Webster Financial Corp (WBS) 2012 Q4 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's fourth-quarter 2012 earnings results conference call.

This conference is being recorded.

Also this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations and business and financial performance.

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

Actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission including our Form 8-K containing our earnings release for the fourth quarter of 2012.

It is now my pleasure to introduce your host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Thank you, Dan.

Good morning, everyone.

Welcome to Webster's fourth-quarter 2012 earnings call and webcast.

Our earnings release, tables and slides are in the Investor Relations section of our website at WBST.com.

I'll provide highlights of the quarter.

Jerry Plush will discuss business unit performance, Glenn MacInnes will review the quarter's financial results and then we will take your questions.

As you can see, Webster finished a strong 2012 on a decidedly positive note and we are excited to report measurable progress against our primary strategies.

Fourth-quarter net income of $0.52 a share increased 21% from last year and 8% linked quarter.

We again reported record core pretax, pre-provisioned net revenue.

That is PPNR.

For the full year, ratings grew 16% to $1.86 per share.

Record performance in the Commercial Bank and in Mortgage Banking coupled with lower expenses against the linked and prior year's quarters produced positive operating leverage of 4.6% for the linked quarter and 4% for the year.

ROE and ROA moved closer to our goals while return on tangible common equity reached 13.4% in Q4.

Total loan originations hit multiple records, rising overall by 44% linked quarter and 40% year-over-year.

Full year originations increased $1.5 billion to -- or 46% to $4.6 billion and we clearly have momentum as a lender of choice in our markets.

Our net interest margin held up better than we anticipated for the quarter, declining just one basis point to 3.27%, primarily due to stronger than estimated commercial loan growth and lower deposit costs and also benefiting from higher than normal prepayment activity.

Total deposits grew about 1% in the quarter and 6.4% for the year.

Transaction accounts grew 5% in the quarter and 18% for the year.

They now account for 41% of total deposits and contributed to a continuing decline in deposit costs.

The loan to deposit ratio stands at 83%, a positive metric, given likely future loan growth.

Asset quality continues to improve, though at a decelerating rate.

Commercial loan credit quality trends in particular remain quite positive.

Glenn will explain the regulatory guidance requiring reclassification from TDRs to non-accrual status of loans related to stay and pay Chapter 7 bankruptcies.

Our improving financial performance is traceable directly to our success in executing two primary strategies.

First, regarding investment in electronic infrastructure we completed the installation of touch screen image capture ATMs throughout the franchise in Q4, complete with customer preset preferences.

Deposit volume has surged at ATMs installed at least four months while related branch transactions volumes are down nearly 10%.

In Q4 we rolled out a new smartphone app for iPhone, Androids and Blackberrys and remote deposit capture for consumers is right behind.

Meanwhile, our Universal Banker program recently rolled out in 10% of our branches, enables our specialty developed bankers to assist customers in more of an advisory capacity, and will become the norm in the quarters ahead.

We have recently organized all of our delivery channels into a single distribution unit as we look to streamline and harmonize service delivery.

Over time, our offices will be smaller, better located, and electronically advanced, and the teller line will become more of a banking memory.

The second primary strategy is investing in relationship development activities where we can deliver valued advice and services to customers who, in turn, generate economic profits.

Those activities include mortgage lending, middle market and small business banking, cash management services, and private banking and investment advisory services, all of which are delivering improving returns.

Commercial Banking turned in its best performance ever in Q4 and has great potential to grow and prosper further.

Loans grew more than 6% linked quarter capping full-year growth of over 17%.

Originations and closings were at an all-time high by a significant amount for the quarter and the year, and business loans now exceed mortgage and other consumer loans for the first time.

Yields and spreads have held remarkably well, proof that we are taking share based on brand and service quality.

Our regional president model helps us compete successfully at the local level where we have gained a well-earned reputation for working with our customers in good times and bad.

Overall client satisfaction is high and rising.

Both new and existing customers are signing up for our increasingly sophisticated cash management and treasury services.

Swaps income was up strongly as we insulated our clients from eventually rising rates while tilting the loan portfolio to shorter durations, and Webster led structure transactions generated over $1 million in fees in Q4.

Each of our five commercial business units reported economic profits in Q4, the second quarter in a row.

2012 was also an outstanding year for Consumer Finance as mortgage banking benefited from the low-rate environment and an improving housing market.

Total originations of $2 billion for the year included $1.4 billion of first mortgage loans, up 64% from 2011.

Home equity loan originations totaled about $575 million for the year, up 11%, including a 28% year-over-year jump in the fourth quarter.

Because we view mortgages as a gateway to acquire meaningful customer relationships, we have doubled our loan originator force over the last five quarters to nearly 80 originators facing the market, focusing first on originating purchase mortgages which accounted for 36% of volume in Q4 versus 24% for the industry with special emphasis on jumbo loans.

Our value proposition promises local personalized service and includes a service guarantee.

Our pricing discipline can be seen in our relatively high gain on sale numbers for the quarter and the year.

As a result, mortgage banking revenue rose to 16% of non-interest income in Q4 as we sold 55% of production versus 50% for the year with most ARMs and jumbos going to portfolio.

89% of our new mortgage loans have an automatic payment from a new or existing Webster checking account.

And our originators have made over 2,500 referrals to their business partners in 2012.

This is relationship banking at its best.

2013 looks bright, given that our mortgage pipeline was [above] $500 million at year-end.

Among notable Q4 achievements was attainment of a 60% efficiency ratio.

We benefited from strong gains on sale income, commercial loan growth that boosted net interest income and disciplined expense management related to our P260 program.

While, as we have said before, seasonal factors will push our ratio above 60% in the first quarter of 2013, our goal remains a sustainable efficiency ratio below 60% for most of 2013 and beyond.

Pleased as we are to reach our P260 goal, more of the contribution came from revenue than we originally anticipated and less came from expense reductions.

We have more opportunities on the expense side, which we will actively pursue this year, and to help us we have recruited a dedicated team of Six Sigma experts focused on continuous improvement across the organization.

Significant initiatives include a bank wide electronic forms project designed to reduce document printing costs, storage space needs, and retrieval costs; continuing restocking of corporate facilities; and an in-depth review of all major vendor partner contracts.

Our capital levels remain well in excess of regulatory requirements and we estimate that we comply today with fully phased in Basel III requirements including conservation buffers.

With the goal to optimizing our tangible capital structure we issued $126 million of non-accumulative perpetual preferred shares in Q4 at a 6.4% coupon, the lowest coupon ever achieved for a BB rated issue, we are proud to say.

In early December, following the Board's authorization of a $100 million stock repurchase program, we purchased $50 million or about 2.5 million shares -- the part of Warburg Pincus's secondary offering of 10 million common shares.

Having now returned capital to their investors 3.5 years into the relationship, Warburg continues to hold a majority of its position in Webster and David Coulter remains a valued member of our Board.

Our solid capital position and earnings momentum will enable us to return capital to shareholders by gradually increasing the dividend payout ratio and repurchasing additional common shares.

I want to take a moment to salute every Webster banker for their outstanding contributions to our 2012 performance.

Webster bankers believe we can make a difference for those who rely on us.

That is our common bond which underlies our progress and success.

Our improving performance strengthens that bond as we pursue our goal to be a high-performing regional bank.

With that I will turn the call over to Jerry for comments on key aspects of performance and trends in our lines of business.

Thanks, Jim, and good morning, everyone.

Let's start with a review of how our principal lines of business are performing.

So if you turn to slide three, here you can see our Commercial Bank unit recorded strong loan and origination growth in the quarter and for the year.

Overall our growth was $300 million or 6.3% compared to September 30 and $748 million or 17% from a year ago.

As you can see in the top chart the real success story here in commercial banking is the greater than 20% in Middle Market and CRE loans over the past year and 8% over the last quarter.

We have also stabilized our equipment finance and asset-based lending businesses and both areas exceeded our expectations in Q4.

Take a look at the bottom chart you can see loan origination fundings totaled $659 million in Q4 compared to $347 million in Q3 and $365 million a year ago.

Our CRE business had a record quarter with $234 million in originations and $205 million in fundings.

The strong growth in commercial banking originations also included $31 million of loans that we will be selling down in the first quarter.

And as we stated in the last earnings call, the yield on new originations in the quarter rebounded to more normalized levels.

Our Commercial Bank relationship managers focus on the full banking relationship with our customers.

It is also worth noting, there were 28 interest-rate risk management transactions -- primarily swaps, CAPS and collars that were booked for clients during the fourth quarter that generated $1.8 million in non-interest revenue.

Our demand deposits at 800 -- excuse me, at $935 million were essentially flat for September 30, but they are up $191 million from the prior year.

Our Commercial Bank team opened 585 new demand deposits accounts in the year in comparison to 503 new accounts in 2011.

It is also worth noting that our sales and structuring group completed six agent transactions in the quarter, selling down $78 million in loan commitments and generating $1.2 million in fees.

We consider this a very important activity largely used to win and retain key client relationships while maintaining appropriate single point loan exposures.

The Commercial Bank pipeline declined from Q3 and Q4 from a year ago, driven by record Q4 closings and in part from borrowers motivated to close ahead of the anticipated tax changes in 2013.

Based upon our past performance, we would expect the pipeline to grow from here.

Let's turn now to slide 4. We will review our Retail Banking group results.

One of our key strategic initiatives has been growth of small business banking.

So in the top chart you can see how small business loans grew by $38 million to 4% from September 30 and $106 million to 12% from a year ago.

This quarter's growth and small business loans reflects a record level of raw loan originations totaling almost $89 million and that is up 20% from the third quarter and also the fourth quarter from a year ago.

The small business certification program that all of our branch managers completed earlier this year contributed to the success with branch sourced and preferred loan commitments in Q4 increasing by over 44% from a year ago.

We are also seeing good success with our merchant services offering, with Q4 fees from this product up 20% from a year ago.

Turn now to look at the bottom chart.

You can see the progress that has been made in taking transaction account deposits.

It is almost 33% of total deposits in the retail bank from 29% a year ago.

The group has seen transaction deposit growth of $382 million or 13% over the past year that is led by small business which grew $188 million or 17%.

At the same time we have seen significant increases in average balances on our transaction accounts.

Our small business transaction accounts had an average balance of almost $23,900 in Q4 which is about 15% higher than the level a year ago.

Similarly, the consumer average balance per transaction account is now over $5,600 and that is up 9% from over a year ago.

The emphasis on transaction accounts and our overall pricing discipline has resulted in lower cost of funds significantly over the past year.

You can see in the bottom line that the 41 basis point cost of funds in Q4 was three basis points lower than Q3 and 14 basis points lower than a year ago.

The low interest-rate environment in 2012 also presented us with an opportunity to reach out and help more of our customers plan and prepare for their retirement than ever before.

And as a result, our Webster Investment Services unit posted record quarterly revenues in Q4 and also for the full year.

Due to our increased advisory focus, 32% of these revenues are recurring and that is up from 27% in 2011.

As Jim mentioned, we continue to invest in our own electronic capabilities and also in the education of our frontline bankers, to demonstrate and educate the benefits of our products and services to our customers.

In the fourth quarter, deposits at our recently upgraded envelope-free image capture ATMs increased by 43% over the same period a year ago.

Our new eChecking product has accounted for 21% of consumer checking sales since it was introduced in April, while checking account attrition has declined and eStatement adoption has increased by 28% during the same period.

We know the customers that utilize Webster's online and mobile banking options typically generate 10% more revenue per household and experienced half the attrition rate of customers who rely on only the traditional delivery channels.

We also introduced our new mobile app.

In addition, on the distribution front, Jim commented on our efforts to relocate and downsize branch locations.

So in the fourth quarter we are pleased to open our newly relocated Simsbury, Connecticut branch, which exemplifies what we mean by branch optimization.

Our former branch in Simsbury was a stand-alone building and it was far larger than the market required and the drive there was some distance from the main facility.

Our new branch is directly across the street.

It is sized to fit the market.

It is in a newly built shopping center with the drive-through services right from inside the branch.

Next week we will be opening in Greenwich, Connecticut, and that location will serve as -- for our private bank as well as our newest retail branch.

And I can say with confidence you can look forward to more updates from us in 2013 regarding our optimization efforts like combinations, renovations and moves.

We will now turn to slide 5 to review our Consumer Finance results.

Our overall balances have declined modestly over the past year, largely driven by our strategy of selling a higher percentage of conforming long-term fixed rate loans.

The increased sale activity, however, has concluded to substantially higher noninterest revenue over the course of the year, reaching over $8.5 million in the fourth quarter.

Our overall portfolio yield declined by 7 basis points in Q4 and that is largely driven by attrition.

You can see how consumer finance originations remained very strong in Q4, with the yields on the new originations.

This is being driven by the addition of proven talents of the sales team, coupled with improving productivity in the Internet and contact center channels.

These channels represented a combined 23% of originations in 2012 compared to 16% in 2011.

We have plans to take this higher next year.

Our originations, including loans sold with servicing retained, were $530 million in the fourth quarter.

Purchase loans represented about 36% of our total production in Q4 compared to 17% a year ago.

And our mortgage applications for home purchases were up 79% from a year ago.

The yield on the new originations declined by 16 basis points over the third quarter due to competitive pressures in the jumbo and adjustable-rate markets.

Though the Q4 level of 3.69% is consistent with the first half of the year, the gain on sale margin on originations that were sold in the fourth quarter was 370 basis points compared to 303 basis points in the third quarter and 224 basis points a year ago.

The pipeline in consumer remains solid with $[520] million at December 31 compared to $649 million at September 30.

The decline reflects the seasonal slowdown at year-end and we work diligently -- and we worked diligently during the fourth quarter to clear what was a very strong September 30 pipeline.

Our focus remains on originating a larger percentage of jumbo mortgages as a key to relationship building and it's showing in the results.

Jumbo originations represented 70% of total originations for the portfolio in Q4 compared to 69% in Q3 and 40% a year ago.

We are also focused on noninterest income, the significant benefits derived from mortgage banking income and that is coupled with credit card fee revenue that were earned through our new partnership with Elan.

Our new program got underway late in Q1.

We now have over 20,000 accounts booked.

Credit card revenue in Q4 was around $400,000 or 37% higher than in Q1 which is the last relevant period to compare it to under our prior agreement.

We will now turn to slide 6 and let's take a look at the results of our Private Banking unit which is expanding its team and making progress towards its revenue goals.

Loan growth was up significantly compared to a year ago and the pipeline remained strong at $73 million at December 31.

We have seen a nice lift in deposit balances from growth of $25 million in the quarter and $87 million from a year ago.

Deposit growth in the fourth quarter also included some significant new clients.

The growth we are seeing in the Private Bank reflects the recent addition of three new relationships officers bringing the total to nine, and we plan to add two more during 2013.

We now have coverage in all but one of our regional markets.

We will turn now to slide 7 to review the results of our HSA Bank unit which delivers its services through multiple delivery channels, including health insurance companies, insurance agencies, third-party administrators, technology partners, and of course our national direct to sales team.

HSA Bank successfully increased its strategic focus on midsize employers.

In the last three years the size of our average employer has grown from 15 to 60 employees and most of this business is done electronically.

This shift in focus to midsize employers and opportunity in the larger employer segment, coupled with providing differentiated value-added services, is really paying off.

So if you look at the top chart you can see we had $36 million in deposit growth from the third quarter.

Though note that most of our deposit growth normally occurs in the first quarter of each year.

This is the quarter when the benefit plan year start for many employers and their employees.

And at this point it looks like we are tracking very well as we head into the first quarter of this year as deposits have increased by $90 million since year-end and totaled $1.36 billion as of January 15.

It also looks like we will comfortably surpass the 51,000 new accounts that were added in January of 2012, and the business continues to scale well as we add significant volume.

You can see also on the top chart the 14 basis point reduction in the cost of funds at HSA over the past year.

We have tightly managed the tiered rate structure that we pay on health savings account deposits.

The chart on the bottom provides our average balance by (technical difficulty) count.

We think the fact that the HSA Bank's sole focus is administration service and support of health savings account underpins our better than average market's performance of the important metric of average balance by age of account.

We will turn now to slide 8 and look at overall originations and balances.

You can see overall balances now total over $12 billion and that shows growth of over $300 million or 2.6% linked quarter and over $800 million or 7.2% year over year.

Our total originations including residential loans originated for sale with servicing released were $1.5 billion in the quarter.

And as we just reviewed, the pipelines remain strong though some post-year-end rebuilding will occur in the first quarter.

I will now turn it over to Glenn for comments on our financial results and to provide an outlook for the first quarter.

Thank you, Jerry and good morning, everyone.

Let me start by turning to slide 9, which provides a quarterly trend in net income available to common shareholders and return on common equity.

The chart is reflective of the progress that Jim and Jerry reviewed and how those actions translate into improving financial performance.

The 21% increase in earnings over the past year corresponds to a fourth-quarter return on assets of just under 1% and a return on common equity of just under 10%.

The $47.9 million in net income to common shareholders in the quarter represents our highest level since the third quarter of 2004, which included $5.8 million in securities gains.

Absent that, the quarter represents record net income.

At $0.52 per share, this quarter also represents the third consecutive quarter of growth in EPS.

As you see on the chart our return on average common equity reflects consecutive increases over the last four quarters to 9.74%.

Slide 10 highlights our core earnings drivers which excludes the non-core categories as noted on the bottom of the slide.

Starting with average interest-earning assets virtually all of the $199 million or 1.1% growth from the third quarter resulted from growth in loans and loans held for sale.

The key drivers of this growth were commercial and commercial real estate loans.

The growth in average commercial loans from the third quarter was $98.8 million or 3.2% and average commercial real estate loans grew $123 million or 4.8%.

Net interest margin for the quarter was 327 basis points compared to 328 basis points in the third quarter.

We realized an approximately 3 basis point benefit to the NIM in Q4 as a result of $1.3 million of deferred fee income from prepayments and past due borrowers paying current in the period.

Absent this, NIM compression would have been in a 4 basis point range consistent with the last three quarters.

We otherwise saw the smallest decline in the securities portfolio yield over the past six quarters as a result of a reduction in premium amortization.

Net interest income increased by $1.4 million over prior quarter.

We had a net increase of $812,000 in interest and fees on loans from both strong loan growth and deferred fee recognition.

In addition, we were able to reduce our funding cost by 3 basis points this quarter.

Core noninterest income was $52.9 million for the quarter, up 11% over Q3, led by strength in mortgage banking and loan fees.

Mortgage banking activity was up $2 million over Q3 as $222 million in conventional fixed-rate mortgages originated for sale in the quarter were sold at a gain on sale of 317 basis points.

We also saw an increase of $1.5 million in loan fees from the loan origination activity in the quarter.

In addition, we had an increase of $673,000 in wealth and investment services from a record quarterly sales performance totaling $5.3 million in investment products by our Webster Investment Service unit.

Core noninterest expense totaled $122.2 million in the quarter which was lower than prior quarter by 1.1%.

We continue to focus on growing the business while controlling expenses and the fourth quarter was no exception.

For the quarter, we again demonstrated positive operating leverage of 4.6% and achieved a 60% efficiency target that we set in 2011 at a time when the efficiency ratio was over 65%.

Summarized, the core earnings slide provides a snapshot of the progress that has occurred at Webster as total revenue grew over the past four quarters, despite five consecutive quarters of NIM decline as a result of a challenging rate environment.

Just as importantly, we have controlled expenses while investing growth initiatives to generate positive operating leverage.

Turning now to slide 11, which highlights our asset quality metrics.

Noteworthy aspects in the quarter are the continued reduction in commercial classified loans which were down versus prior quarter by 7% and the reclassification to nonaccrual of $44.1 million of Chapter 7 loans as a result of regulatory guidance.

Additionally, $5.3 million in charge-offs were recorded to bring Chapter 7 loans to collateral value.

You see the impact of the reclassification in the nonperforming loans chart in the upper left as well as the new nonaccruals in the chart on the lower right.

Apart from the reclassification, nonperforming loans would have decreased $6.6 million or 4.1% from September 30.

Likewise, new nonaccruals were $40 million in the quarter compared to $49 million in the third quarter.

Lastly, with regards to loans past due, reflected in the chart on the upper right, the $7 million net increase was due to a single commercial real estate credit over $12 million.

We will now turn to slide 12 which highlights our allowance for loan loss.

Our provision increased $7.5 million for the quarter primarily as a result of strong loan growth.

We recognized $16.5 million in net charge-offs during the quarter including $5.3 million related to the aforementioned discharged borrowers that was previously reserved.

Our allowance for loan loss of $177 million now represents 1.47% of total loans.

Lastly, you see the drop below 100% coverage on nonperforming loans, primarily as a result of the $39.5 million discharged borrower reclassification.

Our investment portfolio is highlighted on slide 13.

The portfolio has remained fairly flat since the first quarter of this year with loans being the primary driver of earning asset growth since that time.

The securities to asset ratio of 31% at December 31 is the lowest level since September 2011.

The 5 basis point decline in yield represents the smallest decline over the past six quarters.

The available for sale yield declined by only 1 basis point to 268 basis points.

The decline this quarter reflects a benefit from a slowdown in premium amortization due to less reinvestment and securities at premiums to par which almost offset the negative impact of purchases at yields of 200 basis points.

We did see a 13 basis point decline in the health and maturity yield to 414 basis points.

Although premium amortization was unchanged this quarter, yields were driven lower by purchases at 208 basis points and by municipal bond call activity which increased from $27 million last quarter to $39 million this quarter.

Premium amortization on the entire portfolio declined by $700,000 to $16.2 million in the quarter.

The decrease is the result of a stable agency MBS annualized cash flow of 29%.

(technical difficulty) less reinvestment in securities and premiums so far.

Prepayments, calls, amortizations and maturities for the quarter amounted to $452 million with a yield of 324 basis points.

And during the quarter, we purchased $452 million of securities with core value of $422 million at an average yield of 233 basis points and a duration of four years.

Most of our purchases were Agency MBS although $89 million of floating-rate collateralized loan obligations, primarily AAA rated, were added as a new investment category.

This was done to reduce prepayment and extension risks associated with agency MBS.

The addition of these floating-rate assets enabled us to lower the average duration of purchase securities by 1.2 years versus last quarter while giving up only 9 basis points in yield.

The total investment portfolio duration remained at 2.7 years with a neutral rate risk profile to a rise in rates and some exposure to a fall in rates.

We currently expect to maintain investment durations in size throughout the reinvestment -- through the reinvestment of cash flows.

Let me turn now to slide 14 for a review of our deposit trends.

The two charts highlight that total deposits have increased 6.4% from a year ago with a 12 basis point decline in the cost of deposits while transaction accounts have increased 18%.

During the quarter, we reduced our deposit cost by 2 basis points.

As previously noted total transaction accounts now stand at 41% of total deposits.

On slide 15, we highlight our borrowing mix and cost.

An increase in borrowings of about $140 million from September 30 along with the deposit growth of $118 million in the quarter helped to fund the $301 million in loan growth.

We recognized a 9 basis point reduction in the cost of borrowings compared to Q3.

The reduction is a result of a 33 basis point reduction in the cost of long-term debt generated by the full quarter benefit of $136 million trups redemption that occurred in the early part of Q3.

Given the current rate environment, incremental funding is done primarily at short-term rates from 25 to 35 basis points.

We would expect borrowings to decline in Q1 due to seasonality -- seasonal inflows from HSA public deposits.

Our Pathway to 60% update on slide 16 highlights the progress we have made to improving our operating efficiency and the achievement of our target of 60% by Q4.

As you see in the chart, our core operating efficiency improved in the fourth quarter and came in just below our target of 60%.

The continuation of positive operating leverage has been essential to achieve in this goal and we remain committed to ongoing achievement of positive operating leverage apart from the linked core seasonality that we expect to see in Q1.

Slide 17 highlights our capital position.

During the quarter we took the following actions to better optimize our capital.

We issued $126 million of Tier 1 eligible five-year noncallable perpetual preferred stock with a fix for life coupon of 6.40.

We obtained approval to repurchase up to $100 million in common shares and we repurchased 50 million of common shares at $19.85 per share on December 7. We have a solid balance sheet position and the ability to return more capital to shareholders over time.

So before turning it back over to Jim let me provide a few comments on our expectations for the first quarter of 2013.

With respect to average earning assets, overall, our average earnings assets will likely grow in the range of 1% to 2%.

We expect average loan growth in Q1 to be in the 2% to 3% as a result of full quarter benefit of commercial loans booked during December.

Our net interest margins held up well in Q3 to Q4.

As I highlighted, we did have higher than normal prepayments which all in resulted in a benefit of approximately 3 basis points.

Given a continuing low rate environment and partial loan growth offset, we expect a [3 and 5] basis point compression off of the Q4 number in Q1 on NIM barring any unusually high prepayment activity.

And we would expect net interest income to be near the Q4 level.

As we highlight absent discharge borrowers adjustment during the quarter, credit continues to experience stable trends along key asset quality metrics.

Assuming stable asset quality, we expect our Q1 provisions to be flat to somewhat higher commensurate with Q1 loan growth.

Regarding noninterest income, in the fourth quarter we achieved exceptional results in our mortgage banking.

A significant portion was driven by high volume, partly as a result of seasonality.

We would expect to see somewhat lower volume in Q1 even given the robust pipeline and likely somewhat lower gain on cell rates as well, while other components of noninterest income should remain stable to strong.

With regard to noninterest expense, as we have highlighted on prior calls, there will be an increase in Q1, as in prior years, from higher payroll-related expense due to seasonality from payroll taxes, 401(k), etc., and marketing expense as we reposition our brand, and for account acquisition.

That being said, we expect to achieve a sustainable efficiency of 60% or less beginning Q2 of 2013.

So for Q1, expect to see total expenses increase in the 2% to 3% range from Q4 and expenses begin to decline from the initiatives mentioned earlier by Jim and Jerry as well as higher revenues from growth.

We expect to achieve our efficiency ratio back -- we expect to achieve an efficiency ratio back in the 60% range beginning in Q2.

Our effective tax rate on a non-FTE base we would expect to be in the range of 31% in Q1.

Lastly, our average fully diluted shares will be impacted by repurchases during Q4.

Based on our current market price, and no further buybacks, I would assume to be about 89.4 million in shares outstanding.

With that, I will turn things back to Jim for concluding remarks.

Thanks, Glenn.

Our fourth quarter caps a year of steady measurable progress toward our goal to become a high-performing regional bank.

We are stronger, deeper, and better able to meet our customers' needs than ever before as we adapt well to the rapidly changing banking environment.

This concludes our prepared remarks.

We would be happy to take your questions.

(Operator Instructions).

Dave Rochester, Deutsche Bank.

Good morning.

Nice quarter.

Thanks, Dave.

Just quickly on the the income side.

I was wondering if you are expecting to make that switch to neutral check ordering this year and can you update us on what that impact could potentially be?

Sure.

We are likely to make that switch sometime in 2013 and I think the impact probably is somewhere in the $2.5 million to $3 million range annually.

So, probably impacting the latter part of the year, I would guess.

Yes.

And on the capital side, with half of the repurchase plan done at this point, are you thinking you may reload that at some point later this year?

We may do that later this year.

For now we are satisfied to have the 50 and to really look at it opportunistically.

And lastly given the new QM rule, do you expect any changes to your strategy at all?

We don't think it is going to affect the strategy.

Actually we were pleased that it was as broad as it is.

That it has a Safe Harbor.

If we actually looked at our production for 2012, I think that it wouldn't have affected more than 3% to 5% of our total originations.

So at least at this point, and there is a lot of refinement to be done here, we do not believe it will affect our strategy including in the pursuit of purchase mortgages and jumbo loans.

All right, great.

Thank you very much.

Bob Ramsey, FBR.

Good morning.

Nice quarter.

To follow up on Dave's question about QM.

It is helpful to know it's 3% to 5% of your 2012 originations.

When you say you don't have -- expect too much of an impact, does that mean that you would be willing to portfolio a non QM mortgage that otherwise met your criteria that was made part of that 3% to 5%?

Or are you suggesting that it is just not a material amount and you would discontinue at the margin?

Well, the first is that it is not a material amount, that's true and made the comment that there is a lot of refinement to be done here and also including our understanding of what the impacts are, what the exposures would be to the extent that we went outside the QM.

But I would say at this point there's a good possibility that we will not be confined only by QM, that we will look a little more broadly than that, but it is premature to conclude at this point.

Great.

That's helpful.

And I want to talk a little bit about loan growth.

You guys obviously had a very strong quarter for commercial loan growth.

It seems that for a long time any loan growth in the industry has been predominantly about taking market share and we are starting to see more growth from more of our companies this quarter.

I am curious if you are sensing an increased willingness on the part of your customers to borrow, or how much of this may be related to year end issues?

Just any bigger thoughts on growth.

Sure.

Some of it we think was related to year-end issues.

It is hard to pin it down exactly, but we would say you could say somewhere 10% to 15% or so of volume may have been as a result of borrowers anticipating the tax changes and I think that may have drawn down the pipeline more than we normally would see.

And it contributed to the record origination volume.

We think that usage is about the same quarter over quarter.

May be a little tiny increase there.

We do think that borrowers keep talking about how uncertain the environment is, but they are investing in their businesses.

There is very modest economic growth.

But a lot of our gain has come from the increase in the size of our production force, from the quality of our brand in the market.

I think some of the larger institutions are having some difficulties with the negative psychology toward them which enhances the likelihood that we are going to win.

And we have won a larger share of middle market loans than otherwise would be the case.

So it is really this confluence of factors coming together that favor a regional bank in this kind of an environment and particularly, we think, favor us.

All right.

That's great.

And I know you all sort of said you expect an increase in loans in the first quarter of about 2% to 3% on average given some of the strong growth late in the fourth quarter.

I am curious, as you think more and said about end of period, how you are thinking about the first quarter.

And I know it has only been two weeks, but are you seeing continued strong demand so far in the first quarter?

I think we would say demand is not quite as strong as it was in the fourth quarter for some of the seasonal reasons that we have already discussed.

But it is there.

And we are building on what we have created to this point.

Our pipelines are down, but we will start to refill them.

We know that even though the pipeline is down on the mortgage side, it is still over $500 million going into the quarter.

So it isn't just going to be the average that pulls up the earning assets there in the quarter.

I think there will be some true growth.

Very good.

Thank you very much.

Mark Fitzgibbon, Sandler O'Neill.

Good morning, gentlemen.

You have done quite a bit of remixing in the loan portfolio and commercial credits, I guess, are slightly over 50% of loans now.

Is the goal to have a 50-50 mix between commercial and consumer?

Or are you comfortable taking that up to a 60% or 70% level?

The goal is to grow the portfolios that will, over time, generate the highest economic profit.

It isn't simply (technical difficulty) again that our commercial [footings] now exceed our consumer footings and that was one of the overarching goals of the Company for a long time now.

So we are delighted to be at that point.

We talk about our focus on relationship development.

So as we move up market and into the commercial mix, there is an opportunity to build stronger, longer term, valuable relationships for clients that also generate economic profits for us.

And so a lot of our resources are being invested accordingly.

At the same time we are trying to rightsize the consumer bank, investing in the electronics.

But I would anticipate that the footings in the Commercial Bank will continue to increase relative to the loan portfolio.

And then secondly, of the $2.5 billion of CDs that you have, what does the maturity schedule of those look like?

So, I believe we have, Mark, it is planned about $1 billion coming off over the year.

And just looking, that is at about $1.5 billion in the year at about 105, 105 basis points and that will come back in at about 30 bps, 40 bps if we -- and we have been very successful in retaining.

So up to 90% is rolling back into the book.

So that should help us on our funding going forward.

Great.

And the last question I guess is for Jim on -- it relates to acquisitions.

You have done some great work internally.

You haven't been focused on acquisitions for a while.

Do you feel as though your house is in order sufficiently that you would be ready to get more proactive on the acquisition front?

Actually we do.

And a lot of it is about making sure your house is in order and you are performing well at what you do, particularly if you think you might be exporting that to somebody else.

And I think we have made a lot of progress.

There's still some to go.

We are -- our focus is riveted on improving what we do here.

We are not spending a lot of time focusing on the acquisition front at this point.

But we think there will be some opportunities.

We have geared up internally to take advantage of them on a selective basis.

Ideally, in negotiated transactions with likeminded partners that think that, together, we could be a bigger, stronger, regional bank.

So something may come of it, but it may not.

It is not an active prong in our overall strategy.

We are really focused on organic growth.

There's so much we could do with what we have.

Great.

Thank you.

Matthew Clark, Credit Suisse.

Good morning.

On the coverage ratio and nonaccruals, I understand the situation this quarter, but could we assume that coverage will rebuild back above 100%?

And along those lines whether or not we might see a more swift decline in the problem loans maybe like we saw in the TDR bucket?

And just curious what really drove that improvement on the -- in the TDRs.

I think that you would expect coverage to go from 91 basis points above 100.

That's the answer to your first question.

And I think that if you just look at our progression, it has slowed down as Jim highlighted on some of the metrics, but we continue to make progress across all lines.

The TDRs, in part, were -- a part of that is prepayments or refinancing out of the bank.

So hard to predict what that is going to look like.

Some of it is dependent on the borrower.

So I could not give you guidance on what that number is going to look like over the next three quarters, but I think you would expect it to decline over the next three quarters.

On the securities portfolio, that kind of held the line on a dollar basis.

Is that the expectation that you will continue to hold the line there and let the loan contribution continue to increase, relative to earnings assets?

Yes and I highlighted that all our interest-earning asset growth was from loans.

And that we have talked about that.

It used to be almost 2/3, 1/3, and now it is the loans and it is commercial loans which have a yield of about 414 basis points at least as far as funding in the quarter.

So, absolutely, that is our strategy to keep that flat to down and grow the loan book.

Great.

And when you think about the margin going forward, I appreciate the guidance they are, but I guess is there any lumpiness in some of the repricing on the CD book and FHLB book that we might see maybe a more meaningful drop in funding cost in any given quarter this year?

No, there's no lumpiness, no lumpiness there.

I think we do have some things that mature during Q1, but we factored those into our guidance that I provided.

There's stuff that comes in during Q1 which is that [342].

But there's no large items that are going to move it either way.

Great.

Thanks.

Casey Haire, Jefferies & Company.

Good morning.

Just a quick question on the -- so the mortgage banking sounds like it's normalizing a little bit lower here.

Can you just talk a little bit about what kind of excess leverage you get on lower mortgage banking?

Meaning how quick we are to react to drops in volume?

Exactly.

Like what, so mortgage banking down $1 million, what happens on the expense side?

Yes.

I don't have the exact number, but I will tell you that a large part -- we use it -- what our business use calls the accordion method.

So that involves temporary help to hit the peaks and lows.

So we can be very responsive to changes in volume.

And so, to the extent it dries up a large portion of processing side is on the temporary upside.

But I don't have the exact number of that staff.

Okay.

And following up on some of the reserve coverage ratio down below 1.5 here.

I think you guys talked about 1.25 is the lowest you would want to go on a loan loss reserve ratio.

Does that still hold?

Yes, it does.

Is that something we might see in the next couple of quarters here?

Further out I think you would see it.

Not the next two quarters, but maybe the fourth quarter.

Provided, of course, commensurate as I indicated with loan growth.

And credit quality continuing to follow the path that it has.

Actually I just want to add that the 1.25 is not a hard limit and Glenn makes the point that it is relative to the loan quality overall.

And I think that in the last call we suggested it even could be 1.20 or so.

But it is in that range.

Thank you.

David Darst, Guggenheim Securities.

Good morning.

Could you talk about how many more branches you think you could relocate?

And what's the savings per unit and what is the cadence that you would look at relocating the units?

Great question to try and get us to disclose the sequence and cadence.

I would just share with you that we are looking very, very carefully at each of our markets, evaluating each location, trying to make sure that it is the best location, that it is the right size to serve the market that we are getting the most through that particular location both on the investment services, the small business as well as obviously on the mass consumer side.

So, the way I would approach it is what we did in Simsbury you will see us go from much, much larger in the thousands of square feet to just several thousand or fewer square -- or less square-foot location that is just in a -- got more foot traffic to it.

It has got better visibility.

You know, as we noted with Greenwich, we are obviously still going to look at being opportunistic in certain markets.

But there's a number of markets in 2013 that we have got some combinations lined up to do to try and go from a couple of facilities into one that is going to be a much better location.

And we are going to continue to do that for the foreseeable future.

I think this is something that you have got to be -- continuously look at.

I think that traditionally we have built them and as an industry they have been built and they stay.

We are looking at this much more like what you would see retailers in other lines of business do.

We are looking to make sure that we are best location, appropriate size.

We are also taking into account what's happening in the demographics in each of those markets.

We have got some markets where there is just an incredible amount of foot traffic that we expect to continue to occur and, therefore, we will continue in those locations.

There's others where we are seeing a significant shift into the electronic channel and there's our opportunities for combinations.

So I think we will give a lot more guidance to that as we go forward.

We are really not going to do that today on the call but I think you should listen to some of the things that we will do at investor conferences throughout the course of 2013.

We will give a lot more insight as to what is happening there.

I do also want to say just giving the age of some of our facilities, you will also hear us talking about significant renovations.

We are number one market share in a lot of markets and we feel it is very, very important to refresh facilities.

So there will actually be a little bit of spend in some of the markets as well.

But what we have done here is really positioned ourselves between the eChecking product, between the upgrade of all the ATMs, the mobile app and you know that we are going to do the release of [RODC] and we are also going to look at further enhancements of our capabilities in the electronics space.

We are positioning ourselves that for the mass consumer we think that the strong, strong preference is going to be for the the electronic delivery and therefore that you'll continue to see that we will be very, very surgical in knowing where a new location would go and we will still continue to look as you go forward for combinations.

We certainly think and I think these are the most important thing, that physical presence is very, very important in a lot of the markets that we currently serve.

But we are seeing in some that the shift to electronic is really, really ramping up.

So we are keeping a close eye on it.

Then would you say that the number of FTEs per branch is changing as you roll out the Universal Banker program?

Or is just the activities?

Yes, absolutely.

Good question.

Yes because in terms of what is happening is you're becoming much more of a -- instead of a transaction-based facility, they're becoming much more of a sales consolidated base and that just requires a shift to be able to spend more time with the customer.

They are performing most of the routine transactions electronically or at the ATM.

So our view is -- or physically, obviously, walking up to an ATM.

So our view is that the Universal Banker will clearly shift staffing need.

There will also be a big shift in terms of the education, the certification of the banker serving in those locations.

So taking all that into account, there definitely will be some shift in terms of the number of people per location.

Great.

Thanks a lot.

Russell Gunther, Bank of America Merrill Lynch.

Good morning.

Appreciate the color on where you'd expect the reserve to trend near term.

Have you had a chance to assess any potential impact of the recent FASB proposal for life of loan, loss reserves and maybe incentive to keep reserves higher ultimately?

No.

We are still working through that.

So that I would not factor that into our outlook right now.

Okay.

And lastly on the loan growth front, through a good chunk of earnings this season and mixed commentary from some of your peers in terms of what the uncertainty in Washington and the impact there on loan demand.

What are you guys seeing and if we do get some resolution down there, could we see loan growth pick up beyond the expectation you laid out in the first quarter?

I think we would say it isn't simply what happens in Washington, it is how strong the economy is.

And our sense is that the underpinnings of the economy may be a little bit stronger than people have thought, and so we are anticipating there will continue to be modest growth.

That if there is a resolution -- of course, depending upon what that is -- that gives some certainty along with that would go some stability, would that increase confidence and would business people be more likely to invest?

Probably so.

That would be a modest improvement over what our expectations are currently.

That's great.

I appreciate the color.

Jason O'Donnell, Marion Capital Group.

Good morning.

Nice quarter.

Thank you.

Glenn, I know you made some comments about potential seasonal pickup in borrowings in the first quarter.

Can you just give us some sense of how you are seeing the funding strategy play out in 2013 and I guess 2014, given the stronger (technical difficulty) outlook and how things were funded this quarter?

Should we expect to see higher borrowings balance to be part of that equation post the first quarter or are you more likely to manage your securities assets ratio below that 30% threshold?

Yes, I think the latter.

We have been pretty clear about that.

We -- on the treasury side they actually did a great job in timing where the market was if you go back two quarters.

So I think as we see loan growth, you will likely see more of an offset on the securities portfolio.

Okay.

That's helpful.

I apologize if I missed it, but can you address the shift in banking activity you have been seeing towards mobile channels?

I am just curious what percentage of your customers are accessing their accounts through their mobile devices today versus say maybe a year ago.

Yes.

In terms of the uptick in transactions, I think we are going to be able to give you a much, much better picture of that given the downloadable app went out in the middle of the quarter and then the final enhancement for the iPhone went out later in December.

So in terms of being able to give you true mobile statistics, I would prefer to hold on that.

But we are seeing -- we obviously had a bookmark that folks were using.

So there was definitely some traffic that we saw, but basically that's combined in our online statistics previously.

Okay.

Thanks a lot.

Collyn Gilbert, Stifel Nicolaus.

Good morning.

Just a follow up a little bit on a funding question.

Glenn, is there anything that you can -- I mean if we look at the repos at 1.72 and the FHLB advances at 1.11 and I know the duration there may be alone that longer, but is there anything that you can do on the funding side keeping deposits off the table at the moment to lower those?

Or is this a decision that you are consciously making to try to keep that duration a little bit longer?

Yes.

I think we are.

A decision is to keep the duration longer so we are not contemplating any action against that.

Okay.

And a big picture question which, I think, people have asked around it in terms of the reserve, but you guys have obviously made great strides in the last year or so with a lot of the new initiatives and some of the momentum you are gaining.

Do you think that that is sustainable enough or that the momentum can increase enough -- I guess the way I am looking at my model, I am looking out given that the loan growth probably needs to stay more or less or will could potentially stay more or less where it is that you are really going to need to grow the provision again.

So if we, again, my numbers look like maybe say $45 million pick up in the provision over the next two years which is a big number to try to find earnings to supplement that provision growth in the wake of relatively flat net interest income.

If mortgage banking starts to slow.

Is this something that is consciously on your mind as management and the Board.

Am I overstating the impact that this reserve build is going to be on the earnings trajectory?

If you could just give a little color as to what your thoughts are on that.

I think the reserves are something that is on everyone's mind as an industry.

But I also think that the other missing piece here is that our charge-off level is still at the 50, 56, 60 basis points.

So there's more as we clean up the quality of our balance sheet presumably that would come down as well.

That's sort of the third leg, right?

Yes.

But I think, and again, it is commensurate upon our loan growth that we would make the decision whether we are doing a net build or not on an expense basis.

So we have to see how that comes out over the year.

But we do think about it.

You are right.

We think about it a lot.

And what the effects are.

But the conclusion is that the loan growth is valuable to us and we will provide as needed in order to support it.

That is the fundamental conclusion.

And we do look at it as I think everyone does as what percent of earnings is released and we were $9 million for this quarter.

So it was the lowest that we have been for the last couple of quarters.

So 12% versus 20% number and even higher in prior years.

So we are very focused on it as Jim highlighted, but we continue to work it.

Okay.

That was all I had.

Thanks.

Damon DelMonte, KBW.

Good morning.

Nice way to cap off a good year for you.

Most of my questions have been already answered, but just a couple more modeling questions.

On the fee income side, loan-related fees were up nicely over the quarter and I may have missed what you described in your comments.

Could you just go over what was driving that quarter-over-quarter growth and is that sustainable going forward?

Yes, loan related fees were primarily on the commercial side.

And so -- and we had a very strong fourth quarter and we talked about the pipeline and the outlook for Commercial.

So I think you have got to assume that we will continue to generate loans fees.

I think that we are up, but from a modeling standpoint I would say yes.

I mean the other side of it is -- so you have the loan originations and you also have the swap income.

And I don't know if we quoted the number [for] transactions, but that was $1.8 million for the quarter.

So that is something that as we book commercial real estate that we are swapping out and we continue to get fees on as well, that's been a good source of annuity income for us.

So I think that part will continue through the year.

And if you did miss it, we also mentioned some Webster-led agent transactions generated about $1 million in fees in the quarter.

We expect that cash management fees will be on the rise and so to the extent there is some volume decline there, there are some offsets in terms of fee income.

That's helpful.

And then Glenn, just to clarify on the margin.

You said that the 3 to 5 basis point potential compression in the first quarter that includes this quarter's benefit of 3?

Take it off the 3.27.

Okay.

Perfect.

That's all that I had.

Thanks a lot.

Matthew Kelley, Sterne, Agee.

I was wondering what were the origination yields during the quarter on the 309 in investor owner occupied CRE versus the third quarter?

How do those trend?

I think on the CRE we were in the 318 range.

And the third quarter -- not sure I have that here.

We can come back to you.

Okay.

Yes.

How much of the 309 was your portion that you kept of agent led deals that you led larger transactions with the slice that you kept, how much of that was in the 309?

Yes, I think we have got to come back to you on that too.

And in that agent led business which generated the $1 million in fees where you sold down 78.

How much larger can that business -- going to scale to?

Is that team going to build out their relationship networks?

It can scale.

We don't want to say what the potential is, but it is significantly greater than where we are now.

Got you.

And was there anything going on one time in the BOLI income?

Looked like it popped up just a little bit.

(multiple speakers) back out.

We increased our BOLI.

So that's revenue [associated].

I think you look at the -- if we just look at the cash surrender value, you would see the increase in the quarter in September you actually saw the increase.

Okay.

About $100 million higher policy.

Got it.

And last question, deposit service fees.

Any new initiatives planned for 2013 to help recapture what you have lost over the last couple of years, anything changes in terms of the rate of fees, relative to average deposits we should be thinking about?

We are not thinking that there is going to be a significant increase.

We are always looking at the pricing of our products and there could be a modest impact as a result of changes in pricing.

But we think that the unit servicing fees are fairly stable at this point.

Okay.

Thank you.

It appears we have no further questions at this time.

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

Okay, Dan, thank you very much.

And thank all of you for being with us today.

Have a good day.

This concludes today's teleconference.

You may now disconnect your lines at this time.

And thank you for your participation.