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Webster Financial Corporation (NYSE:WBS)

Q4 2008 Earnings Call Transcript

January 23, 2009 9:00 am ET

Executives

James Smith – Chairman & CEO

Jerry Plush – Senior EVP & CFO

John Ciulla – EVP & Chief Credit Risk Officer, Webster Bank, N.A.

Analysts

Ken Zerbe – Morgan Stanley

Mark Fitzgibbon – Sandler O’Neill

Collyn Gilbert – Stifel Nicolaus

Matthew Kelley – Sterne, Agee & Leach

John Pancari – J.P. Morgan

Damon Del Monte – KBW

Gerard Cassidy – RBC Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation’s fourth quarter 2008 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded. Also this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster’s financial condition results of operations in business and financial performance.

Webster has based these forward-looking statements on current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties, and assumptions as described in Webster Financial’s public filings with the Securities and Exchange Commission, which could cause future results to differ materially from historical performance or future expectations.

I would now like to introduce your host for today’s conference, Mr. James C. Smith, Chairman and Chief Executive Officer. Please go ahead, sir.

James Smith

Good morning, everyone. Welcome to Webster’s fourth quarter 2008 investor call and webcast. Joining me today are Jerry Plush, our Chief Financial Officer and Chief Risk Officer; John Ciulla, our Chief Credit Risk Officer; and, Terry Mangan, Investor Relations.

We’ve got a lot of ground to cover, say 35 minutes or so let me get right to it. Normally I’d lead with more strategic comments, but I think the focus today should be primarily on asset quality and capital. I’m sure you’ll agree. So I’ll discuss the strategy in my closing remarks.

We’ve taken strong steps to address credit quality and securities marks and other than temporary impairment. And this call enables us to explain our actions and to highlight our strong capital structure and our asset quality. I’ll take them in that order.

Our regulatory capital is way beyond the requirement for well capitalized. And our tangible capital is higher than it was a year ago. In terms of regulatory ratios, bear in mind that Webster was in the 80th percentile or better at September 30 for Tier 1 leverage, Tier 1 risk based capital, and total risk based capital ratios, compared to the Federal Reserve’s peer group of Webster and 65 other bank holding companies with assets of $10 billion or more. At 12/31, the leverage ratio at 9.6% is about double the requirement for well capitalized. Tier 1 risk based at 12.7% is more than double the requirement, and total risk based at 15.2% is 50% higher than required. And all are significantly higher than our internal targets of 8%, 10%, and 12%, respectively.

Two ratings agencies noted as much in the recent reviews. S&P just affirmed our ratings despite the negative outlook, noting that our non-performing asset levels our no worse than many of our regional peer banks. I think of that as faint praise. And noting as well, that we raised $625 million of preferred equity capital via our $225 million convertible preferred and our $400 million capital purchase program allotment. S&P’s qualifier is that we have a high level of preferred in the capital base and lower tangible common equity levels.

It’s clear, and we get it, that gone are the days when an efficient capital structure was a plus. DBRS commented that Webster’s investment grade ratings are underpinned by our solid Connecticut based franchise that provides stable and low cost funding, solid and augmented capital, and adequate liquidity. And my edit here, not to mention scarcity value.

Webster has always had a keen focus on tangible capital as a primary capital ratio. Our ratio was 7.7% at year-end, up189 basis points from a year ago after the Q4 charges. This important ratio continues to compare favorably with the peer group media. We estimate that our adjusted tangible common equity ratio, as measured by Moody’s, was 6.07% at year-end. And our adjusted tangible equity ratio, as measured by S&P, was 6.65%. In both cases, up significantly from a year ago. These rating agency estimates underscore emphatically the depth and quality of Webster’s capital structure.

We recognize that the playing field has changed and the tangible common equity is the ratio garnering the most attention in today’s risk fraught environment. But we want to be clear that we’re comfortable with our tangible capital levels. We have a variety of leverage we can pull to build those levels, including tangible common equity. And I want to highlight some of them here.

Reducing the dividend is one such option. We announced this morning the reduction of the quarterly cash dividend to $0.01 per common share to reflect the Board’s desire to preserve capital given this extended period of unprecedented economic uncertainty. This move could preserve approximately $60 million in common equity in 2009. Or said differently, it could add 33 basis points to tangible common equity by year-end, and another eight basis points per quarter thereafter, at least until such time as the Board deems it prudent to revisit the dividend level.

The next phase of One Webster we announced this morning should add about four basis points to the tangible common equity each year primarily through lowered expenses. We know that we have to operate more efficiently in this environment. We can build TCE [ph] by using all the cash flows, including maturities from our securities portfolio, to pay off borrowings. Not an option we’d be anxious to pursue, but an available lever, nonetheless, that could produce 14 basis points of TCE growth in 2009.

Our efficient capital structure presents another option. As we would not be opposed to considering ways to move capital down the structure to tangible common should the opportunity arise to do so under favorable terms. While we view that as moving existing tangible capital from one bucket to another, when you do the math, we gain about 55 basis points in TCE per 100 million of convertible preferred stock that might convert to common.

Less assured, but another possible contributor to TCE, is the potential recovery of securities marks should the market turn and liquidity improve. Speaking of securities, it should be noted that the investment portfolio contain $2.7 billion of AAA agency mortgage backed securities at year-end. This portfolio creates very little capital risk, yet reduced our TCE ratio by almost 80 basis points.

In total, the levers I’ve just described, excluding recovery of securities marks, could add over 100 basis points to TCE by the end of 2009 without any need to consider outside capital. Our strong capital position gives us added cushion if there is further economic deterioration in 2009 as well as help protect the company should there continue to be losses or a need to reduce our deferred tax asset. So no, we don’t feel pressured to raise common equity. Even though we understand it’s important to keep all of our options open in this environment.

To wrap up my comments on capital, we’re pleased to let you know that between November 7, which was the date of our preliminary approval to receive $400 million of capital purchase programmed funding and year-end, Webster extended $423 million of credit under 1,900 loans. These loans consisted of $270 million of new originations and $153 million of modifications and renewals. We’ve said from the outset that we would use the new capital to provide an equal amount of credit for the communities we serve. We’re pleased to be able to utilize this funding to expand credit for our region’s consumers and businesses, consistent with the intent of the TARP legislation.

We also implemented, during the fourth quarter, a moratorium on home foreclosures for Webster mortgages and the expansion of mortgage assistance programs aimed at keeping families in their homes. We’re also working with states in which we operate to develop programs where the state provides guarantees of interest in principle on mortgages and small business loans.

Turning now to the provision for loan losses, I have to admit that we expected a better reception than our $100 million provision received last week. Our intention was to prudently address current and potential credit quality issues by targeting weaker loan classes and reserving significantly more than we charged off. In our minds, one of the encouraged uses of the capital purchase program is to accelerate recognition and resolution of underperforming assets, and securities for that matter, with the goal of cleansing the balance sheet. And we’ve made a lot of progress toward that goal.

Our loan coverage now exceeds 2%, up from 1.54% at the end of the third quarter. The ratio of allowance to non-performing loans rose to 106%. If you dig deeper, these strong numbers look even better because we have already taken charge offs of $135 million or about 34% against the remaining $263 million in non-performing assets. I encourage you to focus on this number as we believe it’s differentiating and shines a strong positive light on the quality of our credit management, namely conservative and timely loss recognition. Overall, non-performing assets rose at the slowest quarterly rate this year in Q4 at 5%.

I believe that as we neutralize the small lot of market portfolios, the relatively good performance of our in market loans will be easier to appreciate. For example, our commercial real estate portfolio is performing very well with delinquency at one basis point, and non-accruals at six basis points at year-end. And to the extent you’re concerned that this asset class will weaken in the months ahead, Webster has significantly less exposure to this asset class than do our peer group banks.

Our input print home equity portfolio has a combined loan devalue ratio of approximately 68%. And our first mortgage portfolio has an LTV of 53%, each on an updated basis. The point here is that not all home equity loans are problematic, and default models just cannot be generically applied to this portfolio in our view. Our New England footprint will be a positive as regards asset values as we move through this tough period. It’s also worth noting at this point in the cycle that we have no indirect auto loans and virtually no unsecured debts such as credit cards or personal loans.

We took serious marks in OTTI in our securities portfolio , which you know we’ve broken out for you in graphic detail for several quarters. The primary asset quality focus is the trust preferred portfolio, which has a par value of $360 million, and a carrying value of $93.5 million or about 26% of par value following $118 million in OTTI charges and $66 million in OCI marks we took in Q4.

But again, let’s dig deeper. The AAA and AA securities and high grade single name issuers, which are Bank of America, JP Morgan Chase, and State Street, are marks to about 42% of par value, but not impaired. All of the other trust preferred, about $230 million in par value, now have a carrying value of $39 million or $0.17 on the dollar, and have been impaired to the full mark as of year-end. Of the $44 million of those capital notes downgraded by rating agencies in Q4, two-thirds are still investment grade.

So let’s think about that $0.17. A sizeable portion of the mark can be attributed to illiquidity. Since in our calculation we used today’s very high spreads for the remaining life of the securities. In fact, 63% of that $230 million par value is still cash flowing. And for the record, we value the securities 50% based on our internal model and 50% based on dealer indication prices. The results from both methods were virtually the same in Q4 coming within $1 million overall. If you’re thinking ahead and thinking about capital, the damage these notes could do in the future is clearly limited. And if the liquidity portion of the marks, which we believe is significant, recedes, there could be a real boost to the capital account down the line.

Regarding goodwill, while the final conclusion has not been reached regarding the retail banking segment, we took a non-cash goodwill impairment charge of $189 million in Q4 that reflects, primarily, declines in current indicated values for our lending units. Jerry will provide more detail in his remarks. This non-cash charge has no effect on our liquidity and capital positions though it had obvious effect on the size of the reported loss. We’re going to turn the call over to Jerry at this point for the financial review of the quarter, and I’ll have a few comments on strategy at the end. Jerry?

Jerry Plush

Thank you, Jim. Good morning, everyone. I’ll cover several items. We’ll talk through a loan composition, growth and asset quality. We’ll then cover the investment portfolio. I’ll briefly comment on those other-than-temporary impairment charges that have been taken as well as greater detail in the goodwill impairment charge. We’ll talk through deposits and borrowings. And also conclude with some brief perspective on the first quarter.

So let’s start first with loans and growth. Our total loans at year-end were $12.2 billion that represented a 2.5% decline from the prior year’s ending balance. Excluding a $468 million securitization of residential mortgage loans in the fourth quarter, our core loan growth would have been 1.3% for the year. Commercial loans consisting of C&I and CRE totaled $5.8 billion. It grew by 4% combined from a year ago. Our commercial loans now comprise 48% of the total portfolio, compared to 45% a year ago. The C&I portion of the commercial portfolio totaled $3.6 billion at December 31st. And that’s a decline of $108 million from September 30th, primarily in asset based lending. The entire C&I portfolio yielded about 5.22% in the quarter, compared to 5.24% in the third quarter.

Our equipment finance outstandings totaled just over $1 billion at year-end. Again this is a very direct origination business, centralized underwriting, and the portfolio continues to be very granular as no single credit represents 1% of the portfolio. And the average deal size is less than $100,000. As in all of our commercial lines of business, we continue to underwrite diligently our customer’s current financial condition and prospects. We’re focused on higher down payments and shorter amortizations where appropriate. And we continue to proactively evaluate the industries in which we lend.

Asset based lending outstandings were $753 million at December 31st, compared to $868 million at September 30th. A $115 million decline represents roughly $40 million from prudent portfolio management and reducing about $80 million of what we deemed to be higher risk commitments. And the remaining $75 million decline represents seasonality. The current asset coverage is as follows, approximately 92% of the outstanding is secured by accounts receivable and inventory, with the remaining 8% of outstandings consist of equipment at 7% and real estate at 1%. We’ve managed growth in this asset class being selective in new underwritings and with aggressive problem asset management.

Let’s turn now to commercial real estate. That portfolio totaled $2.2 billion at December 31, representing $133 million decline from September 30th. Within that $2.2 billion, the investor CRE segment totaled $1.4 billion and had declined $58 million from September 30th. We strategically managed growth in this segment during the second half of 2008.

We generated approximately $280 million in loan growth in the first half of the year, taking advantage of stronger structures and better pricing giving reduced capital markets competition. The investor CRE loans are primarily institutional quality real estate with five to ten-year loan terms that are secured by stabilized properties, with solid debt service coverage, and LTDs generally under 75% at origination. As we review and monitor the investor CRE portfolio in this economic environment, we’re focused on what we consider to be the highest risk property types, such as retail, hotel, and office.

In retail, which represents approximately 17% of the investment CRE portfolio, most of what we have is more necessity retail than discretionary retail. We have six hotel borrowers in the portfolio that represents less than 5% of the investment CRE balances.

Regarding the office, which makes up approximately 30% of the portfolio, we regularly communicate on our borrowers’ and sponsors’ ability to gauge occupancy, cash flow, and lease activity. We stress the portfolio regularly, and we utilize established outside resources so we’ll get quarterly loss fasting – loss forecasting specific to our portfolio. We are proactively managing maturities, and we work to identify issues early in the cycle. At December 31st, delinquencies and non-accruals in the investor CRE portfolio were only one basis point and six basis points, respectively.

Res/dev [ph] loans totaled $162 million, and that represents a decline of $55 million from September 30th. The $55 million reduction is comprised of $30 million of res/dev charge offs in the quarter, $17 million from normal payoff and pay down activity, and approximately $8 million that we transferred into REO. Our owner occupied CRE totaled $651 million, and that declined by $20 million from September 30th. Our owner occupied charge offs were nominal for the quarter and for year-to-date. Overall, the CRE portfolio yielded a 5.52% in the quarter, and that’s in comparison to a 5.47% in the third quarter.

Let’s turn now to our consumer and home equity loan portfolio. That totaled $3.3 billion, and it consists of $3 billion in the continuing portfolio, and $284 million in the liquidating home equity portfolio. We had a 2% increase in the continuing portfolio from September 30th. And that reflects originations to our core retail distribution channel. Lines now comprise 58% of the outstandings. And utilization in the continuing portfolio was 48%, compared to 46% in the third quarter.

Our branch originations were $164 million in the fourth quarter, compared to $181 million in the third quarter. The total consumer portfolio yielded 4.68% in the quarter, compared to 5.24% in the third quarter. And that’s reflective of the prime rate decreases that we all saw in the fourth quarter. We would expect some further yield decline in the first quarter from heal offs in connection with these prime rate cuts.

Through proactive line management, we reduced 150 million of lines over the course of the last three quarters. As a result, there’s under $79 million of open-to-buy exposure, or 2.5% of the total portfolio that is at CLTV upgraded in 80% based on updated valuations as of December of 2008. 77% of this is in a continuing portfolio, and $2.5 million is in the liquidating portfolio. And we will continually, actively look for opportunities to manage this exposure further.

Our residential loan balances as of December 31 are $3.1 billion. And that’s down largely as a result of the aforementioned $168 million securitization. The resi [ph] portfolio yielded 5.51% for the quarter, and that’s compared to 5.6% last quarter.

We’ll turn now to asset quality. The provision for credit losses was $100 million in the fourth quarter, compared to $45.5 million in the third and $45.25 million from a year ago. As noted previously, $75 million in the quarter related to the continuing portfolios, and $25 million related to the liquidating home equity portfolio.

The increase over the third quarter provision reflects our offsetting $30 million of res/dev loan charge offs resulting from updated valuations on non-accruing loans in that category in the quarter; higher forecasted loan charges for the liquidating home equity portfolio, given the deteriorating economic conditions; and, increased reserve levels for other lines of business just given to general economic deterioration. Our total allowance for credit losses to total loans was 2.02% at December 31st. And that’s compared to 1.54% at September 30th and 1.58% a year ago. Our allowance was up to 1.63% in comparison to 1.36% in the continuing portfolio.

Net charge offs in the fourth quarter totaled $43.2 million for the continuing portfolio, which included the $30 million in res/dev related to the appraisals; and $9.7 million for the liquidating portfolio, of which $8.8 million was specific to home equity and $900,000 to national construction, compared to third quarter net charge offs of $20.6 million in the continuing and $20.7 million in the liquidating portfolios, respectively.

In the quarter, past due loans and non-performing loans grew at a reduced rate when compared to the prior quarter. Our total non-performing assets increased only to $263 million at December 31, compared to $250 million at September 30th. Our non-performing loans in the continuing portfolio were impacted by the $30 million of res/dev charge offs, and were $198 million at December 31, compared to $199 million at September 30th. Non-performing assets were 2.16% of loans plus other real estate owned. And the net charge off rate was 1.73% annualized in the fourth quarter.

Credit metrics in the home equity continuing portfolio do show an up tick in the 30 plus EPD delinquency rate at 1.12% at December 31st, compared to 0.78% at September 30th. While the non-accrual was at 1% as of December 31st, compared to 0.8% at September 30th, and it’s very reflective of the economic environment.

Regarding the liquidating portfolios, we’ve talked about these in the past, and they consist of indirect, out-of-market, home equity, and national construction loans. We have $320 million of outstandings in these portfolios at December 31, compared to $337 million at September 30th, and the $420 million when the portfolios were established at year-end 2007. The total of $320 million consists of $284 million of home equities, $19 million in remaining construction loans, and $17 million in permanent loans, which going forward, we will incorporate into the balance our national wholesale loans and convert it to permanent prior12/31/07 and remain in our balance sheet in resi loans.

Total permanent loans then from national wholesale activities total $58 million as of 12/31/08. We’re going to talk more on this in a minute or two. With the $25 million additional provision in the fourth quarter for liquidating home equity, the reserve for that portfolio now stands at $38 million against the remaining $284 million in loans that are 13.5% of total outstandings.

The $19 million liquidating national construction portfolio has a $4.9 million reserve balance as of year-end. That reserve is established based on a file-by-file review in the third quarter 2008, and we’ve been realizing losses in that segment in line with those original expectations. $10 million of our fourth quarter provision, as previously mentioned, was allocated towards the $58 million of remaining permanent national wholesale construction loans in our balance sheet. Delinquency on this segment is approximately 34%. So you can see the $10 million that we recorded in provision represents about 50% of those delinquent balances. It’s important to note these loans are secured by completed and occupied homes. This small loan segment accounted for about half the charge offs in the residential portfolio in 2008.

Turning now in the investment portfolio, at December 31, the investment portfolio totaled $3.8 billion, and that’s at an increase of $800 million over September 30th. The increase was primarily due to the securitization of the $468 million in resi loans, which provides greater liquidity and flexibility, while also improving regulatory risk adjusting capital ratios. Otherwise, the repurchases of agency arms and 30-year fixed rate agency securities. However, that’s predominantly armed securities.

We’ll turn now to the OTTI charge, James already discussed this in detail. We recorded $129.6 million in the quarter for certain investment securities, specifically around equity securities in corporate bonds and notes. Note again, in addition to our disclosures in our SEC filings in the investor presentations, very consistent with those, we began – provided today, barely granular disclosure regarding the composition of our investment portfolio and the supplemental schedules we posted online on our Web site.

In addition to the OTTI charges, we recognize $4.2 million in losses in the sales with securities to realize some capital losses in 2008 to offset capital gains for tax purposes that were going to expire. These securities losses would likely have otherwise been an addition to the OTTI charge in year-end.

Turning to the liability side of the balance sheet, our total deposits increased $52 million in the quarter to $11.9 billion, primarily driven by growth in savings and certificates and deposits, offset by slight declines in money market and demand deposit accounts. Our core deposits to total deposits ratio dropped slightly to 59% from just over 60% at the end of the third quarter. Additionally, our cost to deposits remain relatively flat quarter-over-quarter given the slight composition shift towards higher costing CDs.

Turning now to HSA Bank, which is a consistent source of low cost stable deposits for us, whole savings deposit since December 31 totaled $531 million, compared to $515 million in deposits at September 30th. And that’s an increase of $127 million or 31% from a year ago.

We also have about $53 million in linked brokerage accounts, compared to about $57 million a year ago. The brokerage amount balance is reflective of the decline in equity values in 2008. The HSA Bank average cost to deposits was 2.03% in the fourth quarter, and that’s down slightly from the 2.09% we reported in the third quarter. As of the end of December, we had 224,000 health savings accounts, and that’s compared to 220,000 in September 30th and 187,000 a year ago. The average deposit balance per account is now $2,370.00, compared to $2,160.00 a year ago.

Our borrowings decreased $138 million from September 30th. The cost of borrowings declined to 2.87% for the fourth quarter from 3.33% for the third quarter. And that’s reflective of the Fed rate reductions. With our depositors’ focus in 2009 or the primary focus on operating and checking account acquisitions, these initiatives should continue to reduce the need for borrowings at these levels in future periods. As was stated in the previous quarter, our intent is only to grow in the line of business that contribute to deposit growth in the future.

Regarding the goodwill impairment, as we indicated, the company has been testing its goodwill for potential impairment based on the continued public capital markets disruption and the company’s market capitalization deterioration compared to book value. We’ve done these processes well on both the second quarter and the third quarter. We’re utilizing an independent evaluation firm to assist with the testing of the carrying value of goodwill, again, as we have in prior quarters.

So in light of recent market economic advance, we’ve reviewed goodwill to determine whether there are any further impairments. Based on the analysis today, we’ve determined that there was goodwill impairment of $188.9 million related to our commercial banking, consumer finance, and other business segments. However, as Jim indicated, we’ve not reached the final conclusion regarding the retail banking segment. So as we noted, we could incur impairment charges to further reduce the carrying amount of goodwill, which then could also have an increase in evaluation and allowance against our deferred assets. It’s important to note, however, and to reiterate, that a goodwill impairment charge is non-cash in nature. It does not affect the company’s liquidity, tangible equity or its well capitalized position at all under regulatory capital ratios.

At this point, we’ll now turn to fourth quarter results, and we’ll cover net interest income first. The margin came in at 3.2% in the fourth quarter, compared to the 3.2% in the third quarter. This was driven largely by the three Fed rate reserve rate reductions totaling 175 basis points in the quarter as well as interest reversals on non-accrual loans and pool trust preferred securities. Our average earning assets total $15.9 billion, and that’s up from $15.8 billion last quarter.

Regarding the provision, as we previously noted, we recorded $100 million in the quarter. The increased provision levels reflect charge offs based on recent appraisals on non-accruing residential loans, higher forecasted charge offs in the liquidating home equity portfolio in light of deteriorating economic conditions, and increased reserve levels for other lines of business given economic deterioration.

Regarding non-interest income, key changes occurred in deposit service fees, which decline by $1.7 million from last quarter, specifically due to a decline in NSM charges while wealth and investment service revenues declined by $590,000. And that’s primarily from the decline in the value of assets under management due to adverse market conditions.

Non-interest expenses showed a significant decrease excluding the goodwill impairment and severance charges. The decline from last quarter represents significant reductions, specifically in compensation benefits. Our base comp is down $1.6 million from One Webster initiatives. The incentive comp line declined $5.4 million from reversals. And declines were also experienced in group benefits and in pension expense in the fourth quarter.

I’ll give some perspective going forward at this time. Clearly, the NIM was impacted in the fourth quarter from the previously mentioned 175 basis points worth of Fed rate reductions, and the effects of these actions will continue to be seen in the first quarter. While competitive deposit pricing declined in the fourth quarter, we believe that competitive pressures will limit further reductions. We’ll see some lower yields on assets that are tied to prime and LIBOR, and slightly higher average non-performing asset levels could also have some impact. As a result, we would expect the NIM to show some moderate decline in the first quarter.

Regarding fee income, we would also expect some moderate declines seen in deposit fees and wealth management fees in Q1, consistent with the actual results that we saw in the quarter. Wealth, again, is a function of lower dollar levels of assets under management. So again, we would expect this to be consistent that the trends we saw in the fourth quarter to be consistent here in the first quarter.

Regarding expenses, as we continue to implement One Webster initiatives, we continue to see corresponding benefits in future quarters. We recognize that continuous improvement is essential to keep our overall expense levels in check and to offset revenue declines. To that end, the second phase of the One Webster initiative we’ve recently undertaken should show some benefits in the second quarter and beyond. The first quarter, however, would show some increase due to seasonal taxes and benefit expenses as we have in the past. We will work to manage our other expenses to help minimize this impact.

I’ll now turn it back over to Jim for some concluding remarks.

James Smith

Thanks, Jerry. I’ll conclude by emphasizing the shift in our business model to focus intensely on core franchise opportunities with absolute focus on providing basic financial services in market, direct to our customers. The only exceptions, being our direct to customer centrally-controlled equipment financing, asset based lending, and commercial real estate units, and our fast growing HSA bank. We will succeed as a regional commercial bank, easy to understand, easy to measure, and easy to compare.

We understand the tradeoff we’ve made. We will not be counting on out of market businesses to make up for the slower growth market where our core franchise happens to be located. We’re banking on our ability to outperform those in our market by executing on our retail and commercial banking strategies. There’s no fallback position. We know that and we’re highly motivated by that.

We’ll be focusing on five areas in 2009, credit administration has to top the list. With added resources, improved MIS, and reorganized the function over the past year, and we’ll continue our emphasis on this critically important area.

Next is completing the centralization of all support functions. An initiative we undertook with One Webster months ago and have accelerated in the next phase announced today. Third, is launching our Boston presence as a bank wide initiative whereby we’ll deliver all of our capabilities to the region. Fourth, we’re instituting a deposit, or I should say, we have instituted a deposits first mentality across Webster, including changes in marketing programs and incentives to encourage Webster people to focus on gathering deposits ahead of all else. And finally, cross selling to existing customers using new database marketing systems and techniques to deepen customer relationships.

I’ll give you a single example of the success of the deposits first and cross sales strategies. 80% of new mortgage customers are opening up ACH relationships with us, and 40% represent new to Webster checking accounts. I think it’s fair to say that hidden beneath the challenges of the day is the considerable progress we’ve made in advancing our business plans and making progress toward our vision to be New England’s bank.

I hope that our comments today have helped to clarify our actions and highlight our strengths. You may concur with me that Webster’s valuation, currently at about 40% of tangible book value, is incomprehensibly low. Thank you for being with us on call. We’ll be pleased to respond to your comments and questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions) Our first question is coming from Ken Zerbe with Morgan Stanley. Please state your question.

Ken Zerbe – Morgan Stanley

Good morning.

James Smith

Good morning.

Ken Zerbe – Morgan Stanley

I understand you guys did do a great job in terms of cleaning up the balance sheet. Just looking forward, if you were to look at what you have now in terms of whether the remaining troughs or certain loan portfolios, where do you think that you could potentially see additional weakness from here?

Jerry Plush

Ken, it’s Jerry. I think that, taken from the comments that Jim made, the A and lower rated troughs, we feel that we isolated what’s left. The fair value there is, I’ll call it just offhand, in and around the thirty some odd million dollars left in value. So we take that, and I’ll reference the specific numbers in a sec when I grab the supplemental investment page, I would expect that there could be some defaults or deferrals of payments there, and that could create some of that collateral short folder drives, the OTTI impairments the way that we look at it, and we think that the way that a number of other external dealers look at it.

So I think that the good news is in that statement, you’ve got relatively a limited amount of dollars there. As I think about the mortgage backed securities portfolio, clearly, we were actually seeing, subsequent to 12/31, some real up tick in the value of the fixed rate and agency mortgage backed securities. So I actually see some positives there.

I think everyone notes from our – also though, from our investor presentations, we have about $135 million worth of CMBS in the investment portfolio. And I think in the investment schedules, it’s combined in total mortgaged backed securities. We’ve seen some real market weakness there, in those. However, at this stage, given the collateral levels, we haven’t seen any casual issues underlying any of those. But clearly, there is an expectation of the fault in a number of those deals that we caused that type of fair value issue to those. We would say, arguably, a lot of it’s liquidity, or lack of liquidity, but we also think that we’re realistic and expect that there will be CRE deterioration in 2009, and we’ll see some of that potentially come through in the way of those types of values. But I think a lot of that’s taken into account when you think of the values that were shown.

Our real view was, and I think we tried to clearly articulate both from the call and then also in the schedules, is to really give people a framework of what capital’s at risk. Because the OTTI charges we’ve taken, so that specific write downs we’ve taken, coupled with what you can see that’s left and where the OCI levels are, I think you will recognize that that’s all straight deductions from tangible common equity or tangible equity, whichever ratio you want to think about. And as such, we really don’t have that much left at fair value that we think is at risk. So I think, if I’m responding to your question, specific around the investment portfolio. That’s sort of my overarching thoughts about that. And John, if you have any comments on the loans–

John Ciulla

Sure. On the loans, Ken, I mean you know that, obviously, we’ve got the liquidated home equity portfolio. It’s down to about $284 million. In that portfolio, there is about a 40% sub-segment that really is driving the worst performance. It’s about 40% of the portfolio, or 38% of the portfolio. And it’s driving an excess of 60% of the losses. I think we took some aggressive steps with respect to provisioning in the quarter, which give us some good coverage, as Jerry mentioned, against that portfolio. But obviously, we are aggressively trying to work that portfolio down through loss mitigation and aggressive risk management.

Jerry referenced in his comments the $58 million in permanent national wholesale loans where we put up a $10 million reserve. The good news there is those are occupied completed homes. And we believe we’re undertaking right now a file-by-file review, which we did on our in construction loans to make sure that we’ve got adequate provision there. But that portfolio is amortizing, and again, it’s relatively small, but we’re watching it carefully.

Residential development, you note, that we took some significant charges in the fourth quarter. There’s $163 million [ph] left in that portfolio. There is clearly still risk in the portfolio if we continue to see deterioration in home prices, and lack of activity and sales activity in the market. The good news is that $48 million of that $162 million net balance that we’re reporting are non-accruals that have already been marked down aggressively or appropriately, but taken significant marks against the $48 million. And the balance then of residential development loans are much more granular than the ones that went non-accrual and we took losses against.

So in that remaining balance, there’s only four relationships greater than $5 million in exposure. And all but one of those are performing relatively well. So I think we’ve got our arms around that portfolio. We do monthly absorption reviews, but obviously, as I mentioned, and you asked that question, I think we still see potential for risk in that portfolio.

And then beyond that, it’s the same story as we gave in the third quarter where our C&I booked both in the middle market, and this is in professional banking, along with investment commercial real estate, while we’re seeing stress and some negative risk migration. The portfolios are performing very, very well. I think we’re benefited by our geography and the strength of underwriting. So we’re looking at what the – those asset classes, which tend to lag in the – in terms of performance in a long economic downturn making sure we’re staying ahead of it. But thus far, the statistics show that those portfolios are holding up quite well.

Ken Zerbe – Morgan Stanley

Okay. Thank you very much.

Operator

Our next question is coming from Mark Fitzgibbon with Sandler O'Neill. Please state your question.

Mark Fitzgibbon – Sandler O'Neill

Good morning. Guys, I was wondering if you could share with me what you're seeing in the home equity and commercial line utilization rates. What kind of trends you've been seeing this quarter?

James Smith

Utilization rates–

Jerry Plush

Hey, Mark. It's Jerry, and John will also comment. In my comment, our general view was we – and I think probably the most important thing for everyone to know is, we monitor all open line on a daily basis. So each of the business units report to both John and myself on a daily basis with their activity. And it's monitored, not only then by from a credit and overall risk perspective, it's also monitored by each and everyone with the line of business directors.

So there's a real focus on understanding the trend in that portfolio. And I would have to say that, specifically to consumer, we did see a little bit of an up tick, but when you think, it's 48% versus the 46%, I believe fourth quarter versus third. But what I think it really does point out is, as your underwriting new credits, given that the line assignments that we're handing out may not be at the same levels that you would've seen in prior periods. So when you look at current period vintage, you're just not going to see us as well as most lenders are signing out the higher levels that you would've seen on the line.

So it's a little bit misleading, particularly given that we've seen such a shift in consumer preference and clearly, that's rate driven, and also because of the open ended nature of them to build towards lines. So I think as it relates to home equity, I think we would say that constant daily monitoring both within the line and also from the credit risk management standpoint, really not seen a real surge in any one category, specific vantages. And I think that overall, we're comfortable with – that we saw some slight up tick overall in utilization. John, you want to comment on commercial?

John Ciulla

Yes. Mark, I would agree. I think all the data we have shows that there's really not a behavioral switch in commercial. It's relatively flat period over period if you X out the seasonality in some of the businesses.

I think we mentioned on the call last time at the end of the third quarter and beginning at the fourth quarter, we did have a handful of commercial borrowers. Some specific to our asset-based business where there was a, sort of, a liquidity preservation draw, I'd like to say, but I think once there were government actions were announced, those liquidity draws were quickly repaid And we have not seen cash hoarding or any other type of bars where behavior that 's impacting our utilization rights in the commercial asset class, as well.

Mark Fitzgibbon – Sandler O’Neill

Okay. And then, with respect to the provision, know it's a giant guess at this point. Could you give us a sense for where we should be thinking about provisioning levels for the first quarter?

Jerry Plush

Yes, Mark. And I think just generally speaking, one of the things that we have consistently shown over a very demonstrated period in time is that we'll obviously record provision to the extent of anything that we charge off, so at this point in time, I would say going in a certainly at this point and time within the cycle.

And at this point and time of the way, just to give you a view of our thinking, we'll clearly, into the extent that there was $15 million or $20 million worth of charge offs in the quarter, reflect that we would want to replace those.

I think the issue for provisioning, comes down to a couple of things, one, clearly, we did not see significant loan growth. So one of the issues, and even though we're trying to continue to be proactive in lending to the markets, we're seeing an equal amount of contraction going on there.

So I'm not sure that we'll see as much of a provisioning based on growth need in 2009 because my expectation would be that we'll see a fair bit of churn, and it will still see some very, very well numbers, single digit numbers in terms of overall growth. Even though again, I want to emphasize – and I think this echoes Jim's comments, we're trying to proactively be there in the small business and the commercial and in the consumer markets for the customers in the – not only in the local footprint but serving all of our lines of business.

And again, very much focused on those little core deposits. But specifically, as it relates to the way we're thinking about provisioning, going forward, it's really the risk assessment given the environmental factors that we're assigning to each category. So it's not going to be as quad or statistically driven as it may be historically. Because right now, as an example, we look at lines such as small business or CRE or C&I and elected based on our judgment. More of the subjective or qualitative side that the environment says that we needed to boost reserves in those classifications.

Yet you wouldn't see necessarily delinquency trends that would lead you, to what I’ll call, the statistically driven or quant driven type of approach. Long-winded way of saying, I'd expect us to, generally speaking, to be looking at a core provisioning number that you could think about that we've said in the prior quarters. The kind of numbers that we've put out there before, but I just caution that our view is – capital and equity are what we've got to manage and make sure that we – clearly, we show that this quarter, we wanted to step up, make sure that we felt that we are up to a much higher level in and around provision.

Given what we assessed to be risk and lost content in the portfolio. So I will just say, generally speaking, I think we will look more towards where those core provisioning levels were in prior quarters, but not necessarily – people do need to know.

I think that you could see some choppiness in provisioning just based on, facts based or other evidence that comes to our attention.

Mark Fitzgibbon – Sandler O’Neill

Thank you.

Operator

Our next question comes from Collyn Gilbert with Stifel Nicolaus. Please state your question.

Collyn Gilbert – Stifel Nicolaus

Thanks. Good morning, guys. This is kind of a follow up, I think, to what Mark was asking on the provision line, and I guess, Jim, I'll take it back to your initial comment in terms of perhaps being given a little bit more credit for the $100 million provision in the fourth quarter. And I think where credit could be given as if – if you guys can give us visibility that, that was a one time boost in the provision, or if there is clarity to be given that we wouldn't expect that time to continue going forward, that we can – and maybe that's what you’re sort of saying here, Jerry. But I think that's the moving target here. And if we try to sort of assess what you've guided to in the past, it's been considerably lower than where we are today. And I think that's – I know that's certainly my challenge. So if–

James Smith

Yes.

Collyn Gilbert – Stifel Nicolaus

You could tie those together a little bit.

James Smith

Collyn, you’re spot on. And we'll readily acknowledge that as we look through what we felt would need to be the core we've also been trying to break out for, and again today, even with the much larger provisioning that we did, the pieces. So if you asserted to think again about what we did today, $30 million of that, in the context of what I was saying is really a replacement of the charge off that we took. We looked at its updated forecasts that we've done both in internal model and an external model, looking from something as simple as ROE rate analysis to just say we believe there's more lost content, given the deteriorating economic conditions that'll happen to those home equity lines. So hence, while there's a boost over there.

So two big components that we've put up this quarter that I would think were specific actions related to evidence we found during the course of the quarter. One of which, we were pretty clear in indicating to folks in the last call that everybody knew that either projects that were on the interest reserve or had already shown at default. We clearly moved everything to non-accrual, ordered the appraisals and took the charges.

So I would say just top level. The 30 and the 25, respectively were specific to actions in the quarter. Also the 10 million that we put up around that specific segment of the resi portfolio would be, again, an item that we said. We're looking at a specific packet of loans that are causing a lot of delinquency. We think that – I think I outlined today was half the charge-off to experience to the resi portfolio. So just add up those components. I think you get back to where that core provision number would be.

Collyn Gilbert – Stifel Nicolaus

Okay. So then, to decipher through that we could assume that the provision would be lower in the first quarter.

James Smith

We sure would hope so. I think the way that Jerry broke it out in his remarks helped to clarify. You looked at, there was 35. That was similar to what was taken in Q3. And then, there was 30 with a specific purpose against commercial real estate. And there was 10 against some permanent loans. Again that was specific. There was 25 because we decided we need a bigger number in the liquidating home equity portfolio. If you do the math, I think you could deduce for yourself what we think the run rate is.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay, that's helpful. And then, just a question on the NSF charges. You had said that they were a lot lower this quarter. Any thought on why that might be? I mean, what kind of trends are you seeing in your checking account behavior, your consumer behavior, retail behavior.

Jerry Plush

Well, one thing that we're saying is that people are being more careful. I think it's the sign of the times. That if you can avoid overdraft days, you want to, people are paying more attention to their checking accounts. They're paying more attention to their cash needs.

As a result that we think they're probably managing better which is a good thing.

We also think that some of the relationship accounts that have introduced are attracting a lot of our customers which is also a good thing. And we hope that it will end up meaning higher balances and ultimately more valuable relationships over the long term.

Collyn Gilbert – Stifel Nicolaus

Okay, great. And then, just one final question. What was the exact date that you guys received the TARP money?

James Smith

November 21.

Collyn Gilbert – Stifel Nicolaus

December 21?

James Smith

November.

Collyn Gilbert – Stifel Nicolaus

November 21. Okay, perfect. Thank you very much.

James Smith

Thank you.

Operator

Our next question is coming from Matthew Kelley with Sterne, Agee & Leach. Please state your question.

Matthew Kelley – Sterne, Agee & Leach

Yes. Hi, guys. I was wondering if you could just walk us through the mechanics of shifting from preferred to tangible common, how that process would work. You've mentioned that for every $100,00 million that shifts, you get 55 basis points on TCE. What would that process look like?

James Smith

The res/dev is right here, way down deep into the details that right now, we've put it out there as we could possibly do, as a means of raising comment of we chose to. I think there are various ways to approach it there. There are certain kinds of exchanges that you could undertake, but I wouldn't want to get steeped in the detail at this point. I'd like to leave it out there as a possibility. It's just the use of capital that is tangible today that can be pulled down the curve if we chose to do it.

Jerry Plush

Hey, Matt. It's Jerry. I guess my reaction would be I think just in terms of the context of Jim's comment. He was trying to give everyone. I think he did a very good job of getting a sense of – there's a lot of levers for an organization to pull, to boost TCE. Certainly, there could be the potential of asset shrink. There could just be natural asset shrink, just form the standpoint of it as we grow. We may still well cash flow out of the securities portfolios to not be reinvested.

There's clearly the expense cuts that you think the value that we have just done in this second phase of One Webster. That we really haven't given anyone a lot of color about that 200 position elimination should generate a fairly significant Q2, Q3, Q4 savings at the bottom line. We're going to come forward. Literally, we just wrapped it up as we were going through this process of getting the books closed. As we give a little more color with that, they are too, which should be some favorable trend in the expense run rate.

I think as it relates to the equitization or the potential of doing something around that, really can't comment specifically but just wanted to make sure that people know. Suddenly, that's something that a lot of investment bankers have called and had conversations with us about.

There are levers for us to pull, and then obviously, we did One specifically as it relates to the dividend reduction because I think the prudent thing for us at this point in time, and that the board decided yesterday was that it made sense for us to preserve capital even though, we think our overall capital's trend's so neat. We just felt that we need to be very respectful of the tangible common and the tangible equity levels that we have in the organization. So hopefully, that's helpful to give you color on that.

Matthew Kelley – Sterne, Agee & Leach

Yes. I'm just trying to figure out if I'm the holder of that $225 million worth of the preferred you guys did in June, had a conversion price of $27.71. Would you guys solicit the holders of those securities for some type of an exchange? Or are you talking about the potential of using any freed up liquidity to actually go out and tender for those bonds that is treated as a big discount?

James Smith

Hey, Matt. We just can't comment at this point. I think what we wanted to do today was, again, give you the context, and given any further details of that would clearly indicate whether we were or weren't going to elect to do that. We just wanted to show it as an example.

Matthew Kelley – Sterne, Agee & Leach

Okay. Other question was on the – can you just clarify on the commercial mortgage backed securities holdings. What's the amortized cost and fair value and notion value, and notional value, actually, as well?

James Smith

Hey, Matt. Yes. I think our current value is about $135 million. I think the current fair value on those is $65 million. And why don't we do this, we'll give you a little bit more color on that. I just don't have it right on my fingertips right now. But I'll make sure that Jerry and I come back to you directly on that.

Matthew Kelley – Sterne, Agee & Leach

Okay. Thank you.

Operator

Our next question is coming from John Pancari with JP Morgan. Please state your question.

John Pancari – J.P. Morgan

Good morning.

James Smith

Good morning, John.

John Pancari – J.P. Morgan

Just on that CMBS portfolio again, understandably, there's clearly, and I know you indicated this is not a liquidity issue, not necessarily cash flow issues. Well, with the mounting liquidity issues here, I just wanted to get to an understanding about why we haven't seen any impairment yet on that portfolio, just given the some of the liquidity issues you're seeing out there on some of CMBS products?

James Smith

Yes. John, specifically on that portfolio, there's one bond that will keep a close track on that's got the greatest level of market challenge. And again, when you think of that portfolio, it's all around levels of over capitalization or over securitization. They are all AAA rated. They're all – and again, we'll give some granularity to this in some of the follow up calls. We've got the specific details out. But I think that, our cinch is, they're all cash flowing.

We're not seeing any deterioration at this point in the underlined collateral. And at this point, it's more of reflection of anticipated issues in these securities as opposed to a specific credit issue that would really drive you to pay that's impairment. I would also say that if we were to just use a measure of – at what point would you look to say that there is impairment? I think you got to get behind, and we are looking at the underlined collateral, specifically to the identified – he level you should be. I think there's probably an argument just to whether it should be based on the trade value in the market or whether there's actually still solid collateral to cash flow.

The vast majority of the credit. So I do think there's much more of a credit component that has to come into effect when you look at these bonds as opposed to just the illiquidity in the market and the decline of prices. Most of the subordinations – most of the collateral levels, the over collateralization levels, you know, when these things are to 20% to 30% range. I believe there's only one that's less than that. And again, I think you have to look at the specific deals to really make sure that you understand where you really got some level of other than temporary impairment.

At this point, we looked at it at $12.31. It's been looked at obviously, externally. And we're comfortable where we are, but we're being very open at something that we're monitoring. Capital at risk – we already have it against those C&Is. So I think just from the standpoint of – if we make a change, that it's no longer OCI through OTTI. We've got the best – a big piece of those bonds covered at this point in terms of risk the capital.

John Pancari – J.P. Morgan

All right, Jerry. Thank you. Jim, I just want to ask you a higher level question here. I appreciate the detail you gave in terms of the leverage you can pull in the capital side, but each one of those measures appear like they could be slow in generating capital and something smaller than others. And given the magnitude of this downturn, given the severity of this credit deterioration we're seeing for the group, specifically for your company and lastly, where your stock is. How much willingness do you have to do a diluted deal, diluted common equity rate at this point? And then if not, are you pursuing – would you consider looking at other options in terms of a strategic partnership or a sale of some sort?

James Smith

Yes. That's a broad question. I'll just say that, I mean, we have taken steps already such as reducing the dividend to a $0.01. That's 33 basis points in a year. It's either nine basis points a quarter beginning right away. You get some benefit from the next phase of One Webster, for example.

And I want to stress again, and we said this repeatedly through the call is that we don't feel any pressure to raise capital. We have very strong capital levels. Particularly, focusing on that tangible capital at 770, which continues to compare favorably with our peer group, so the perspective from which we are operating. So it's to the extent that there are opportunities out there, we would look at them more opportunistically than any other way.

As far as partnerships, I'll make the same comment that I always do, which is that we're interested in making combinations with the like-minded partners that share our vision to be in New England's Bank, I'd have to say their evaluation's where they are. It's hard to imagine that much would happen here.

John Pancari – J.P. Morgan

Okay, thank you.

Operator

Our next question is coming from Damon Del Monte with KBW. Please state your question.

Damon Del Monte – KBW

I was wondering if you could quantify what we can expect for expenses with the Boston initiative. I don't recall if you had done that last quarter.

Jerry Plush

Yes, Damon. It's Jerry. And just in terms of some of the core expenses, we're looking at probably in the neighborhood of $1.5 million or so in the current period. Maybe potentially up to $2 million. It depends on the ramp up and in the timing, obviously.

I would just say that we've taken that into account. And clearly, as you can see, with some of the expansion plans we have, rest assured that there are other issues or other expenses that we are taking out. And that there's decisions we just haven't – that we're in the process of evaluating or I'll call it alternatives to look throughout the network as there are other places where we could save money to offset those expenses.

So rest assured, I wouldn't put it as an automatic to add in, that there's other things that we're doing that would be taken out to offset.

Damon Del Monte – KBW

Okay, thank you. And then also, Jim, in your opening remarks, you made some comments about S&P's view or the rating agency’s view on capital levels.

James Smith

Yes.

Damon Del Monte – KBW

Specific to comments you made, could you repeat for us, please.

James Smith

Are you saying what I was talking about our estimate of what the just and tangible common equity ratios are?

Damon Del Monte – KBW

Yes.

James Smith

Yes. We were saying that our estimate, the best that we can calculate it, so you know I need copy out of with that. Is that the adjust of a tangible common equity ratio for Moody's would be a little over 6%? Say 6% or 7% or so.

Damon Del Monte – KBW

Okay. And what does that adjustment take you to a comp? How is that different from the tangible common of 4 and a total tangible equity of seven?

James Smith

Well, it takes us some of what's in the tangible and gives credit for it to the – as common capital. And that's how you end up in the middle. And they have a formula. They actually have several formulas that they use to arrive at that. S&P does something similar that they call adjusted tangible equity. It's pretty complex calculation. I think it'd be better to try to handle that offline with Bruce Wandelmaier, our Treasurer. I'd be happy to have him in touch with you.

Damon Del Monte – KBW

Okay.

James Smith

But I also think it’s important and worth noting because they do, do the math, and they indicate what the levels are, occasionally, when they put out their own report. So with S&P it’s $6.65, and Moody’s at $6.07. We thought it was important for people to understand that that’s how they look at it.

Damon Del Monte – KBW

Okay. Great. Thank you very much.

James Smith

Thank you.

Operator

Our next question is coming from the line of Gerard Cassidy with RBC Capital Markets. Please state your question.

Gerard Cassidy – RBC Capital Markets

Thank you.

Jerry Plush

Hi, Gerard.

Gerard Cassidy – RBC Capital Markets

Good morning. Maybe you guys touched on this and I just didn’t hear it. In terms of the outlook for non-performing assets, considering this was a very difficult recession. And then let’s assume, for the moment, that it extends into the latter part of this year. Where do you guys see the non-performing assets going? Considering in the recession of ’90 of ’91, if I recall, I think they broke 5% of total loans. Could we see that kind of number this time around.

James Smith

Yes. I mean I’d say it’s difficult. Obviously, we lost forecast a lot looking at ’09 under various scenarios. And the two metrics that go into that are what we see falling in a non-accrual, and then obviously, how quickly we can resolve what’s coming on. And so a combination of those, obviously, our goal is to minimize that growth through both prospective asset quality management and expedited asset remediation.

As Jerry mentioned earlier in the provision, I think it’s difficult, with all the scenarios we have, to think about where we see non-accrual loans going over the course of the next 12-month period. I mean there’s no question about the fact that our base case models, we continue to see negative risk rating – negative risk rating migration increases in non-accruals modestly over the next four quarters.

But again, as we’ve talked about several times in the last couple of quarters, we’re sort of through the first wave of asset issues with respect to residential related asset classes. And now we’re sort of in this lull were we have not yet seen a significant impact on the C&I, small business, and real estate. But obviously, our expectations are that if we continue to see negative economic trends continue for the next 12 months, that we will ultimately see some stress in those portfolios. So I would say we expect, overall, net rates of non-accruals to rise, but through aggressive asset resolution, and through hopefully, good prospective asset identification, we’ll be able to moderate those increases.

Gerard Cassidy – RBC Capital Markets

On the asset resolution, can you guys give us a sense of how big – how big that department was, let’s say, a year ago versus today? Do you expect to add more people to the department? And what are the expenses associated with that resolution.

Jerry Plush

Sure. And I’m sure you’ll hear this story in many of our other peers. We’re clearly up – we’re up four, five FTEs in the realm of our special assets group, which is more broadly defined now. And we’re bifurcating some of the responsibilities from pure workout to establishing some early stage asset remediation units whose sole focus is to take those assets that are not yet in hardcore workout, if you will, or litigation, and try and restructure loss mitigate work – remediate work people out of the banks.

So I would say that it would definitely have more focused resources in that area. The good news, in a difficult expense environment, is that we’re shifting resources rather than having to go out and add tons of incremental resources.

James Smith

And still in finance, in shifting the resources, what we’re saying is that for at least a year now, Gerard, we have taken the external focus and made it an internal focus. So even within the business lines, the focus is on understanding what our customer situation is and trying to determine as early as possible that there are issues there.

In the meantime, though, through this intense centralization process, there are significantly greater resources involved in credit administration, loss mitigation, and credit management than were before. And I don’t know whether you’d have a number for him, but it’s–

Jerry Plush

And I’d just add to that, Jim, I think that the ramp up that we’ve had even in the depth and graph of the loan review staff. So Gerard, we’re being very proactive on the active portfolio management independent loan review front. But I think, to both the points that have been raised, from a cost standpoint, we’re literally offsetting the ramp up of what we’re doing or the shifts that we’ve done in personnel from the revenue side of the house to the risk management side of the house. So you’re not going to see, from a standpoint externally, significant up tick in the expenses related to this because we’ve taken steps internally to offset it. So John, if you have anything to–

John Ciulla

I also want to say that I did state that at number one in terms of the current focus as well.

Gerard Cassidy – RBC Capital Markets

One final question, maybe Jim, you could answer this. With the legislation going through Congress on cram downs, it appears very likely now that it’s going to probably be passed. What are your folks’ view on this? And are you trying to do anything through your (inaudible) and congressmen in Congress to prevent it from happening? And number two, if it does pass, what type of impact are you guys planning that it may have on your consumer loan portfolio?

James Smith

Yes. Let me say, we are working on this. And we support the ABA’s position, which is in opposition to the cram down. We think it ultimately will raise the cost of home ownership to millions of Americans. And it’s a bad bill. And as you know, the industry has tried, and successfully so to oppose this for a long time now. It’s less likely that we’d be successful this time around, but we are definitely going to make the effort.

I think that the impact will be that it could negatively affect consumer behavior. It could result in more non-accruals, and we think also larger losses. And in some cases, unnecessary losses as a result of the cram down. But I would say, from our perspective, that we are proactively trying to identify, ahead of the curve, the distressed borrowers that we have in our consumer and mortgage portfolios and reach out to them, to work with them, to try to set up plans for them that will enable them to make their payments, if not now, then down the line. And keep them in their homes. We think that is the best remediation policy that there is.

Operator

This does conclude the Q&A session. I’d like to turn the floor back over to management for any closing comments.

James Smith

Thank you again all of you for being with us today. We look forward to talking with you soon.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And we thank you for your participation.

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Source: Webster Financial Corporation Q4 2008 Earnings Call Transcript

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