Webster Financial Corp (WBS) 2013 Q4 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's fourth-quarter 2013 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 2013.

I will now introduce your host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Thank you, Rob.

Good morning, everyone.

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

I am joined by CFO Glenn MacInnes for about 20 minutes of prepared remarks focused on business and financial performance in the quarter, followed by your questions.

First things first.

I want to congratulate Joe Savage who has also joined us here today on his promotion to President of Webster Financial Corporation and Webster Bank, as well as his election for the bank's Board of Directors.

Joe earned this promotion through his consistently high performance, leading Commercial Banking over nearly a dozen years and because he models the values that bring Webster's 3,000 bankers together and set us apart.

Our culture defines us and differentiates us in our markets and Joe reinforces that winning culture every day.

He will now bring his special talents to bear for the benefit of the entire organization.

Turning to the fourth quarter, and beginning on slide 2, Webster delivered another solid performance as our bankers continue to excel in service to our customers and communities.

Strong overall performance was driven by multiple factors.

In a nutshell, record core revenues, positive operating leverage once again, strong commercial loan growth, improving asset quality, and a steeper yield curve produced a record level of quarterly core pretax, pre-provision earnings of over $80 million.

Net interest income increased 2.6% linked quarter and over 5% year over year to another quarterly record driven by a 4 basis point increase in the net interest margin and ongoing strength in commercial lending.

Overall loan balances are $12.7 billion, an increase of just under 2% from September 30 and about 6% from a year ago.

Balances in every key category are higher linked quarter except for asset-based lending where most of the linked quarter decline was seasonal and the ABL portfolio has grown 11% from a year ago.

Total originations were just under $1.2 billion in the quarter which was 21% lower than a year ago.

More than half the decline was in residential mortgages, given the still high level of refinancing activity a year ago.

Most of the remainder of the decline was in commercial lending as the fourth quarter of 2012 benefited from the substantial tax-related closing activity at that time.

Our pipeline remains strong, especially for Commercial Banking and business banking, and our emphasis on purchased mortgages should strengthen the personal lending pipeline in the months ahead.

Core non-interest income increased 12% from the third quarter as an expected rebound from the third quarter's depressed level of mortgage banking revenue was augmented by strong results in wealth and investment services revenue.

Total core revenue grew 4.8% linked quarter and exceeded $200 million for the first time.

Year over year, core revenue grew 3.1% despite a $5.7 million decline in mortgage banking revenue.

Once again, revenue grew faster than expenses both linked quarter and year over year.

This positive operating leverage drove the efficiency ratio down to 59.3% compared to 60% in the third quarter and 59.7% a year ago.

For the full year, positive operating leverage of 4.3% drove the efficiency ratio down nearly 3 percentage points to 60.4% as selective strategic investments and our successful efforts to operate more efficiently have made us sustainably more competitive.

I want to stress that positive operating leverage has been and remains a crucial metric on our path to high performance, including our overarching financial goals to earn a return in excess of our cost of capital.

Asset quality improved further, marked by meaningful declines in commercial classified assets, non-performing loans and nonperforming assets.

The ratios of NPLs to loans and NPAs to loans plus other real estate owned are at their lowest levels since the first quarter of 2008.

Clearly the strengthening economy, rising home prices and lower debt service are having an increasingly positive effect on consumers' payment behavior.

Given improving asset quality and linked quarter loan growth of just under 2%, the loan loss provision increased $500,000 linked quarter and $1.5 million year over year.

The reserve release in the quarter was $5 million, its lowest level in 13 quarters.

Net income for the quarter was reduced by two items that Glenn will discuss in more detail.

The first item involves, other-than-temporary impairment charges, uncertain investment securities related to the Volcker Rule.

The second item is $1.6 million pretax noncore expense, primarily for banking center and facilities optimization.

Adjusting for these items, core EPS was $0.52 in the fourth quarter.

Adjusting only for the OTTI charge, return on assets and common equity were each at their highest levels over the four quarters of 2013 at 94 basis points and 9.0%.

Our improving financial performance, while still short of our goal to deliver economic profit, has driven our market cap close to its all-time high and Webster's accumulative total shareholder return over the past three- , four- and five-year periods ranks number one in our proxy peer group.

Our strong capital position supports our asset growth, provides for the return of capital to the shareholders through dividends and selective buybacks, and enables us to confidently pass the annual regulatory, severely adverse stress scenario.

A target of 10% for the Tier-1 common to risk-weighted assets ratio allows us to meet those objectives and, at 11.43%, we will exceed that target.

All of our capital ratios are well above internal targets as well as estimated fully phased-in Basel III well-capitalized targets.

With regard to balance sheet sensitivity, we continue to be well-positioned for the long end up interest-rate scenario.

The economy in the Federal Reserve's first District of Boston, which includes the bulk of our four state footprint, continues to expand modestly with a generally positive outlook according to the Fed's Beige Book released a couple of days ago.

Home prices continue to rise and commercial real estate in the region maintains modest strength.

Other indicators show that the state of Connecticut, which is the heart of our franchise, has added about 16,000 jobs or about 1% of the workforce over the last 12 months with an uptick to 4,000 jobs added in November, the most recent month available.

Turning now to line of business performance, slide 3 summarizes Commercial Banking results.

On a combined basis, loans were up 3% from September 30 and up 12% from a year ago.

Full year fundings matched prior year at $1.7 billion, which is strong performance considering the tax-driven financing at the end of 2012.

Our agency transactions generated fees of $2.5 million for the year, up $1 million from 2012.

Aggregate volume in this business was $427 million in 2013, compared to $275 million a year ago.

Portfolio yield decreased by 10 basis points from the third quarter, reflecting market pressure and the benefit of a greater amount of prepaid in Q3 that accelerated FAS 91 recognition in that quarter.

The yield of 3.32% on $459 million of new fundings compares to a yield of 3.86% on $516 million new findings in Q3 with the yield decline reflecting asset mix, market pressure, and a greater proportion of high-quality CRE fundings where our borrowers are taking advantage of interest-rate swaps.

Swap fees were up $1.1 million linked quarter to $2.7 million.

Commercial Banking's forward momentum is reflected in the best year-end pipeline we've had in three years.

Transaction account deposits grew 6% compared to Q3 and 20% from a year ago.

This growth represents intense focus on capturing core operating relationships across our businesses.

Revenue from cash management services grew 9.5% year over year as we continue to invest in our product suite.

We've turned the corner in our equipment finance business.

You will recall we pulled back from a national franchise to focus more closely on our regional markets.

Credit quality is now outstanding and we are building out the sales platform.

The $460 million portfolio grew 8% from Q3 and 10% year over year.

Our middle market New York franchise, which we launched in Q3 with the hiring of our regional president, is off to a good start with a couple of loans booked, an active and growing pipeline, and successful recruitment of talent in the market.

We are excited about the potential of our New York hub to duplicate the success we have enjoyed in Boston.

Slide 4 reviews our business banking unit which recorded year-over-year loan growth of 7%.

You can see the increase in competition has driven yields lower on new originations, relative to Q3.

Transaction accounts improved to about 75% of total deposits for the segment and have grown more than 4% from a year ago, while reflecting a seasonal decline from Q3.

Business banking deposits exceed loans by 68% and provide very low cost funding across the bank.

Slide 5 presents personal banking results.

Overall consumer loan balances have declined about 1% over the past year, primarily due to ongoing consumer deleveraging.

Residential mortgage balances are essentially flat, largely driven by our strategy of selling conforming fixed rate loans.

The personal bank portfolio yield was unchanged from Q3 at 3.82% while yield on new originations held in portfolio in Q4 improved to 4.19% from 3.97% in Q3.

Total consumer lending originations were down 31% or $165 million year over year, primarily due to a decline in refi mortgages.

Given our emphasis on purchase mortgage originations, full year purchase originations grew 13%.

In the fourth quarter, purchase mortgage originations represented 71% of total resi mortgage originations compared to 53% in Q3 and 32% a year ago.

Jumbo originations represented 60% of originations held for portfolio, driving our portfolio concentration to 46% compared to 42% a year ago.

Net operating expenses for personal lending were down 24% in Q4 as compared to the peak in Q2 and are expected to decline further by approximately 10% in Q1 this year.

Our credit cards program continued to boost noninterest income growing by 70% year over year to $1.7 million and flat to Q3.

Personal bankings deposits totaled $8.2 billion at year end, down 3.6% from a year ago though up 5.6% annualized from Q3.

The decline from a year ago reflects the high level of CD maturities in Q3 that contributed to the 4 basis points linked quarter reduction in the cost of deposits.

Low-cost transaction account deposits grew $125 million or 6% over Q3 and now represent 26% of total deposits in the personal bank compared to 25% in the previous quarter.

Our emphasis on transaction account growth, combined with lower cost of CD renewals, has caused a reduction of 1 basis point in the cost of funds this quarter and 13 basis points year over year.

Personal banking investment assets under administration in Webster Investment Services grew by 9.5% year over year to $2.5 billion, driven by a 14% increase in sales production and increased market valuations.

Revenues from personal banking investments correspondingly grew by a record 23% year over year.

We continue to optimize our distribution network.

Banking Center building square footage has declined about 4% from a year ago to 744,000 total square feet even as we added two new smaller banking centers in high opportunity markets.

The momentum continues at the start of 2014 as we recently consolidated two banking centers into a single new facility.

All of our banking centers are now staffed with trained universal bankers, which has enabled the staffing decline of 7% year over year.

Migration to digital channels continues.

Deposits at self-service channels including ATMs and mobile deposits increased by 33% year over year and now represent 32% of total deposits while banking center transactions decreased 11%.

Our active mobile customer base has increased by over 40% and now represents 23% of our consumer deposit households.

21% of our mobile base has made at least one mobile deposit since we launched that service in June.

Slide 6 presents the results of the private banking unit which we view as a primary growth opportunity.

Our investment in the leadership team and our focus on local service, a full suite of deposit lending, always objective investment advice and fiduciary services is resonating in the market as we seek to develop deep lasting relationships.

Loans grew almost 13% linked quarter and 32% year over year and the loan portfolio yields rose 12 basis points linked quarter.

Deposits grew about 8% linked and 12% year over year with a 3 basis point year-over-year decline in the cost to deposits driven by growth in transaction deposits.

Assets under management adjusted to reflect the sale of a nonstrategic AUM portfolio during Q3 increased 16.5% year over year with new inflows of almost $40 million in Q4 and $146 million over the course of the year.

Slide 7 presents the results of HSA Bank, which now has over $2.1 billion in footings including over $1.5 billion in deposits.

HSA Bank's steady rise in assets and accounts over the 10-year history of health savings accounts is a reflection of the group's quality reputation for service and the resulting loyal customer base.

The value of HSA's fast-growing, long-duration, low-cost deposits will become increasingly evident in a higher rate environment as they fund to rapidly growing commercial loan portfolios without need to stress deposit pricing in our primary markets.

HSA Bank's deposits grew modestly from Q3 as is normally the case, just most of our deposit growth occurs in the first quarter each year.

Year over year, deposits and deposit accounts continued their 20% growth rate.

Both carrier distribution and average group size increased more than 30% year over year.

Accounting for the safely robust first-quarter enrollments, deposits have increased by $124 million since year end.

It looks as if we will surpass the 62,000 new accounts that were added in January last year by at least 50% and might reach 100,000 new accounts by month end.

The business continues to scale well as we add significant volume.

In an exciting recent development, Chad Wilkins has joined us recently as head of HSA Bank and as a member of Webster's executive management committee.

Chad's experience includes several years as general manager and CEO of a leading national healthcare insurer following 15 years with US Bank, spent primarily in increasingly responsible positions in commercial payments roles.

Chad's unique background in both health insurance and banking will prove valuable in moving HSA Bank forward at this exciting time for consumer-directed healthcare plans.

With that, I will turn it over to Glenn.

Thank you, Jim.

I will begin on slide 8, which summarizes our quarterly trend of net income available to common shareholders and key performance metrics.

Of note, earnings declined $3.6 million from Q3 as a result of $4.7 million after-tax OTTI charge related to the Volcker Rule.

Apart from this, reported earnings increased $1.1 million led by an increase of 7.2% in core pretax pre-provision earnings.

Compared to a year ago, earnings declined $6.8 million, again largely as a result of the OTTI charge.

Excluding OTTI, earnings were down only $2.1 million from a year ago, absorbing an after-tax impact of $3.7 million in lower mortgage banking revenue, and $2 million of additional preferred dividend costs related to our issuance in December of 2012.

Let me take a moment to provide more detail on the OTTI charge that we recognized in the quarter.

The pretax OTTI charge of $7.3 million was comprised of $4.7 million for CDOs and $2.6 million for CLOs.

With respect to the CDOs, the recent guidance on the Volcker Rule permits banks to hold full trust preferred securities only if the underlying collateral was issued by banks with under $15 billion in assets.

The four CDOs we impaired were all collateralized primarily by debt issued by insurance companies.

Important to note that early this week, we sold those same CDOs at a gain of $4.3 million which will be recorded in the first quarter.

With respect to CLOs, there is still uncertainty as to whether and for how long we can own these securities.

Consequently, the proper accounting required us to record the OTTI charge as we will -- and we will continue to monitor the situation.

Note that both the CDOs and CLOs have been held in AFS portfolio and marked each quarter through OCI.

The recognition of OTTI, therefore, had no impact on shareholders equity in the quarter.

Back on the slide you see our reported return on average assets was 85 basis points in Q4.

Adjusting for the OTTI charge, the return on average assets would be 94 basis points and return on average tangible common shareholders equity would have been 12.4%.

Slide 9 highlights our core earnings drivers and, over the next few, pages I will discuss in more detail the key drivers of our core earnings growth, but would note our average interest earning assets grew $246 million compared to the third quarter and our net interest margin of 327 basis points increased from 323 basis points in each of the first three quarters of 2013.

Combined, this resulted in a new quarterly record in net interest income of $153.9 million in Q4 or an increase of $3.9 million from Q3.

Core noninterest income which excludes securities, gains, and the OTTI charge increased $5.5 million or 12% from Q3.

This primarily reflects the expected rebound of mortgage revenue from Q3 and strong -- and a strong quarter for wealth and investment services.

And continued prudent management of core operating expenses contributed to another quarter of positive operating leverage.

Taken together our record core pre-tax pre-provision earnings of $80.5 million were $5.4 million higher than Q3 and up 5% from prior year.

Slide 10 highlights the components of our net interest income in Q4 compared to Q3.

We posted quarterly growth and average earning assets of $246 million and a 4 basis point increase in the yield on interest earning assets which was led by a 20 basis point increase in the yield on securities.

This combination resulted in an increase of $3.9 million in interest income compared to Q3.

As you see, virtually all the growth in average earning assets was due to growth in our commercial business.

Average deposits decreased $71 million as a net result of broad business growth, offset by seasonality in government balances while the rate paid remain the same at 29 basis points, so total interest paid on deposits declined modestly from Q3.

CDs represent our highest cost of deposits at 108 basis points with $1.2 billion maturing over the course of 2014 at a rate of 52 basis points.

To the extent they roll over, our current average cost is around 30 basis points.

The $255 million increase in borrowings in Q4 occurred at an average rate of about 20 basis points.

As a result, the total cost of borrowings declined by 9 basis points from Q3.

So as you see, we held the line on interest expense for the quarter, which contributed to the improvement in net interest income.

The net result is the $3.9 million or 2.6% increase in net interest income versus prior quarter and a 4 basis point increase in net interest margin to 327 basis points.

Jim discussed the activity in loans and deposits, so I will discuss our investment portfolio beginning on slide 11.

As you see, the investment portfolio increased modestly as a result of purchases and lower cash flows.

The slowdown in cash flow resulted from higher mortgage rates which reduced premium amortization on a linked quarter basis by $3.8 million to $12.6 million.

This explains the 20 basis point increase in portfolio yield in Q4 to 337 basis points.

The strong performance was the result of a strategy to purchase higher coupon, higher premium bonds that perform well in a gradually rising, long-term rate environment.

We do not expect the portfolio yield to increase further in Q1 as we do not anticipate any additional reduction in premium amortization at today's rates.

Cash flows during the quarter amounted to $264 million with a yield of 323 basis points compared to $369 million in the third quarter.

During the quarter, we purchased $367 million of securities at an average expected yield of 268 basis points and a duration of 3.8 years.

Most of the purchases were fixed rate agency MBS and agency CMBS.

Although we added $27 million of floating-rate collateralized loan obligations at a yield of 190 basis points, note that the duration of our total portfolio remains around four years and our purchase yield continues to rise.

In mid-December, we suspended purchases of CLOs following the issuance of the Volcker Rule.

At December 31 the fair value of the portfolio was $358 million with 70% rated AAA and the remaining 30% in AA.

The portfolio yield was 180 basis points.

Given the upward trend in rates during Q4, the unrealized gain in AFS portfolio decreased by $17 million or less than 1%.

We continue to maintain shorter duration in the AFS portfolio and keep over half our investments in the HTM portfolio.

This strategy helps to protect our tangible capital ratio, which grew 12 basis points in the quarter, despite the 10-year swap rate increasing by 32 basis points and growth in the balance sheet of $243 million.

Slide 12 provides detail on our interest rate risk profile.

Even with recently improving economic statistics, the short end of the interest-rate curve seems anchored for the next year or more.

We expect the curve to steepen further before short-term rates start to rise and have positioned our balance sheet to benefit from such an environment as evidenced by our investment portfolio yields and in NIM this quarter.

Our interest-rate risk modeling suggests further improvement in PPNR and a long end up scenario.

This slide reflects data as of November 30 and you can clearly see the growing benefit to PPNR over time.

Note our PPNR analysis reflects scenarios with an immediate increase in long end rates compared to a scenario with no change in rates.

The benefit from higher rates is primarily related to slowdowns and prepayments of higher-yielding assets and the reduction of investment premium amortization, along with higher new asset yields.

We will continue to take gradual steps to prepare for the eventuality of higher short-term rates.

But in the meantime, we want to highlight our interest-rate risk profile for what seems to be a likely scenario.

Slide 13 provides detail on core noninterest income.

As previously highlighted, the quarter reflects a $5.5 million increase in core noninterest income.

Approximately $1.2 million represented unrealized gains in our loans held for sale at September 30 that we were unable to record in Q3 under the lower of cost to market rules.

As these loans settled in Q4, we were able to record the gains in the quarter.

Mortgage banking revenue also increased by an additional $0.9 million in Q4 reaching the normal quarterly level of around $2 million to $2.5 million in the post refi era.

Wealth and investment service revenue increased by $1.9 million from Q3 to achieve a record level of just under $10 million.

This strength in the quarter relates primarily to our Webster investment services -- investment services unit as a result of continued growth and development of junior brokers and strong incremental production.

The $1.4 million linked quarter increase in BOLI and other category that you see on the slide reflects the $1.1 million increase versus prior quarter and client swap fees in our Commercial Banking unit that Jim previously discussed.

Slide 14 highlights our core noninterest expense, which increased compared to Q3 and prior year though at a lower rate than revenue growth.

Noteworthy on this slide is the $3.3 million increase in compensation and benefits from Q3.

About $1.1 million of the increase relates to additional expense from deferred compensation programs, largely in connection with Webster's 22% share price increase in the quarter.

$1.5 million of the increase reflects higher medical costs for more employees reaching out of pocket maximums toward the end of the year.

We had $1.6 million in noncore expense in the quarter which does not affect our efficiency ratio.

These costs primarily consist of write-downs on assets held for disposition as part of our banking center optimization as well as severance expenses.

Our efficiency ratio is highlighted on slide 15.

The sub 60% efficiency ratio was a result of strong revenue performance in the quarter and our ongoing focus on operating expenses.

Continued achievement of positive operating leverage, which we have now demonstrated for four consecutive years, has driven the efficiency ratio lower.

Turning now to slide 16, which highlights our asset quality metrics.

Non-performing loans declined by $14.6 million in the quarter led by reductions of $9.6 million in commercial and commercial real estate categories along with $4.7 million in the residential mortgage portfolio.

The decline in NPLs reflects lower inflows in commercial and commercial real estate and increased resolutions across all portfolios.

Past due loans increased $4.9 million in the quarter primarily as a result of business banking line maturities and renewals in process, along with one CRE credit that is in work-out with resolution anticipated during the first half of this year.

Consumer and residential delinquency was relatively flat with a decrease in residential, offset by an increase in consumer.

We have made continuing progress on reducing commercial classified loans which declined another 13% on a linked quarter basis.

Commercial classified loans now total $227 million or 3.3% of commercial loans.

Assuming recent trends remain intact, we think continued improvement in key asset quality metrics can be expected in Q1 and beyond.

Slide 17 highlights our capital position.

Key capital levels improved over Q3 while supporting $243 million of balance sheet growth, once again highlighting the strength of our core earnings and effective management of our investment portfolio.

So, before turning it back over to Jim, I will provide a few comments on our expectations for Q1.

Overall, average earning 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% range with continued growth in our Commercial Banking business.

Assuming that loan prepayments stay consistent with Q4 levels, we expect net interest margin to be down 3 to 4 basis points driven by lower commercial yields and anticipated calls on municipal securities in Q1.

Of course, NIM will vary with loan prepayment activity and loans returning to performance status.

That being said, we expect net interest income to increase up to $1 million over Q4 driven by loan volume with partial offset due to NIM compression.

Our leading indicators of credit were encouraging during the quarter and we continue to signal further improvement in asset quality.

Given our outlook in Q1 for Q1 loan growth, we could see a modest increase in the Q1 provision.

Regarding noninterest income, we expect higher fee revenue from deposit and investment services, partially offset by lower banking revenue.

We do not expect purchase mortgage activity to pick up until Q2.

So taken together, we anticipate a modest increase quarter over quarter in non-interest income going into Q1.

We would expect core operating expenses in Q1 to remain flat to Q4 as a result of seasonally higher employment expenses, offset by reductions in increased level of deferred compensation and medical costs which we have seen in Q4.

We continue to target an efficiency ratio of around 60% in Q1.

And we expect our effective tax rate on a non-FTE basis to be around 31%, 32% in Q1.

Based on our current market price and no additional buybacks in the quarter, we expect to see the average diluted share count to be in the range of 90 million to 91 million shares.

So with that I will turn things back over to Jim for concluding remarks.

Thank you, Glenn.

Just briefly, it is clear that we are making progress along the path to high performance.

Revenue and profits are improving, lending activities are strong, efficiency is sustainable and our performance relative to our peers continues to improve.

We are happy to take your comments and questions.

(Operator Instructions).

Dave Rochester, Deutsche Bank.

Good morning.

That was a really nice jump in Wealth Management fees.

I know you talked about that a little bit.

Are any of those performance-related?

Is this a good run rate going forward as you grow that business?

When you say performance-related --.

More like one-time-ish, annual 4Q type of thing or will that stick around?

Yes, no, we expect it will -- probably will stick around.

Most of these are like are A-type performance and we are seeing strength both in Webster Investment Services and in the private bank.

So, as I mentioned, this is a key area of focus for us in strategic investment.

We are expecting bigger things from wealth and investment services.

Great and switching to the margin regarding loan yields, was there any impact from a change in prepayment penalty income?

Sorry if I missed that if you gave it.

A change in prepayment?

Prepayment penalty income.

I think it was about $1 million or so last quarter.

Yes, I think it is about 5 basis points.

Great.

And you talked about the pipeline still being strong.

Was wondering how it compares to the pipeline going into the quarter at the end of 3Q.

Were you stronger than that level?

Should we expect stronger originations or will we be stepping down?

We have got the information, but -- take us a second to dig it out.

Let's focus on the commercial pipeline.

It is bigger than it was at the end of Q3.

(multiple speakers) 10% to 15% higher than it was and it is the highest level in -- at year-end in at least the last three years.

Great.

And switching to the Commercial Banking origination yield, I know you talked about that being down a little bit and potentially being a driver for margin pressure in 1Q.

Are you not expecting that yield to rebound?

I know you mentioned a mix shift in the production.

Is this the mix we should expect going forward and should we see the low 3% range on originations in that (multiple speakers)?

I will ask Joe Savage to respond.

Yes, our expectation would be that it would rebound.

And again, we are talking about yields.

More specifically, we did -- as Jim said, in his opening comments, we did more floaters on the CRE side and that was the preponderance share of the book on originations.

So, assuming that doesn't stay at that particular level and, then, we see a step-up which we would expect to see in our segment banking side, my guess is you'll see improvement in the overall yields.

I think it would be important, however, to say that there is market pressure and you can read that in all the statistics.

You look at the BB, B universe, down year over year some 60 basis points in yields, and so there is going to be that pressure.

But we are highly dependent upon mix.

We are highly dependent upon fixed versus float.

And in the case of CRE for example, we had a greater proportion of float versus fixed, and that doesn't crush the spread so much although spreads were down.

But it will push the yield around.

Yes, and I would just add that if you look at our payoffs for the quarter, you see it coming down with an average rate of about [366].

So you can put that in a context of where our NIM is and get some sense of what is coming back on.

Great.

All right, thanks guys.

Dave Darst, Guggenheim Securities.

Good morning.

You had an announcement earlier in the week where you've appointed someone as the Director of Continuous Improvement.

Could you maybe talk about what's new to this role and what are the things that you may accomplish here that you haven't maybe been able to do in the past 18 months?

Because you have made a lot of progress on the expense side and I think internally in these types of areas.

Sure.

So it is David [Had] who joined us, I guess about a couple of weeks back.

And we are very focused, and a continuous improvement to us is to continually rationalize our distribution channels.

That is a big focus for us as well as -- and you know that we are working under eForms or electronifying all our paper, so that process is finding its way through the whole bank.

So there's a lot going on that David, we are fortunate to have, is going to head up and coordinate throughout the bank.

Do you have any kind of expense guidance or are there any points in the year when we should see some benefit of these activities?

Yes.

I think you are starting to see some of it already in our number and the fact that we are sub 60.

But the expense itself will most likely come in the second half of the year, particularly with respect to eForms.

And that will allow us to keep control on cost and also, quite frankly, to invest in those businesses where we will get additional revenue.

Okay.

And then with your capital ratios continuing to lift, could you comment on what you see as the ability to return more capital this year either in further repurchases or raising the dividend?

Sure.

We did note that our capital levels allow us that flexibility and I think we focus more on the dividend improving and we are somewhere in a 30% or so payout range.

So as earnings improve, there's an opportunity to increase the dividend.

We may look a little harder at what that payout ratio ought to be.

We have got $50 million of approved unused buyback authority as well.

We'd probably use that opportunistically rather than as an ongoing event.

Is any of that based on the outcome of the stress test?

No.

The stress test, I think we have -- we tried to be very clear about that is to say that is to say the way we look at the stress test is we want to make sure that we have ample capital in the event of a severely adverse scenario, and that we can look forward a couple of years and say, all right, what will our ratios have to be now to make sure that we remained well-capitalized with a buffer in the event of a severe adverse scenario.

And so we pegged that at about 10% or 2 to 1 common.

We are right now at close to 11.5%.

So, we have plenty of capital.

And then we look at that and say, well, we can capitalize our asset growth because we think we have got great opportunity for loan growth, particularly in the commercial area.

And then we can look at how we are going to return to capital as well.

Great.

Thank you.

Matthew Clark, Credit Suisse.

Good morning.

In the -- you may have mentioned it during your prepared comments, but the uptick in Other income could you just remind us where that came from there?

In Other income primarily swap -- customer swap fees quarter-over-quarter increase about $1.2 million, $1.1 million, $1.2 million.

Okay.

And then on the expenses as we look out beyond the upcoming quarter, it sounds like there's some seasonality here in the first and I think you had mentioned your guidance for the quarter was around a 60% efficiency ratio.

I assume we will get some relief as we move throughout the year.

Is that fair?

I think that is fair.

It is all about operating leverage for us.

So you'll see some -- you'll see it improve as the quarter -- as the year goes on.

Okay.

All right, that is it for me.

I think you guys covered the rest.

Thanks.

Casey Haire, Jefferies.

Good morning.

Glenn, just wanted to follow up on your remarks about preparing for short rates.

I know that is a bit of a longer term phenomenon, given your expectation for short rates coming up in the second half of 2015.

But was wondering what you were planning to do to prepare for that eventuality this year, be it shortening duration or otherwise.

There's a couple of things.

Extending liabilities through cash in derivative markets throughout 2014.

Obviously growing, continuing to grow our commercial bank which, for the most part, is floating rate sensitive type assets, and then really focus on increasing our personal deposits.

And I think if you look along those broad lines, that is pretty much what we are focused on in preparation for rising short-term rates.

And then on top of that you have obviously the clear benefit we get from our partners in our health savings account business as far as volume.

Okay, but no change in the investment strategy really this year?

No change, no.

And switching to credit, the loan-loss reserve coverage ratio at 1.20%.

How much lower can we go from here?

Yes.

As I said, asset quality continues to improve and it is something we monitor.

We don't have a target that we are drifting toward, but it could go lower.

But it is all going to be driven by obviously loan growth and asset quality.

We would like to see the charge-off level, which is 47 basis points, come down much more.

We think the normal for us is probably around 30 bps.

Okay, great.

And just to clarify, the fee guide, that's the modest increases off of that [51 5] and so it is X the OTTI charge, correct?

Yes.

Yes.

Okay, thank you.

And it does not include the gain that we realized this week from the sale of the CDOs.

I think it's -- that is not, I would take that out.

Both are out.

Both are out.

Bob Ramsey, FBR.

Good morning.

I know you highlighted early in the prepared comments that since you launched global deposit in June that I think 21% of your mobile users have made at least one global deposit.

I am curious how that affects you all from a cost perspective and in terms of what does it cost to process a mobile deposit versus an ATM or teller-handled deposit?

I don't have the stats right in front of me, but it is cheaper and cheaper is the way I would say it.

And particularly in terms of the load it takes off of the universal banker in the banking center so that they can provide counsel and advice.

So, I mean it is multiples cheaper, obviously, than an over-the-counter transaction and marginally cheaper than an ATM transaction.

And, Bob, it is Glenn.

We can come back to you with those numbers.

I know that we track that.

So I can give you a sense of that.

Great.

No, that sounds great.

And one other question.

I know you guys highlighted at your Analyst Day this year the opportunity over the next several years to bring down the square footage in your branch network.

I am curious as you think about 2014, what are plans to consolidate branches or otherwise tweak the distribution channel?

It probably is more tweak than anything else and we have some consolidations that are planned.

A couple of 2 into 1s, maybe 3 into 1. Don't have a lot of closures on the horizon because we have taken care of a lot of that along the way.

We are trying to match up some of our activities against the expiration of leases in some of our branches.

So, I think you really have to look at this as at least a three-year process to make that happen.

So, we are down around 744 right now.

We were at one point at least 800.

So we are making some progress.

We will continue to make progress through this year and then as the leases come up, that will accelerate in later this year and into next year.

Okay.

Great, thank you.

Matthew Kelley, Sterne Agee.

Staying on that topic, the decline in branch-based transaction and the increase in mobile, is that transition happening faster than what you thought it would this time last year?

What is the pace of that transition relative to your expectations?

Yes, I would say it is faster than we could have anticipated.

I think the world is startled at how quickly that it is happening, that you have no customers in mobile a little bit over a year ago and now you have got 40% of the base in there and then the fact that 21% of them in a period of less than six months actually made a mobile deposit is really astonishing.

And for us it is reinforcing that we said this is really important.

We have to go ahead and make this happen.

Going back to where we said we have got to have all of our ATMs be image capture-oriented.

And so we accelerated that investment because we thought we would get a good return on it.

And that inspired us to move forward more quickly with the mobile and I think we are seeing a dividend from having made those choices.

But, yes, it is happening faster and we expect it will continue to surprise on the upside.

And that is going to help us to rationalize the banking center expenses.

One of the things that is happening is we are running our community banking operation more efficiently by far than we were before.

And one of the benefits of that in reducing the expenses is we are able to reinvest that.

To Glenn's point, it is not just about reducing expenses, it is about investing in the businesses that are going to give us the highest return on capital, and so we have been able to shift some of that spend into the commercial group and into the private bank.

And are all your branches now operating on the universal model that you have designed and implemented?

Or is there more (multiple speakers) ?

Yes, they are.

Yes, they are and we noted that, as a result of that, we need fewer people obviously in the branches because they are not doing transactions.

So we are down about 7% year over year.

We expect that number will continue to shrink marginally in 2014 and 2015.

Got you.

And on the commercial real estate business, you had mentioned that you had a good slug that was floating rate.

What was that percentage in the quarter and how did that compare to the full year?

This is Joe.

Is this Matt?

Yes, in the fourth quarter we had 23% of that CRE book was fixed.

In the third quarter it was 7%, and that really more than anything explains the yield comment.

I'd have to take a look at the full year, but it was 23% Q4 fixed and 7%, 3 in the prior quarter and then as Jim said right in his opening comments, the beautiful net result of all of that was a $1 million improvement in our swap income.

So it wasn't a bad outcome.

Yes.

And then last question, Jim, how would you handicap the likelihood for traditional bank M&A for Webster as we head into -- as we start 2014 compared to last year?

This time last year?

I guess I would give the same response I have for many quarters now, which is that we are laserlike focused on improving our performance because we think that is where we are going to get the biggest reward.

And as we move closer to returning in excess of our cost of capital, we know that there's more progress that we can make there.

So we are really not focused on M&A.

I think the environment is such that there is likely to be some consolidation.

But it isn't a key element of our strategy at this point because we are focused on improving ourselves and the more we improve ourselves the more that will create potential opportunity.

Great.

Thank you.

(Operator Instructions).

Collyn Gilbert, KBW.

Good morning, gentlemen.

Just a question on the commercial pipeline.

What is your approval rate or your pass-through rate that you are seeing on your commercial pipeline and how would you say that is compared to say a year ago?

Our approval rate, we have done studies and it's typically we don't put something on our pipeline until it meets several tests.

The RM has to say there's a better than 50-50 chance that it will go through.

It generally is $2 million or greater in terms of revenues, 180 days or is the expectation when it would close.

And when we've tested those assumptions, we -- because we have some accounts officers, don't like to put anything on until they are absolutely certain it is going to happen -- we get to about a 66% realization rate.

And so the real story for us this year is that, gosh, we drained everything last year and this year's, surprisingly we built that pipeline and I think we are sitting at [370] now versus [200] last year.

So when Glenn gave you an outlook for Q1 as opposed to nothing occurring first quarter last year, it should be a good first quarter for us this year.

So, I am not sure I got all your questions, but I hope that gives you a feel.

It is about a 66% is what we get out of that 367.

We would expect that to roll in over a three- to six-month period of time.

Okay, that is helpful.

And how does that 66% compared to say either a year ago or three years ago?

I mean I am sure it is way different than three years ago, but just trying to get a --

The 66% is the cumulative run over an extended period of time.

I would be a liar to tell you that I knew exactly what that take rate was last year versus two or three years ago.

As a cumulative run.

Okay.

That's helpful, thanks.

Then, I don't know if this is for Glenn or Joe, but what is the effective duration right now on your loan portfolio?

Total?

Yes.

I would say about one year.

If you look at it -- I'm sorry, Joe, but I guess that is the weighted duration of the total.

Yes.

The commercial book is -- the one thing I think that perhaps is relevant is it's about 80% float.

And we generally see those assets roll off, even they might have -- while they might have contractual maturities in the five- to seven-year period of time, they will last about a year and a half, two years.

And that is what accelerates and oftentimes that deferred income that we speak about.

If I -- if you look at it about of the total loan book and this includes residential, commercial, everything, about 35% fixed and the rest is either periodic or floating.

Meaning periodic being within 30 days, floating being less than 30 days.

And as Joe indicated I think on the whole book it is about 1 1/2 years.

Okay.

That's great.

Then one final question, sort of big picture question, maybe for you, Jim.

How do you think about like what the appropriate growth is for the Company as you are looking out over the next, say, year to three years' cycle?

Are you really looking at it from a top-down approach?

Are you taking a bottoms-up approach based on the people on the ground?

Just trying to get a sense of how you are thinking about where your growth can go and really what is driving that.

I would say, really, it is both ways.

It is bottom-up and top-down and we look at it that the businesses that are able to give us the highest return are the ones that we are going to be investing in, building those deeper relationships that add value for the client as well as add value for us.

We try to balance the investment in that growth including people and all against our desire to have sustainable efficiency.

But there is no limit in terms of -- we will grow as fast as we can in the businesses that are going to give us the best return.

That was all I had.

Thanks.

Jake Civiello, RBC.

Good morning.

I know you said the reserve ratio could have room to move lower, but would you say there is a particular level where the rate or keeping the ratio below it would make you uncomfortable especially given what transpired over the course three or four years ago?

Yes, no, I don't have a specific number.

I can just tell you we are very cautious as we have been for the last couple of years and at 120 we feel very good about it.

We do a lot of -- we talk a lot about it and like I said I think charge-offs and asset quality if they continue to improve, then we will feel better about the portfolio.

No specific number though.

Yes, completely agree.

It is about asset quality, loan growth and the overall outlook.

And we are very comfortable where we are and we could be comfortable at a lower level.

Was there any unusual negative impact in the professional service expense associated with Volcker interpretation that won't be repeated in the first quarter?

Nothing significant.

Anything that you see in other expense, whether it was professional fees or not would have been relative to investment in the business.

Quarter over quarter.

Nothing on Volcker.

All right.

And I know you have talked about this in the past, but can you give a little more thought about your decision to extend duration in the investment securities portfolio?

And then in the flattening yield curve environment where the short end increases, but the long end does not move higher as you are currently expecting, could your strategy lead to a meaningful change in OCI?

Or what are some of the issues that could pop up as a result of -- I hesitate to call it a bet that you are making, but as a result of the decision that you have -- for the path that you have chosen?

I don't think that we have extended the duration in our investment portfolio and I am just looking for the chart that we show.

Because I think we are still in the 3.9.

We have been about 3.9 to 4. We do look at it and we look at the impact rates could have on the extension.

Even 100 basis point shock, rate shock wouldn't extend the portfolio out anything over five years.

So we feel good about that.

So, there's no -- we have made no conscious decision to extend our portfolio.

Okay, I guess I wasn't referring to specifically in the fourth quarter, but more or less over the course of the year as the total duration went from closer to 3 at the end of last year to 4 at the end of this year.

Right.

I think that is all.

And we used to have a chart and I guess we'll have to put it back in there, but the rise in the rates really is what drove the extension in the investment portfolio.

And we used to show, and we can come back to you with that and show you we plotted out against the 10-year and you can see the impact the 10-year has on the effect on -- the affected 10-year has on it, and rising 10-year on the duration of the investment portfolio.

So the purchase duration stayed at about 3.8% and we've managed the overall book as well.

Yes and the 10-year was up 100 basis points in 2013.

So I think that is really what's accounting for most of the extension on the investment portfolio.

Again, when we look at it and I have it right in front of me, when we look at even a 200 basis point rate shock based on what we -- the way we are structured right now, would only bring the investment portfolio to five years.

And it would never even at a 300 or 400 basis point rate shock it would never go over five years.

So it's -- and that is the combination of both AFS and HTM.

So, I think we are good from that standpoint or protected from that standpoint.

All right, that's helpful.

Thank you very much.

There are no further questions at this time.

I will turn the floor back to management for closing comments.

Okay, Rob, thank you very much.

Thank you all for being with us today.

Have a good day.

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