our decision, starting in July to sell all rather than most fixed rate mortgage originations into the secondary market.

When we complete the securitization of the remaining $630 million in mortgage loans in Q1 '07, resi loans will comprise only 30% of the loan portfolio, down from 37% at September 30, '06.

We expect that further planned attrition in the resi portfolio will be more than offset by commercial and consumer loan growth.

Turning to deposits, total deposits amount to $12.5 billion, and aside from NewMil, which added $600 million in deposits, grew by 2% from a year ago.

Consumer preference across the industry is for higher yielding deposit products, which has had a compressing effect on net interest margins, and our experience is no exception, As CDs are up $400 million year-over-year and money market accounts are up about $50 million offsetting the nearly $220 million shift from savings and transaction accounts.

Just the same, deposits continue to grow faster than the market.

Webster gained another 33 basis points of statewide deposit market share in Connecticut in the twelve-month period ended June 30, 06, according to the FDIC's annual summary of deposits.

We had over 13% of deposit market share and solidified our number two ranking, adding NewMil's 80 basis points statewide share, Webster share has increased to 14.1%.

This puts us only about 5 percentage points away from the number one position compared to a gap of nearly 11 percentage points a couple of years earlier.

Market share gains are a clear sign of progress and momentum.

As I stated earlier, we opened two new branches this quarter, one in Waterford, Connecticut and another in Westerly, Rhode Island and now have a total of 25 branches under our de novo expansion program.

Our de novo program had total deposits of $734 million at year end compared to $572 million a year ago, a 28% increase year-over-year.

The de novo program is an essential part of our strategy to increase our retail presence and helps create opportunities for us to deliver our bank-wide products and services to consumers and businesses in new market areas.

Total expenses of the de novo program have increased due to the strong consumer preference for higher cost deposit products.

The net expenses related to the program were $0.02 per share in the fourth quarter of '06, up from a $0.01 a year earlier.

We continue to see de novo branches as integral to our plans for longer term organic growth.

Turning to acquisitions, we completed our acquisition of NewMil Bancorp early in the fourth quarter.

This acquisition bolsters western Connecticut franchise and improves our position in Fairfield County by adding, after consolidation, 14 additional branches.

We've said often our build and buy strategy is the cornerstone for growth in our organization.

Here is a case where half the branches which were consolidated were combined into Webster de novo branches.

Turning to HSA Bank, we now have $287 million of total deposits in this division, an increase of 37% from a year ago.

We also have over $30 million invested through the mutual fund program.

We have added close to 2,000 net new accounts per month and expect this growth to increase in 2007.

Thus far, through the first 17 days of January which is a heavy enrollment period normally, we've added 12,000 new accounts.

HSA Bank will continue to invest to compete for its share of anticipated industry wide growth in HSA deposits as market acceptance for health savings accounts continues to build among employers.

HSA Bank is a diversified source of core deposits used to fund continuing strong loan growth at Webster, especially as we rely less and less on wholesale borrowings for funding.

Finally, our tangible capital ratio at year end was 6.46%, a substantial increase over the 5.54 a year ago and 5.68 at September 30, '06.

Accomplishing this goal was a significant step forward achieved in a relatively short time frame and it gives us options for capital deployment which we haven't enjoyed in recent years.

Going forward, our focus will shift more to regulatory capital ratios, which will be discussed in more detail in the financial overview.

I will now turn the program over to Jerry so he can provide full details on our financial performance in the fourth quarter, and then I will say a few words about the future.

Jerry?

Thank you, Jim.

Good afternoon, everyone.

In investor presentations during the fourth quarter, Jim and I have reiterated our goals of building our tangible capital level to 6 to 6.5% to significantly reduce our reliance on securities and wholesale borrowings, to improve our loan to deposit ratio and improve the net interest margin.

We're happy to report that considerable progress was made in improving each of these in the fourth quarter.

Our tangible capital ratio improved from 5.68% at September 30, of '06 to 6.46% at December 31 of '06.

Our securities to total assets declined from 18.3% at September 30th to 11.5% at December 31st.

Borrowings to total assets declined from 21.9% at September 30th to 15.1% at December 31st.

Our loan to deposit ratio improved from 106% at the end of September to 104% as of December 31st.

We previously announced in the fourth quarter as part of our repositioning plans to securitize $1 billion in residential loans and to hold these securities for collateral needs and use the proceeds from other maturing securities to pay down approximately $650 million in short-term borrowings.

As of December 31 of '06, $370 million of these loans have been securitized with another $633 million in loans scheduled to be securitized by January 31 of '07.

Upon completion of the balance of the $1 billion mortgage securitization our loan to deposit ratio will improve to approximately 99%.

Finally, our net interest margin improved to 3.23% in the fourth quarter over the 3.01 reported for the third quarter of '06, as the positive effect of the balance sheet repositioning actions began to show in our results.

Today we reported $0.67 of diluted earnings per share in the fourth quarter on net income of $37.8 million, which is inclusive of net charges of $8.4 million related to previously announced balance sheet repositioning charges and other items including acquisition costs and gain on sale of properties.

Excluding these items, our net income was $43.3 million or $0.77 per diluted share.

The charges of $8.4 million in the quarter included a previously announced $5.7 million loss on the sale of $250 million of residential mortgage loans, $2 million of previously announced NewMil acquisition related expenses, and 2.4 million related to the previously announced sale of the 1.9 billion of AFS mortgage backed security portfolio.

Offsetting these charges was a $300,000 net gain related to the pension plan curtailment and $1.4 million related to gains on the sale of properties.

So as previously noted, the most significant driver of performance for the fourth quarter was a 22 basis point improvement in the net interest margin again from 3.01% for the third quarter to 3.23 which we reported for the fourth quarter, and again the positive effects of our repositioning actions will continue to be seen in 2007 as well.

The yield on total loans increased to 6.69% or 4 basis points higher when compared with the third quarter.

We had average balance growth of 6% in the higher yielding commercial and consumer loan categories.

The yield on securities increased to 5.72%, compared with 5.06% for the third quarter, again reflecting the positive effects of the security repositioning actions we have taken.

On the funding side, our cost of deposits increased to 2.86%, or 10 basis points over the cost of deposits for the third quarter.

The cost of timed deposits increased to 4.44% compared to 4.23% in the third quarter, while the cost of Federal Home Loan Bank advances and other short-term borrowings was 4.71% in the fourth quarter, down 7 basis points from the third quarter.

Turning now to total non-interest income, we reported $51.4 million in the fourth quarter compared to $6.8 million in the third quarter and $58.2 million a year ago.

Non-interest income in the fourth quarter was impacted by the previously announced charges from losses on sales of securities of $2.4 million, the loss in the sale of residential loans to $5.7 million, and the gain on sale of properties of $1.4 million.

Our third quarter non-interest income included a $48.9 million charge for loss in the write downs of our available for sale mortgage backed securities portfolio to fair value.

Deposit fees totaled $25.5 million for the fourth quarter, compared to a total of $25.3 million in the third quarter and $22.9 million a year ago.

Insurance revenue was 8.3 million in the fourth quarter, compared to $9.8 million in the third and $10.7 a year ago.

The decrease in insurance revenue reflects a reduction in contingent commission income of 1.3 million in the fourth quarter of 2006.

Our loan and loan servicing fees were $9.6 million compared to $7.8 million for the third quarter and $9.2 million a year ago.

Included in our fourth quarter results were $2.4 million of commercial real estate prepayment penalty fees.

Our wealth management fees grew to $7.2 million, compared to $6.7 million for the third quarter and $6.2 million a year ago.

Our other non-interest income was $3.7 million compared to $1.7 million in the third quarter and $3.5 million a year ago.

Our fourth quarter of 2006 results include a $1.4 million gain from the sale of properties.

Gains from our mortgage banking activities totaled $2.9 million, a significant increase from the $185,000 loss we recorded in the third quarter, which was related to a lower cost of market adjustment.

Turning now to non-interest expense, they totaled $122.6 million for the fourth quarter, compared to $115.9 million in the third quarter and $119.4 million a year ago.

Our fourth quarter results increased primarily from the acquisition of NewMil Bancorp on October 6 of 2006.

Our fourth quarter expenses include one-time NewMil acquisition costs of $2 million, and they also include the additional costs of approximately $3.4 million for the fourth quarter of NewMil's ongoing operations.

Our fourth quarter results also include the write off of $200,000 in leasehold improvements from the early termination of two lease properties and $440,000 in other lease termination expenses.

Our professional services expense increased to $500,000 from regulatory consulting expenses.

That engagement is now completed and from an increased legal expense.

By taking these items into account, expenses were comparable to third quarter results.

We had $2.7 million in losses from the sale of securities in the fourth quarter, including $2.4 million from recognized losses on the completion of our previously announced available for sale securities repositioning.

We also sold an equity investment in other institution during the quarter and recorded a loss of $500,000.

Our available for sale portfolio now contains no securities at a fair value less than book.

Turning now to credit performance, our charge-offs exceeded the provision by $6 million this period.

We had identified and specifically reserved before the fourth quarter for the two commercial loans that drove the increase in charge offs for the fourth quarter.

As we previously stated, we believe that our adequacy-based view to our reserves is appropriate and again we've looked at our reserves this is way in the fourth quarter and will continue to do so going forward.

Our allowance to total loans was 1.2%, the same as we reported at September 30 of 2006.

However, it is also important to note that with our asset mix changing, we will continue to evaluate our position on a quarterly basis to reflect the risks associated with this asset mix change.

We also announced today that subject to regulatory notices, we intend to call our Capital Trust 1and Capital Trust 2 securities which have a call price of 104.68%, and 105% respectively.

We plan to take a pretax charge to income in 2007 of approximately $6.5 million related to the redemption premium and write off of unamortized issuance cost.

We are considering the replacement of those legacy trust preferred securities with enhanced trust preferred securities which will have greater equity content for rating agency purposes.

Based on the current interest rate environment, we may elect to replace the legacy trust preferred securities at a reduced cost or elect to enhance our capital levels by issuing a higher dollar amount of enhanced trust preferred securities with no impact to earnings per share in future periods.

Now looking ahead to 2007, we expect that our net interest margin will continue to improve and approach 3.35% to 3.4% in the second half of the year inclusive of expectations that the consumer preference for higher yielding deposit products such as certificates of deposits continue.

We previously announced at the end of September that we are undergoing a comprehensive strategic review of the bank and of all lines of business.

We stated then we expected this process to take from six to nine months to complete.

We completed much of the analysis and are in the process of making recommendations for select action steps.

Our intent is to complete this process no later than the end of the first half of '07 so that as decisions are made, we will update you accordingly.

Regarding expenses, we will also be turning even greater focus now on our expense structure, with our balance sheet repositioning completed and our plans for capital now underway.

We believe there are opportunities to improve and certainly to become more efficient.

More will be forthcoming on this initiative as well, as we make final decisions.

In closing, regarding our dividend and share buybacks, both are being evaluated closely in the first quarter of 2007, so again we will update you accordingly as decisions are made.

I will now turn the program back to Jim for his closing remarks.

Thanks, Jerry. 2006 was indeed a transformational year for Webster as we took a couple of giant steps towards our vision of being New England's bank.

As a result of our bold repositioning moves, we've built a much stronger balance sheet that is better protected against future interest rate shocks and well positioned to generate more stable and reliable earnings.

We've achieved our goal for the tangible capital ratio and have moved from dead last in our mid-cap commercial peer group to the middle of the pack with further improvement in the offing.

Our strong capital position gives us broad strategic flexibility.

We've demonstrated again our ability to grow commercial and consumer loans at double-digit rates and generate deposit growth that eclipses the market.

Exclusive of the one time charges, our expenses have stayed in check and asset quality remains a fundamental strength.

There is no doubt that the quality of earnings has improved significantly in recent quarters.

Now having completed the balance sheet repositioning and with plans under way to attain desired risk adjusted capital levels, we look ahead, confident we can realize our potential as New England's bank, and generate attractive shareholder return by meeting the basic financial needs of individuals, families and businesses in and around our primary markets.

With these goals in mind, we have undertaken a strategic review, which we expect to complete by mid-year.

We're aiming to improve our overall return on capital and intangibles are considered capital for the purposes of this exercise, with special emphasis on optimizing returns on fee-based businesses with high efficiency ratios, like insurance, for example, and on businesses which depend heavily on out of market activities for revenue and profit, like national wholesale mortgage lending, for example.

The concept is pretty simple, really.

We think of it as the formalization of good practices which brings better focus and discipline to the process.

In our view, a business with indirect components should generate a higher return on capital than a direct business.

A business with out of market characteristics should generate a higher return on capital than an in-market business.

Fee-based businesses should achieve minimum operating margins.

We'd prefer not to go into further detail at this time, except to say the results of the review should be improved return on assets and capital, and an improving efficiency ratio, let me at least cite an example.

We split our wealth management business into two pieces, each now reporting separately to the Chief Operating Officer.

In doing so we aligned Webster Investment Services, which is our mutual fund and annuities distribution business more closely with the retail bank, outsourced its back office to a leading third party provider and eliminated an executive level position.

We expect the result will be sharpened focus on discrete responsibilities, improved efficiency and better alignment within the organization.

We're approaching other opportunities in the same way.

In conclusion, we remain steadfast in our commitment to continue to improve our performance relative to key peer group performance metrics.

We're highly motivated to improve efficiency and returns, that this will enable us to invest in our bright future, a future which envisions a continuation of our build and buy strategy to further grow our retail and business branching presence in New England.

We'll also continue the buildout of our technology capabilities in '07, with such projects as internet development, document imaging, consumer automated lending solutions, company-wide purchasing solutions, financial planning and HR systems upgrades, all requiring investment and all intended to improve efficiency and customer satisfaction.

Regulatory compliance in the buildout of our enterprise risk management capabilities, including systems, procedures and staffing have and will continue to receive significant management attention and focus and investment.

I want to say clearly that we understand that expense control is vitally important in today's difficult operating environment, and therefore every dollar of expense will be scrutinized.

We look forward to reporting back to you on our progress in coming quarters.

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].

Our first question comes from the line of Mark Fitzgibbon with Sandler O'Neill & Partners.

Please proceed with your question.

Thank you for taking my call.

First, I was wondering if you could share with us what the loan pipeline looks like today versus maybe where it was at the end of last quarter?

Yes, this is Bill Bromage, Mark.

While I can't give you a specific numbers, I don't have those with me, but I can tell you that we have very strong loan pipelines in our Mass/ Rhode Island franchise.

I've spoken to the head of our small business area, and we have an excellent pipeline there.

We are actually surprised in our middle market.

We split our middle market up geographically in the north region of our middle market.

Normally what happens at this time of year is December is a big close period, and you go into January kind of depleted, and in fact that's not the case in that particular, so our evidence would indicate, without being able to quote you specific numbers, a strong pipeline which is obviously a great start to a new year given that our normal experience is that it isn't quite as strong in January as it is in December, and I think that there is no evidence that I have that our pipeline this year is any different from our pipeline last year in terms of its strength and relation to our growth objectives for the upcoming year.

Jerry, the tax rate at 35% looked like it was a little higher than what we've seen in recent quarters.

Is that a good run rate going forward, or was it just some trueing up in the fourth quarter?

We used the statutory rate for the adjustments that you're seeing for an all-in tax rate we're running at about 31.7.

That would be the number I recommend you use.

Okay.

And then in terms of expenses, I know you're probably going to announce later some expense initiatives, but could you give us a sense for whether -- I guess in the fourth quarter if you exclude NewMil, looked like operating costs up maybe a little less than 1%.

Is it likely we'll see flattish expenses even with de novo branching barring any expense initiatives?

Mark, it is Jerry.

My sense is you will continue to see, we invest over the course of the year, so in any given year you're going to see some increase year-over-year of just from a run rate, of as we continued to invest in buildout, particularly in people, and all the different areas of the organization, so a perfect example would be the branches.

We just opened two branches as you know, we just announced for the fourth quarter.

You're now going to get an annualized effect from that.

We're taking all of that into consideration plus looking at the investment we know we need to make to become more efficient, and we're putting that up against the overall expense base, and what we're looking, are there opportunities for us to do some things centrally that have been distributed, are there some things I think as Jim previously mentioned that we can potentially outsource, I think an excellent example on Webster Investment Services.

The types of initiatives we're going to be looking at, so I think you'll see in the first quarter you'll see expenses continue to have a little bit of a climb, but you will see the effects of us as we structure things or change things throughout the course of the first half of the year and really begin to see some benefits sort of leveling off in the second half of the year.

Mark, I just want to add that we're intend to go communicate is that we will keep a strong grip on expenses.

At the same time we want you to know we're going to invest in our future which is why I took the step of actually citing what some of those investments would be.

I don't intend to create the impression that we're going to announce a bank wide initiative in the near future but rather keep a strong grip on expenses while we invest in our future is what you can expect.

Got you.

One last question, Jim.

What are your broad thoughts on the acquisition market?

Are seller pricing expectations becoming more rational, and is the deal flow picking up because of this challenging environment?

I kind of chuckle sometimes.

They have to come down a lot for me to think they were in the rational range, but, yes, I do think that there is a a more sobering look at what the valuations are, and I think that the environment with the relentless interest rate pressure and the increasing costs of regulation may be inducing possible partners to think in terms of whether they might want to take a partner.

I have no particular projection as to what that means, but we're quite confident that we may have the opportunity to make combinations with like minded partners that share that vision that we talk about of being New England's bank.

We'll just have to see if that comes to fruition.

Thank you.

Our next question comes from the line of Jared Shaw with KBW.

Please proceed with your question.

Good afternoon.

Hi, Jared.

Good quarter.

Just a couple questions.

The first in terms of the NewMil acquisition, can you let us know and you may have done this earlier and I apologize if you did, how many of those branches have been able to be consolidated so far and where are we on the process of seeing the cost saves implemented there?

Sure.

We consolidated six of the 20 offices.

Of those, three were consolidated into Webster de novo branches.

I would say that most of the -- the integration is complete, and most of the benefits now are in the run rate.

Okay.

And would you anticipate any more than -- any more branches under the NewMil structure being consolidated?

Not over the near term.

Okay.

I just want to say, Jared, if I could that one of the values of NewMil was they extended our franchise into Westchester -- into western Connecticut and down into Fairfield County, and we looked at it primarily as an extension and strengthening of the franchise that did have some consolidation attractiveness as well.

Okay.

Great.

And then in terms of the Jerry had mentioned the $500,000 of regulatory consulting expenses and that being finalized this quarter.

Does that mean that I think that everything is going well with the OCC and progressing well there?

I will just say you always have to be careful in characterizing that relationship, but so I would let them speak for themselves.

Let me say we've made very significant progress toward meeting the commitments that we made for them, and we have a very good working relationship with them, and so we're on track.

Would there be other than potentially valuation issues, would there be any reason why you couldn't do acquisitions looking out into 2007?

I don't see a reason why we would not be able to.

Have you noticed the utilization rates on the home equity lines increasing in the last few quarters?

The unfunded commitments?

Pretty much flat.

Great.

Thank you very much.

Thank you.

Our next question comes from the line of Andrea Jao with Lehman Brothers.

Please proceed with your question.

Good afternoon, gentlemen.

Good afternoon.

A question on the margin progression.

If you expect the margin to hit 235 to 340 in the back half of '07, how much of a lift do you see in the first half of the year, the first quarter, and do you think the margins just kind of stabilizes in the back half of the year?

Andrea, it is Jerry.

Yes.

You will see steady progress month to month in the first quarter, so we're probably looking as I gave that range, the 335 to 340 is really the expectation for by mid-year, but I actually believe you'll see some improvement that will get us into the 335 range in the first half of the year and you will see that 340 in the second half of the year.

Got you.

So --

Again, a big driver of that is the asset mix.

If you think year-over-year, there is a lot of benefit from the repositioning we've taken lower yielding residential loans out of the mix if you were to say, and the replacement is the higher yielding consumer and commercial that are replacing, so as we look forward from a growth trajectory, you will see improved asset yields that are coming on as a real driver of -- and then of course, given where we think interest rates are and holding that environment, our view at this stage, that if there is going to be no change, so we would expect we would build in some increased expenses as it relates to our cost to deposits, and again we will now be fully funded certainly at least in the first quarter, as we look at it today with a completion of the securitization as well, so what will happen with the margin will clearly be in the hands of what assets we add and what our cost of deposits are.

Right.

So just to clarify, just to emphasize, you're assuming that there are no Fed cuts during the course of 2007?

That is correct.

Okay.

The balance sheet will probably compress in the first quarter and maybe in the second quarter before stabilizing in the third and fourth?

I just want to say the only comment I will make in terms of the balance sheet is our intent is to complete the securitization at the end of this month, and we continue to see some opportunity to pay down as securities mature to pay down borrowings.

Got you.

I think we're at the same place we had announced in some of our investor presentations when we were going through the completion of what we said when we projected at the completion of all of those actions we'll be a little bit smaller than we came in in terms of asset size, several hundred million smaller, and that's still what we see as opportunity to take maturing securities and pay down borrowings.

Okay.

If deposit growth falls below loan growth, you'll use some of those maturities to fund loans as well?

Correct.

That is very helpful.

Thank you.

Thanks for the questions.

Our next question comes from the line of Laurie Hunsicker with Friedman Billings and Ramsey.

Please proceed with your question.

Good afternoon, Jim and Jerry, just wondered if we could talk a little bit more about some of the asset quality detail, wondered if you could provide some color on the two commercial loans and then of the $9 million in charge-offs, was it $6 million that related to those loans or how much and are those loans still around and --?

It is Bill Bromage.

Hey, Bill.

Hi.

On the net charge-offs?

The two loans, one loan was slightly less than $9 million.

It was a middle market portfolio company that was in the consumer goods space.

It was an MPA.

Previously quarter we had put up a specific reserve against that, or allocated a portion of our reserve to it, and we took that charge this quarter, that was just shy of $5.5 million.

We have remaining on that about a $2 million balance which is secured by a piece of real estate that we believe covers that remaining balance, so we think that is still non-performers, but believe that will be recovered in full.

The other loan was a contractor.

We had about 3.5 million outstanding, too, and we took a $1.8 million charge on that.

Those two were 7.2 of 8.4 on the commercial side.

If you were to kind of look on a go-forward run rate and obviously things will jump around and we might see weakening credit, I mean, where would you be guiding us to on the loan loss provision side?

Let me if I may just speak to the credit quality, and I think from a credit quality perspective our own expectations and we've said this before, is we become more commercial bank like, we expect that these kinds of events are going to happen occasionally.

That's just the nature if you look at the charge-offs for the full year for the Corporation and around 13 basis points, that's a reasonably good number for a commercial bank, so we feel comfortable with that.

There is no trends in our portfolio, particularly in the commercial side, it's quite strong, and no trends we see there that would tell us that absent a credit event, and Laurie, we've all been waiting for some time for that credit event to come.

We don't see the early warning signs in our portfolio.

At this point, that's not to say been in the business too long it is not going to come, but we don't see those signs in our portfolio today, so we see the normal inflows and outflows, potential larger number in a quarter than we would like is a bigger loan goes through this process, but we don't see any indication of a significant shift as we go forward.

As for provisioning I think I would suggest to you our loan loss I would tend to think more of loan loss levels in relation to the portfolio and non-performers in the provisioning, and I think that our expectation is that our reserve is adequate for a portfolio and covers the risks involved in that, and we would expect to continue to -- with the performance we have to perform -- keep our reserve at about the level it is at now.

Okay.

Great.

Laurie, it is Jim.

I wanted to reinforce that by referring to the comments we made about the adequacy based approach to reserves and also just a reminder, too, that the coverage ratio was 1.20 at the end of the year, which was the same as it was at the end of September.

Great.

Okay.

Thanks.

With respect to Collier Capital Trust, when you talk about your margin, and I think you gave margin projections somewhere in the neighborhood of 335 to 340 for '07, how much are you factoring in as coming from the capital trust?

Nice question, Laurie.

It is Jerry.

We are, if you noted in the comments that I made in and around, and I also believe it is also disclosed in the press release, we have not made a decision -- let me start over.

We've not called -- made the call.

We have just announced our intent.

Right.

Second, we are evaluating the potential of actually replacing those securities with the enhanced trust preferreds which given the costs we could actually -- and also the percentage that we can have in terms of total capital of enhanced trust preferreds, that's why I have given the -- we may elect to either replace at a reduced cost, in like amount or actually put on a greater amount given the favorable interest rate costs of those types of securities today in this rate environment, so there is really some options there, so we have not taken a benefit into account per se given the potential of taking the latter option of potentially issuing even more.

Okay.

Great.

That 3.35 to 3.40 projection number has absolutely nothing to do with -- it's not in there yet, whatever it is you decide to do, correct?

Correct.

Great.

Jim, you mentioned this earlier, and I apologized I missed it.

The 25 in de novo branches, how much in deposits do you have now?

$740 million or so.

740 million.

Okay.

Up from about 28% or so, I think, from the previous year.

How many de novos do you plan to open in '07?

Somewhere in range of what we did in '06, around six branches or so.

Six branches.

It is a bit scaled back from what our plans are longer term.

Okay.

Just to follow on a question that Mark Fitzgibbon was asking about acquisitions, can you just talk about maybe a little bit more extensively what you're looking for in terms of target for acquisition candidate and you had briefly touched on sort of buybacks and dividends, maybe just expand down that whole branch of capital management?

Sure.

I think the best thing is that with our stronger capital position we have flexibility, so when we look at capital management, we can look at our dividend.

We can look at a buyback program.

We know that we can capitalize our strong loan growth and we have the opportunity to use that capital to make acquisitions, and I believe that we're likely to have opportunities in '07 and be very well prepared for them, given what our balance sheet looks like to make combinations with like-minded partners, and those would be institutions, primarily banks, that would be in and around our existing markets and would help us to achieve our vision of being New England's bank.

I guess specifically, can you just remind us how small you would go on the acquisition side, how big you would go on the acquisition side?

Ideally we would like to do acquisitions that can be meaningful because of course regardless of the size of the acquisition there are certain resources that are required to achieve it, but we're open to considering partners, the combination with whom will strengthen our franchise, will contribute positively to our growth and our earnings growth, and will advance us towards the vision of being New England's bank.

I think we have an extraordinary opportunity as today is the largest independent bank based in New England to increase our presence and our competitive thrust in the market, and I see acquisitions, again we talk about our buy and build strategy, as potentially being a meaningful part of that, always subject of course to our acquisition discipline.

Aside from straight bank acquisitions, if there are areas where we're able to improve or extend competencies that we have today, we would consider those as well.

Okay.

Just in terms of the bank acquisitions, meaningful is Ig anything you define as anything, NewMil is $900 million in assets so $1 billion up to $5 billion, $10 billion, something like that?

I don't want to put parameters around it because they canning limiting on either side, but let's say it could be less than a billion and it could be more than five.

It depends upon the opportunity, the partner, the connectivity that we have, the shared vision of being New England's bank.

One last small question, as we look at your income statement, the other-other line of $3.733 million of non-interest income, was there anything nonrecurring in that number?

Laurie, it is Jerry.

Yes.

The number that I referenced there was about $1.4 million in gain on sale of properties.

That's where that was.

Okay.

Properties.

One other thing that you mentioned, the $500,000 loss from the sale of equity investments, that just showed up under that 2.732 loss; is that correct?

That is correct.

Great.

Thank you very much.

Thanks for your questions.

Our next question comes from the line of Kevin Timmons with C.L. King.

Please proceed with your question.

Hi, guys, good quarter.

Nice to see it.

Thanks, Kevin.

Most of my questions were answered on the margin.

Just to clarify again the call the trust preferreds is not included in that margin guidance you gave?

Hey, Kevin, it is Jerry Plush, just to clarify, and my view is it is because we are weighing our options between issuing a like amount or whether we actually ramp up and build capital as a result of because of the interest rate environment being able to issue a greater amount.

Okay.

And what is the current weighted cost of those two issues?

You've got between I believe one is 9.32 and the other is at a 10.

Okay.

The other question on the margin that still remains I wanted to check on, the implication to what you said I think is that you confirm no effect cuts and so forth, but you're really not even including any improvement in the competitive pricing issue, you think you can get to the 335, 340 based on where you are and where your balance sheet is going regardless of -- you're not looking for any core improvement in the environment?

No, the primary drivers of the margin improvement again is the balance sheet mix.

When you look at -- and it is also our emphasis as an organization.

I believe as Jim referenced earlier, we're not putting any fixed rate residential loan production up on our balance sheet, and I believe that was our announcement as of July, so you're not going to see the build back in the residential portfolio, which inherently has lower yields than our commercial and consumer business, and we stated we've got great momentum in the commercial and consumer area.

We reported very good growth for 2006, and we believe we can continue that path in 2007.

That's your primary drivers in terms of its asset mix and it's also the continued growth that we see in the higher yielding categories.

Okay.

Good.

Those two non-performers, do you know roughly when they were put into NPA status?

I believe they were in the second quarter, Kevin.

Okay.

Thank you very much.

Our next question comes from the line of Collyn Gilbert with Ryan Beck.

Please proceed with your question.

Thanks.

Good afternoon, guys.

Hi, Collyn.

A very quick question.

On the fee income side how much was that was attributable to NewMil of roughly the -- well, if you want to give it to me in a pickup of fees from the third quarter or overall fees.

Hey, Collyn, it is Jerry, approximately $900,000 to $1 million of the fees are related to NewMil.

Okay.

Great.

That's all I had.

Thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS]

This is Jo Keeler.

I just wanted to correct the statement on when those two credits went non-performing.

The smaller of the two went non-performing in the second quarter.

The larger of the two went non-performing in July of the third quarter.

Our next question is from the line of [Tom Lamm] with Weybosset Research and Management.

Please proceed with your question.

Good afternoon, everybody.

Good afternoon.

Just a quick question.

Any thoughts on doing something about the dividend, perhaps raising it?

Yes.

As I mentioned in my remarks, we are taking a thorough look the our dividend payout ratio as well as share buyback programs in the first quarter of this year, and upon completion of those reviews we'll certainly be out and notify everyone accordingly.

Terrific.

Thank you very much.

Gentlemen, there are no further questions in queue.

Do you have any closing remarks?

I'd just like to thank you again for your time and interest in Webster, and we look forward to reporting to you on our continuing progress.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.