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Webster Financial Corporation (NYSE:WBS)

Q4 2009 Earnings Call

January 22, 2009 9:00 am ET

Executives

Jim Smith - Chairman & Chief Executive Officer

Gerry Plush - Chief Financial Officer & Chief Risk Officer

John Ciulla - Executive Vice President & Chief Credit Risk Officer

Analysts

Ken Zerbe - Morgan Stanley

Gerard Cassidy - RBC Capital Markets

Bruce Harting - Barclays Capital

Mark Fitzgibbon - Sandler O'Neill

Damon DelMonte - KBW

Bob Ramsey - Friedman, Billings, Ramsey

Matthew Kelly - Sterne, Agee

Collyn Gilbert - Stifel Nicolaus

Operator

Good morning, and welcome to Webster Financial Corporation's fourth quarter 2009 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 2009.

I will now introduce your host, Jim Smith, Chairman and CEO of Webster. Please go ahead, sir.

Jim Smith

Good morning, everyone, and welcome to Webster's fourth quarter earnings call and webcast. You can find our earnings release that was issued earlier this morning and the slides and supplemental information that accompany this presentation in the Investor Relations section of our website, www.websterbank.com.

As usual, I’ll provide an overview for the quarter and to some degree the year, and Gerry Plush, our Chief Financial Officer and Chief Risk Officer, will provide a detailed review of our financials. Afterwards I’ll offer some closing remarks and then open it up for your questions.

We’ll begin with slide three, and what a difference a year makes. I’m struck by how different the atmosphere is from a year ago, how much more positive the general attitude is, and how much stronger the economic fundamentals appear to be. The Zeitgeist had shifted more than 90 degrees. Confidence is gradually supplanting fear, and the credit markets continue to heal and function in a more orderly fashion. GDP is growing again.

Instead of talking about a decelerating rate of deterioration in the economy, the public discourse NOW is about how the economy is better and we see that trend continuing, especially in New England. These trends and attitudes are evident in our fourth quarter results. The fourth quarter was marked by many significant improvements in Webster's operating fundamentals, especially as seen in stabilizing and improved credit metrics. Including lower delinquencies, a reduced provision for losses, lower net charge-offs, and higher loan loss coverage.

Other positive trends include improved pretax pre-provision earnings, expanded net interest margin, and continuing strong core deposit growth. While our results do not yet reflect a return to profitability, our solid performance and improving trends are encouraging. Our recently announced lending and hiring initiatives reflect our positive outlook for continuing improvement throughout 2010.

While the aftershocks of the great recession will reverberate for sometime to come, we believe that the economy, at least in Southern New England, is on relatively stronger footing. New England banks performance continues to outperform national averages as measured by the levels of non-accrual assets and charge-offs.

Unemployment in Connecticut and Massachusetts remains well below the national average of 10%, while Rhode Island is higher. New England's housing market is fairing better than the national market. For example, the most recent Case-Shiller Home Price Index shows the Boston MSA, experienced a 2.8% decline over the prior year, while the average for the 20 largest MSAs was a drop of 7.9%.

In its most recent Beige Book, the Fed reported that New England respondents said employment was stable or up slightly, retail sales were flat to positive year-over-year, and home sales were up substantially. Some respondents even noted modest improvements in commercial real estate. This optimism is reflected in our plans for 2010 as we pivot from a necessary preoccupation with identifying, reserving for, and managing credit challenges to a year in which we plan to finance the nation's recovery.

Earlier this month, we announced our intention to increase our lending to small and medium size businesses by $400 million in 2010 and hire 150 people for full and part time customer facing and support positions. Hundreds of quality applicants showed up at our first job fair to fill these positions.

Before I talk further about our priorities for 2010, I want to provide you with an overview of some of the highlights of 2009 with focus on fourth quarter developments. The fourth quarter consolidated net loss was $13.7 million, significantly improved from the prior three quarters. Notable was the fact that our core pretax, pre-provision earnings rose to $57.4 million from $56.1 million in the third quarter. Nevertheless, as a key financial measure a loss is poor performance regardless of positive trends.

If you turn to slide four, over and over again we reminded shareholders of our strong capital position in 2009, particularly our regulatory capital levels, which continuously exceeded all requirements by significant margins, though we acknowledged and acted on the prefer ability of higher Tier 1 common equity in a highly stressed economic environment.

Given the composition of our capital structure, we exchanged more than $200 million of existing convertible and trust preferred into common, $27.5 million of which occurred in Q4 and we raised $122 million in new common from Warburg Pincus, $74 million of which became common equity in Q4 after an overwhelmingly favorable shareholder vote in December, and $6.9 million of which was invested in Q4 through gross uprights that Warburg exercised in connection with the Q4 exchanges.

We’ve raised capital at very attractive prices. The net effect issuance price for our various capital raises in 2009 was $12.57 of share compared to tangible book value per share of $12.48 at December 31, protecting our existing shareholders while bolstering our tangible common equity. The exchanges also reduced the cost of interest and dividends associated with our trust preferred and convertible preferred securities benefiting shareholders.

Over the course of 2009, our Tier 1 common to risk weighted assets ratio, while not yet an official regulatory capital ratio, but nonetheless increasingly important to regulators and the market, raised 217 basis points to 7.83% at year end from 5.66% a year ago. This was the single most important accomplishment of 2009. In the face of historically high, loan loss provisions and charge-offs we increased our Tier 1 common ratio by 38% and on terms that our shareholders can feel pretty good about.

Meanwhile, Webster's regulatory capital levels remained well in excess of the minimums. At year end, our Tier 1 risk based capital ratio stood at 13.20%, placing Webster above the 75 percentile for bank holding companies with at least $10 billion in assets at September 30.

Turning to slide five, it is this overall capital strength that underpins our desire to initiate an orderly and responsible repayment of the capital purchase program investment that we accepted from the U.S. Treasury just 15 months ago. We took the capital, as we said at the time, out of an abundance of caution to protect against the unforeseen.

Throughout 2009, we still exceeded the levels required to be considered well capitalized, excluding CPP, as we reported on a quarterly basis throughout the year. With that in mind we believe it's time to begin to pay it back. The plan that we submitted earlier this month envisions an orderly repayment schedule that minimizes the dilutive impact to our shareholders. With approximately $500 million at the holding company available for CPP repayment, we have the capacity to repay. We hope to have more to say soon.

Turning to slide six, another objective for 2009 was to accelerate deposit growth with special emphasis on increasing core deposits. We exceeded the internal goal that we set for ourselves growing total deposits by $1.7 billion or 15% in 2009. Core deposits, which exclude CDs and brokered deposits, grew by $2.7 billion or 39% in 2009.

Pretty impressive growth that drove market share gains in Connecticut and in the Providence MSA. Our success in growing deposits came from across our retail, commercial, government, HSA Bank, and cash management businesses and involved a broad array of initiatives including direct mail, cross selling efforts, and a focus on individuals with whom we can build deep relationships.

Our government banking team had some significant wins in the fourth quarter, including core operating relationships with the state of Rhode Island and the city of New Rochelle, New York. HSA Banks deposit share based grew 26% last year to $668 million and accounts climbed 16% to more than 260,000.

HSA continues on a roll so far in January, traditionally its strongest month, as deposit growth has outpaced January of '09 rising nearly $60 million to $727 million and we have opened 40,000 new accounts this month. Our loan to deposit ratio NOW stands at 81% compared to 103% a year ago, and the core deposit ratio has climbed to 71% from 59% at the end of 2008. We are in a great position to fund our anticipated loan growth through our core deposit base.

Turning to the credit quality, slide seven. In the fourth quarter we saw positive trends in general asset quality metrics. Delinquencies declined by $29 million or 22% to $101 million, the lowest quarter end level in 18 months. New non-performing loans declined for a third straight quarter, while cures and exits of existing non-performing loans increased for the third straight quarter. The provision for loan losses declined $18 million to $67 million from $85 million in Q3 and net charge-offs of $52 million were down $13 million from $65 million in Q3.

At year end our loan loss reserve edged up to 91% of non-performing loans and our overall loan coverage ratio stood at 3.09%, up from 2.88% at the end of Q3 and 1.93% at the end of 2008. Here is another point worth making regarding credit quality. Our loan portfolio had a stronger credit profile at year end, largely driven by strategic reductions in loan balances in certain asset classes.

Over the past two years loans have declined by about $1.4 billion, about half of which resulted from residential mortgage securitizations and the recent sale of our insurance premium finance business, of the remaining $684 million decline all but $17 million occurred through planned reductions of the discontinued out-of-market liquidating portfolio, residential development loan balances, and mostly out-of-market asset based and equipment finance loans.

In-market loans were essentially flat as we continue to make credit available at our core franchise. Looking ahead, we will continue to be extra vigilant in managing credit risk in 2010, and while we expect that provisions and charge-offs will remain elevated for some time, our credit metrics appear to be headed in the right direction.

Turning now to slide eight, I would like to touch on geographic expansion. In the fourth quarter we opened our Boston flagship office and relocated our Providence offices and branch, both of which are in the heart of their respective financial districts. Our Boston flagship is a holistic office that melds middle market banking, business and professional banking, government finance, cash management, and retail into what is truly a regional headquarters that offers business customers in particular the totality of Webster.

The evening reception for our December ribbon cutting attracted more than 300 business prospects and dignitaries and we are building a robust pipeline of new business. In Providence upgrading and moving our regional headquarters and branch to a premier location at 100 Westminster sets the stage for significant growth for Webster in the Providence MSA where we are already growing market share. We now have 33 banking offices in the Boston to Providence corridor.

As you have heard me say before, it's part of Webster's DNA to be there for our customers in difficult times. That’s never been truer than over the course of the last year, as we worked with our Southern New England families to keep them in their homes. We’ve not had a single contested mortgage foreclosure, where we were able to contact the borrower and we’re proud to make that claim.

In all, we have modified more than $80 million in outstanding mortgage balances. Contrary to national trends, less than 10% of our mortgages that have been modified have fallen back into arrears. If you look at our $109 million in non-performing first mortgage loans, you’ll see that $40 million in balances that have been modified are current on their payments, while most of the rest have returned to performing status.

We’re also proud that we were named the top SBA lender in Connecticut for the second consecutive year, and once again we’re the top lender to minority-owned and women-owned businesses. Clearly, Webster's 3,000 bankers rose to the occasion. We were there for our customers when they needed us most.

On that note, I’ll turn the call over to Gerry.

Gerry Plush

Thank you, Jim, and good morning, everyone. On slide nine, here we’ve provided a view of core earnings for the fourth quarter. We’ve noted several items to take into consideration when looking to see what the pre-tax, pre-provision earnings of the company were in the fourth quarter. So we’re pleased report an increase to $57.4 million in Q4, primarily from higher revenue.

There were four material items that impacted the quarter, and resulted in a net pre-tax loss so, on this slide we’ve backed out such items including $3.5 million for the fair value of adjustment of warrants in connection with the final accounting for the Warburg Pincus investment. We’ve also excluded $6.5 million in severance and other costs and $2.7 million in already owned, repossessed equipment write-downs in addition to the $67 million of provision that we recorded for the quarter.

Note that the provision consisted of $62.2 million related to our continuing portfolio and only $4.8 million related to the liquidating portfolios. So, exclusive of these four items, there’s clear evidence of the positive momentum in our underlying operating performance in the quarter, and again primarily from continued margin improvement.

On our next slide, here’s a summary view of our income statement. First, the increase in net interest income reflects a significantly improved net interest margin up 3.26% as the cost of interest bearing liabilities declined 18 basis points, while the earning asset yields declined only 11%.

Our core non-interest income, apart from the sale of securities and the gain on warrants, declined modestly. An increase of almost $1 million in loan fees offset an anticipated decrease of $868,000 in other income as the third quarter included a collection of some insurance proceeds. The remaining non-interest revenue categories were fairly comparable to third quarter levels.

Our core non-interest expenses increased $1.8 million, primarily from increases in compensation related expense, primarily from higher medical claims, and the recording of taxes associated with incentives, which is a change for us from prior years in terms of our accounting and to a lesser extent some increases in occupancy, marketing, and outside services with some offset from a reduction in other expenses.

I’ll cover this in greater detail in a few slides. The non-core items for the quarter end included the previously mentioned gain on warrants, the foreclose property asset write-downs, and severance on other costs as we noted in the prior slide.

Turning now to slide 11, you’ll see again the margin improvement, which was 3.26% in the fourth quarter, compared to 3.18% for Q3 and 3.20% a year ago. So we’ve nearly recouped the margin decline that occurred in the fourth quarter of 2008, and was also seen in the first quarter of 2009, as interest rates dropped to historic lows at that time.

As I mentioned during the third quarter call, we had a significant number of CDs that matured in Q4, $800 million worth, that repriced at lower rates, moved out, or into other deposit products. In addition, we continued to make disciplined pricing decisions in all our other deposit categories and as a result, our total cost of deposits decreased by 18 basis points.

The decrease in the cost of funds reflects $118.5 million of FHLB advances that matured in the fourth quarter that had an effective rate of 4.02%. Overall, we’re pleased to report the margin expansion in Q4, and our expectation is, there’s some opportunity for further improvement in the first quarter of 2010. We’ll talk more on that in just a few slides.

If you would turn now to slide 12, we provide some detail regarding our non-interest income. Deposit service fees declined by $209,000 from last quarter. This slight decrease in Q4 reflects seasonal activity. In addition, it's is worth noting here that we’re evaluating both the impact that the legislative environment will have on this category in 2010, and our deposit product offering in this regard.

Moving now to loan related fees, we had an increase of $945,000 from the third quarter primarily due to increased amendment, prepayment, and other commercial loan fees in the fourth quarter.

Wealth and investment services revenue slightly declined by about $150,000, we saw a slight decrease in financial planning revenues. Mortgage banking activities totaled approximately $1.5 million, which was comparable to Q3 results. Other income decreased $868,000 from the third quarter, as Q3 results included the receipt of life insurance proceeds in that quarter.

So the positive news here is what we breakout below the line for your review. We reported an immaterial net gain in sales from investment securities and a very minor OTTI adjustment for the period, while Q3 results resulted in a combined loss from both categories of about $6 million. There’s more detail available in the investment portfolio action slide that we’ll cover in just a few minutes.

Turning now to look at non-interest expenses, which are shown on slide 13; they increased by $1.8 million from the third quarter, exclusive of foreclosed and repossessed property expense and write-downs as well as severance and other charges, which we show below core expenses on this slide.

Our comp and benefits increased $1.8 million, again from higher medical claims and from the accrual of payroll taxes associated with incentives. In prior years we reported this expense in Q1, whereas we’ve changed this prior practice to record that expense in the year earned versus paid.

Our occupancy increased by $488,000 from some higher snow removal expenses incurred in December, and to a lesser extent the depreciation related to our new Boston facility. While our marketing expenses rose by $563,000 in Q4, as we previously disclosed last quarter, in part from the promotions related to the opening of the Boston flagship office and for the opening of our new province of location.

Outside services increased by $580,000, primarily from contract help at both IT and tax among other areas, but our other expenses declined by $1.4 million to more normalized levels in Q4 and provided some offset to the increases just referenced. Foreclosed and repossessed property expenses and write-downs were up just under $1 million on a quarter-to-quarter basis, while severance and other costs were higher by $2.4 million.

The severance and other costs reflect $1.7 million in severance related to staffing reductions and our equipment, finance, and asset based lending areas and $3.7 million in facilities related charges and $1.1 million fraud related expense that had no customer impact and excludes any consideration of recovery. The $3.7 million up facilities related charges primarily reflects some of the actions we’ve taken recently towards the consolidation of back office facilities, including marks on certain buildings that are held for sale and certainly lease terminations.

If we go to slide 14, here we provide a high level deal selected balances. Total assets declined modestly as compared to last quarter. Residential mortgages increased from Q3, while the three other principal categories declined, primarily commercial loans, which declined by $239 million. We’ll discuss the specific loan segments in greater detail in just a few minutes. You can see here that the securities portfolio increased by $170 million and we’ll cover that in detail in the next several slides. So on the funding side our deposits increased by $31 million.

There was a combined increase of $612 million in the core categories of demand, NOW, and savings, and a decline of $217 million in money market and $362 million in CDs and brokered deposits. This slight overall growth as well as the loan balance decline resulted in further improvement in the loan to deposit ratio to 81%, and a significant change in mix improved the core deposit ratio to 71%. Deposit growth and loan repayments were utilized to offset maturing borrowings, which declined by $135 million, and we utilize the balance to fund securities purchases, which we will now look at next.

We’ll turn now and take a more detailed look at the investment portfolio in the next slide. So here you can see the components of our $4.8 billion investment portfolio. There continue to be no securities backed by sub-prime, alt-A, or low doc loans. You can see here that there’s $61 million in unrealized gains in the HTM portfolio and we had $3 million in net unrealized losses in the AFS portfolio compared to $4 million on September 30. As in prior quarters, we’ve posted additional details on our website, regarding the investment portfolio and the number of supplemental schedules for your review.

If you turn now to slide 16, we provide some details on the purchase and sales activity for the quarter. The net growth of $170 million reflects purchases of $333 million of mostly short duration agency securities, $50 million of one year agency debentures, and $45 million of super senior securities, all shorter duration assets with limited extension risk and all with good liquidity. So on the sales side, we’ve outlined here in detail by investment type all our sales activity.

As we did last quarter in keeping with our strategy of reducing exposure to financial institutions and to reduce our deferred tax asset. We sold $1 million in book value, which will par value at $8 million of pooled trust preferred securities and a net loss of almost $1 million and $5 million in book value or $15 million in par value of one single issuer trust preferred security at a net gain of $611,000. These two sales combined generated additional tax losses, which helped us reduce the deferred tax asset balance in Q4. We also recognized some very minor OTTI charges of $77,000 on the balance of our pooled trust preferred securities in Q4.

We’ll turn now to take a look at our loan portfolio, which totaled $11 billion at year end, a decline of about $286 million from the Q3, which includes a $93 million reduction from the sale of our insurance premium finance business in November and declines of $72 million in ABL and nearly $54 million in equipment finance.

As we’ve done in recent quarters, our intent in the next few slides is to provide some commentary on each segment of the portfolio and then an overall asset quality wrap up at the end. So first some background, Webster's $10.8 billion continuing loan portfolio consists generally of relationship lending to consumers, small and middle market businesses. Our asset-based lending and equipment finance have done direct to customer and centrally managed.

CRE is done on a regional basis and any loans outside of the footprint are made to sponsors known in the region. Our discontinued liquidating portfolio consists predominantly of indirect home equity loans at this point and this portfolio declined by $13.2 million in the quarter.

On the next slide, we focus on loan mix and yields. You can see the yields in the overall portfolio climbed four basis points during the fourth quarter. The decline in resi yields continue to reflect pay downs and refinancing activity. The declines in the other three categories largely reflect the effect of fixed rate maturities priced at higher levels being replaced by new originations at lower rates.

We’ll now give some detail on each of the loan segments. So let's first take a look at our residential portfolio. Approximately 82% is in footprint, 44% of the portfolio is in jumbos, and about 55% is in conforming loans. There are no option arms and our alt-An exposure is under $33 million.

Originations were $273.3 million for the quarter, compared to $219.1 million in the third quarter and $85 million a year ago. The refreshed weighted-average FICO in this portfolio was $724 million and the refreshed portfolio weighted-average LTD is 59%. Residential non-performers were essentially flat and there was a reduction of $4 million in the component of non-performing loans that are modified in pay.

Also worth noting is the clear downward trend in 30 to 89 day delinquencies that you can see here in the trend line on the slide. We also provide an update on the permanent NCLC segment within residential and that declined to $37 million at year end, down from $41 million at September 30. It's unfortunate this segment continues to have a disproportionate affect on NPLs, again at December 31, and the net charge-offs in the fourth quarter relative to our entire $2.9 million of continuing residential portfolio.

On slide 20, you can see our consumer portfolio is about 99% home equity; utilization was up slightly to 52%, compared to 51% in the third quarter. 84% of our portfolio is in footprint; almost 20% of the home equity portfolio is NOW in a first lien position. There’s no change in average FICO scores from the last quarter and we saw another 1% positive change in CLTV that reflects updated Case-Shiller valuations.

Our non-performing loans declined modestly even taking into account an increase of $1.5 million in the component that are modified and paying. Our originations were $58.5 million this quarter, compared to $66.8 million in the third quarter and $167.4 million a year ago. Our NPLs totaled $38.8 million and that is down slightly from the $39.8 million we recorded at September 30.

We’ll now take a look at our discontinued liquidating portfolio in the next slide, which consists of about $219 million dollars of home equity loans and $5 million of national construction loans. We saw a $13 million decline in the quarter including about $5.5 million of net payoff and pay down activity.

Non-performing loans were essentially unchanged at $20.5 million, while the 30 to 89 delinquency rate improved modestly in the quarter. About $8.1 million in charge-offs were specific to the home equity segment, compared to $13.1 million in the third quarter, while $454,000 in net charge-offs related to the NCLC portfolio, and that’s compared to $73,000 in the third quarter. Our reserves for these discontinued portfolios totaled $53.4 million, of which $52.5 million is for home equity and $900,000 is for the national construction portfolio.

The liquidating reserves for home equity are based on forward-looking projected charge-off coverage and the reserves for the NCLC are based on a credit-by-credit assessment, both of which are updated quarterly. Again this quarter we provided $4.8 million of provisions specific for this segment and our coverage extended from over 15 months to over 18 months worth of forward losses in the home equity portfolio.

Turn now to take a look at our commercial non-mortgage portfolio. This consists of our middle market, small business, and segment banking areas. We sold the insurance premium finance business during the fourth quarter, which had $93.5 million in loans at September 30. So contained in this portfolio, now are our core in-market small business and middle market customer relationships.

The portfolio totaled $1.5 billion at year end, and decreased from $1.62 billion mostly explained by the sale of the insurance premium finance business. Originations for the quarter for small business totaled $15.6 million, compared to $17.9 million for the third quarter and $30.4 million a year ago, while middle market originated $28.5 million in the fourth quarter, compared to $8.2 million at Q3 and $6.5 million a year ago.

Our non-accruals declined $5.1 million from the third quarter, and the 30 day to 89 day delinquency rate was down modestly. Overall, the middle market-small businesses portfolios continue to be relatively stable from a credit performance perspective thus far in the cycle. As Jim commented earlier, increased originations in our outstandings are expected in these segments during 2010.

We’ll turn now to take a look at our equipment finance portfolio, which is deducted on a direct origination basis, and the portfolio consists of the five industry segments that we’ve listed on the slide. This portfolio totaled $898 million at year end, compared to $951 million at September 30, and $1.04 billion a year ago. The reductions reflect the strategic emphasis on core franchise relationship activities.

Originations were $48.7 million, compared to $48.8 million in the third quarter and $123 million a year ago. When we look at the asset quality stats specific to this line of business, we certainly seen increases in non-performing assets across all segments over the past of the year, and that’s due to the challenging economic environment and the impact that that’s had on small businesses across the country.

This is also reflected in the $5.3 million increase in net charge-offs in the quarter. We did see, however, a modest decline in NPLs this period to $30.2 million compared to $31.8 million at September 30. There were $14.2 million of total new non-accrual loans in the quarter, compared to $12.5 million in the third quarter.

Looking now at our asset based lending line of business in the next slide, reductions in commitments in outstanding balances in the first nine months of 2009 continued in the fourth quarter. New originations are occurring in the Northeast Corridor compared to nationally in past.

Our originations for the quarter were $18.2 million in Q4 in comparison with $14.6 million in Q3 and no originations a year ago. Our net charge-offs declined to $1 million in the fourth quarter from an elevated level of $15.9 million in Q3 that included $9 million for a single credit. The increase in non-performing loans in the quarter reflects the addition of two large credits to NPL status.

Turning now to the next slide, you can see our commercial real estate portfolio, which consists of investor CRE and small business owner occupied. It continues to be well diversified by product, geography, and property type. We’ve got modest retail exposure and our team continues to work actively monitoring maturities, vacancy trends, and leasing activity.

Originations were minimal in the fourth quarter, only $400,000 in comparison to none in Q3 and $27.8 million a year ago. The portfolio decreased slightly in Q4 and net charge-offs were $4.6 million in the fourth quarter, compared to none in Q3 and non-performing loans increased to $56 million from $47.6 million at September 30.

The increase in non-performing loans is driven by the addition of one credit to NPL status. Delinquencies totaled $8.2 million compared to $23.9 million at September 30, and $7.2 million at the end of '08. Our upcoming maturities for 2010, 2011, and 2012 are $325 million, $270 million, and $135 million, respectively.

We’ll turn now to slide to 26 and you can see here our res/dev portfolio declined to $114 million at year end. It's a reduction of $15 million from September 30, and that’s primarily driven by $11 million of paydown and payoff activity and $6.6 million in net charge-offs and this is offset by some routine loan disbursements on performing projects. Our net charge-offs in the fourth quarter were primarily driven by non-accrual resolution and updated valuations of non-performing loans. There were $10.8 million of new non-accrual loans in the quarter compared to $7.6 million in the third quarter.

While absorption remained slow, we did see sales activity across our footprint in Q4 as we effected 51 releases on $10.2 million in payoffs from executed contracts, both in the fourth quarter and prior quarters. About 92% or $106 million of this portfolio at year end was in Connecticut and Massachusetts, and about $29 million of projects were in Fairfield County. In the performing portfolio there were only two remaining resident relationships that have an aggregate exposure greater than $5 million.

On slide 27, we provided a summary of new non-accruals, which we've covered in each section, as well as the cures and exits, net charge-offs and transfers to REO. So here you can readily see the flows in nonperforming loans from quarter-to-quarter. The very positive news here is that we have seen continued reductions in new non-accruals overall, as well as increased cures and exits. Our intent on the following slide wrapping up asset quality is to provide a view overall of some key ratios for the portfolio and the discontinued liquidating portfolio.

Our totaled non-performing loans were about $373 million, compared to $361 million as of September 30. The increase in non-performers was primarily attributed to increased levels of commercial real estate, resi development and asset based loans, offset by declines in all other loan categories. Note that our past due loans for the continuing portfolio has decreased noticeably to about $90.5 million, compared to $114.9 million at September 30. While continuing loan categories declined except for a very slight increase of $235,000 in equipment finance.

Turning now to slide 29 and before we move on to discuss deposits and other liabilities, one other asset category that has garnered a significant amount of attention at many institutions is the deferred tax asset account, and we’ve disclosed here some comparable data for Q4, Q3 and year end 2008. You can see on this slide the DTA has declined nearly $18 million from September 30, the result of some of the aforementioned investment sales we previously discussed.

Note also that there’s no valuation allowance required for Q4, and we've outlined the positive evidence utilized to reach this conclusion. In addition, our Tier 1 capital ratios improved based on the exclusion of only $55.6 million of the $122 million of net deferred tax assets at December 31, 2009.

So now let's take a look at deposits on slide 30. We've talked throughout the year that everyone in our company has had a deposits first mentality and that we've all been focused on the primary goal of self funding our loan activities, improving our loan funding mix and cost. So in the fourth of '09, we generated $31 million in new net deposit growth.

While far lower than prior quarters, it's important to understand the mix change, which created the significant improvement in core deposits in total, and in the fourth quarter the core categories of demand, NOW, money market savings grew, while CDs and brokered deposits declined. So you’ll see on the next slide, so while the deposit growth was a modest overall during the quarter.

We saw an 18 basis point decline in costs, reflecting the mix changes that have taken place and here you can see our costs are lower in every category. Our intent in 2010 is to remain much focused on borrowing more shares in HSA, in retail, in commercial, in small business and government banking operating relationships. In addition, when interest rates begin to rise again, we would expect CDs to become a preferred choice for consumers and therefore some change in the overall deposit mix going forward is likely.

Turning now to slide 22, you can see our borrowing to total assets declined to 11.2% at December 31, down from 11.9% at September 30 and 20.4% a year ago, what’s important here is the asset size, the denominator has been relatively constant for each of these periods.

We do however, believe that as we look to grow in 2010, as well as to hedge against interest rate risk as the economy recovers, that some prudent utilization of term borrowings, such as three to five year FHLB advances, is going to be appropriate. So some increase as a percentage of assets is certainly likely in future periods. We’ve already done so selectively in the first several weeks of 2010 at very attractive rates.

Then once again on slide 33, we have outlined the diverse sources of liquidity that we have. We saw strong core deposit growth in the quarter. We saw inflows from the diverse channels and lines of business that we have, which differentiates us from many of the competitors as shown here. Additionally, you can see that we have availability from wholesale sources of about $5.3 billion in capacity. Also, from a holding company perspective we have over 10 years worth of cash needs available.

So, I’ll turn it back now to Jim. He’s going to provide some remarks on our goals for 2010 and then conclude our presentation.

Jim Smith

Gerry; thanks very much. Just to clarify a point made earlier, we reported on the net effect of the issuance price for various capital raises in 2009. I want to be clear that was at $12.43 per share and that the tangible book value per share was $12.57 at year end.

Now moving up to the slide on 2010 priorities, we wanted to provide some perspective on key areas of focus. Similar to the past year we plan to report on our progress on each of these initiatives as we release quarterly earnings and participate at investor conferences throughout the year. In this way we hold ourselves accountable for our performance.

In keeping with our recent announcement to nearly double our business lending volume in 2010 and add 150 Webster bankers, we believe that core footprint business banking expansion with specific emphasis on small business and middle market is essential in keeping with our goal to be the leading regional commercial bank serving New England.

We intend to focus our asset based lending efforts within the Northeast similar to how we conduct our commercial real estate activities and have already streamlined our previously national equipment finance business. We intend to increase share in existing markets, especially newer markets and work to optimize all of our delivery channels.

In other words, we will maximize the efficiency and accessibility of our entire system based on the way our customers prefer to conduct their banking business. Areas of focus for market expansion include renewed investment in marketing and people in Westchester County and execution of initiatives already underway in the Providence to Boston corridor.

Among the activities we will implement and invest in are the rollout of extended hours, investment in mobile banking and online banking enhancements in customer acquisition. We will heighten our focus on retail consumer finance as a means of cross sell and in-market growth. We also think it's essential to invest in service quality and delivery with a goal of achieving superior customer satisfaction and to track this goal will be enhanced performance metrics.

Given the pressure we expect on deposit related service charges, we are evaluating ways to expand our sources of spread and fee income via changes to existing product features and the introduction of new features and benefits, as well as increased credit card referrals and cross sell opportunities in areas such as small business, wealth, and HSA. We also know that continuous improvement is a necessary ongoing process for an improving efficiency ratio.

We’ll complete our commitments made in the One Webster process and we will generate new ideas for revenue enhancement and cost reduction. We will invest in our we and Webster employee engagement program, which has been embraced by Webster bankers and is essential to maintaining the culture they believe in and of course, capital and risk management remain priority one.

As I previously noted, we intend to seek the orderly repayment of CPP this year and we intend to implement, via full allocation of capital to all businesses, stringent measurement of returns by line of business. In addition, we recognize the looming risk of rising interest rates and the need for prudent interest rate risk management, which Gerry referenced in his remarks and last, but never least, we will have a continuing credit risk focus as we further refine our risk management processes and work to proactively manage NPA levels.

So in conclusion, while fourth quarter results did not yet reflect a return to profitability due to issues around credit, there are many positive developments and trends that board well for future performance. We have further strengthened our already strong capital position by any definition. Credit metrics are encouraging, to say the least. We saw meaningful expansion in net interest margin, which contributed to increased pretax, pre-provision core operating earnings.

Deposit mix improved, as did loan to deposit and core deposit ratios. We expanded our presence in the vitally important Boston and Providence regional markets. Webster has a clear vision and compelling strategy to become the leading regional bank in New England and we look forward to sharing our progress with you throughout the exciting year ahead. That concludes our formal remarks.

Gerry and I’d now be happy to answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ken Zerbe - Morgan Stanley.

Ken Zerbe - Morgan Stanley

My first question is could you just speak to the types of borrowers generally that drove the increases in the non-performers and the asset based lending and CRE portfolios, obviously, the biggest concern is just you get these new NPLs, or the rising NPLs will that lead to additional credit losses?

John Ciulla

In ABL, we had three manufacturers, again no specific industry or geographic trend. We believe in many of these instances, we still have good collateral coverage. So obviously, while you’re right an increase in NPLs can signal future credit losses, there’s nothing particular in asset based lending in the fourth quarter that was unique or disturbing.

In fact, one of the new inflows was actually resolved in the quarter resulting in a net increase of lower than the actual inflows in ABL. In center cap, it's really across the board, we continue to see, as a Gerry had indicated, performance in all sectors; challenged in small business and on equipment valuations. So I don't think there’s any underlying specific trend and we continue to do a good job on the remediation in the exit side trying to offset the inflows.

Gerry Plush

Ken, I also think it's important to note that, we take all of that into consideration in the establishment of the reserves that can set at quarter end. So in terms of how we felt about any potential loss content in any of those NPLs it’s been reflected in the allowance numbers that we established at the end of Q4.

Ken Zerbe - Morgan Stanley

Then the second question I had, have you guys considered taking any actions to help accelerate, I guess, the resolution of your discontinued portfolio? I don't know if that’s even possible or not, but maybe you could just address selling the portfolio, trying to take a big reserve build?

Gerry Plush

Yes, Ken, I think the reserve at this stage is approximately 24% of the outstandings. We’ve seen over the course of the last several months some very encouraging trends in terms of reduced levels of delinquency and charge-off. So, while four months is not enough in our mind to declare that we’ve got this past us, certainly at this point our view is that we’ve recorded what we see going forward, a very strong reserve that could take care of what we project, on a row forward basis, exposure.

So, while to your point, it will create some noise if we continue to hold the portfolio over the course of 2010. I think we feel very good about the reserve levels that are established and some of these leading indicators that maybe some of the worst in this particular out-of-market loans is behind us.

Ken Zerbe - Morgan Stanley

Would that indicate that you might actually see the reserve continue to decline overtime?

Gerry Plush

I think probably the most encouraging news that we can provide is that we only recorded such a small amount towards the liquidating portfolio as part of our provision this quarter. Our expectation is that at this stage, we’ve got in excess of 18 months worth of forward charges.

So we may continue to be conservative on that in the first quarter to two quarters, but I would expect that we should be in a fairly good position as it relates to the reserve levels associated with the risk in that portfolio. Again, that’s based on the information that we’ve got, sort of the most recent trends that we see in that portfolio.

Jim Smith

May I just had to that, Ken, that to your point that, if there were a price that approached what we deemed to be the value of that portfolio, of course we would take a look at it, but the gap is significant.

Operator

Your next question comes from Gerard Cassidy - RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets

The question has to do with the DTAs. Can you guys share with us, I think the rules are fairly clear on the regulatory side where you’re not permitted to use the DTAs in the tangible, the Tier 1 capital unless you can prove that you’ll be profitable in, I think, a 12 month period. Then they are limited to, I believe, 10% of the Tier 1 capital. How about on the GAAP side? What are the restrictions? Because, this is where it seems to be fuzzy here, can you guys share with us your understanding of how the public accounts treat them?

Gerry Plush

I think, and as we reported in last quarter, we try to align both, and I think we took a very conservative tact last quarter in reporting this and basically had a much stronger disallowance. Clearly, as we look at the evidence that we outlined on the page, we’ve got a better outlook as it relates to when you look forward in terms of our view on earnings as well as some of the other items that we’ve listed there.

So I think in terms of the evidence that’s laid out, we’re feeling pretty good at year end. I don't think that there’s really a material difference other than the timeframe that you look for recovery. So for regulatory purposes, clearly there’s a 12 month rule from an accounting perspective or from a management perspective, we’ve got a little bit longer time horizon associated with that.

Gerard Cassidy - RBC Capital Markets

Then second, when you guys look at the 2010 outlook, if the U.S. economy maintains itself as in the expansion, what metrics are you looking to determine when your loan loss reserves or the loan loss reserve building is sufficient? Is it the inflows of the new non-performing assets? Is it net charge-offs? Is it your customers? Can you share with us some color around, what you guys are specifically looking at to determine that, “Okay, we’ve got enough in the reserves?”

Gerry Plush

I think it's a combination depending on portfolio type. Certainly, we’re looking at delinquency and roll rate analysis as it were and unemployment rates, when you look at the residential and consumer portfolios and we’ve certainly seen some stabilization there. I think the very positive news you can see in our numbers is declines in delinquency in those portfolios.

I think as it relates on the commercial side, Gerard. Now, I’ll ask John to add a comment, I think it's a function of our very proactive risk rating that goes on. In particular exposure that I think most people are reflecting on right now or have the greatest level of concern is around commercial real estate.

I think that throughout the course of the year between John's team, Bill Rang, Joe Savage, and that Commercial Bank team there has just been a very strong effort in conjunction also with our credit review folks led by Tony DeSantos. I think we feel good that we’ve done a good job of proactively risk rating, taking the appropriate approach, and again that is all reflected in our reserves at year end.

If I had to say, I think just in terms of the next follow-on question, our clear view is that our provision and charge-off numbers should be coming much closer, if not literally being on top of one another, as we move forward . Again, assuming that we don't see material degradation here going into Q1, but where we sit today our expectation would be a much, much narrower band in those numbers in the first quarter. John if you would comment.

John Ciulla

No, I would agree with those comments entirely. I think that we’ve got good trends in delinquencies, the NPA trends are positive, albeit we added slightly, but then specifically with commercial the risk rating is really a key and you’ve heard us say on several prior calls that we continue to see negative risk rating migration as a general comment. While we still have some of it, it's really more focused in the commercial real estate sectors and we are starting to see a change in portfolio performance from a risk rating perspective in the non-CRE categories, which is certainly encouraging.

So I would angry agree with Gerry, that we’re getting much closer to the point, if these current trends continue to aligning the provision with the charge-off levels and as Gerry said, we take into consideration all of those credit metrics and the trending in trying to reach that conclusion.

Jim Smith

There’s no simple rule of thumb, Gerard, as you know, but if we were looking for one particular connection, we would say that when non-performing assets started to decline that we would see less need for a reserve build.

Gerard Cassidy - RBC Capital Markets

Just finally, I know it's only January 22, but the comments about as long as you don't see any big degradation in credit quality in the first quarter. Is there any early sign on directionally? Is it just continuation of the fourth quarter trend or a material improvement or material deterioration?

Jim Smith

I think it's too early to try to suggest any trend change at this point. We don't have enough information.

Operator

Your next question comes from Bruce Harting - Barclays Capital.

Bruce Harting - Barclays Capital

It looks like a long yields of NOW kind of bottoming out whereas investment securities yields are still dropping, maybe you can just make a comment or to on the components in terms of fixed versus variable and where you think both of those are going to go before the Fed may start tightening later in the year? Then as you look through, those are great slides, where you show the graphs for each of the asset categories.

It looks like all, but really two categories, what have we got here? The asset-backed lending and commercial real estate, NPAs have flattened out, but the 30 to 89 delinquency trends are down for all of those, almost every category, so what’s the disconnect, why are the NPAs still rising but 30 to 89 delinquencies down? Is it just a matter of a quarter or two lag before those 30 to 89 day trends result in more substantial drops in NPLs?

Gerry Plush

There were a lot of questions in that one question. Let me see if we can go back on the yields first and then let's come back specifically on the NPAs and the delinquency and some of our thoughts there. In terms of the investment portfolio and some of the decline in the yield, I think it's really a composition shift. We are being very conservative as it relates to and I made a couple of remarks on this when I covered the slide around the very short duration, limited extension risk type of securities, very good liquidity securities that we have been adding into the portfolio.

So you are not seeing I mean we are certainly giving a not to the fact that there is going to be a need for the use of some of those securities as we begin to build the loan portfolio throughout 2010. I also think that it's a function of we have looked at the mix of what is 15 and a 30 year fixed in that portfolio and are beginning to signal to, not only internally and externally, we have made some shifts about how our thinking is for interest rate risk.

Don't want to be sitting here with so much of the portfolio in core operating accounts and not beginning to extend some liabilities and take advantage of opportunities there. Conversely, as we think about our investment portfolio, we don't want to have too much longer duration with a lot of extension risk type of securities there. So I think that accounts for why you see some downward pressure in the yields on the investment portfolio.

Thinking about the loan portfolio, really we’re down just a couple basis points in resi; that would be expected. It's predominantly in the jumbos and some of the other asset types that are in there. You’ve got a great deal of fixed rate mortgages that are there. You continue to see some of the higher rate refinance out so, that takes some of the pressure or would show you why there was some downward pressure on the yields in that portfolio.

When you look at all the other portfolios, you have got a much greater proportion of variable rate loans. I think that the good side, or I would take as sort of the good note there, is we have got upward potential overtime as we begin to see rates start to back up.

So I think that there’s a real positive opportunity there and I think only with the exception of our equipment finance portfolio, which is predominantly fixed, you have got much more of a variable mix in the rest of our commercial and consumer portfolios. So I think we’re in a good place as it relates to that.

Then I’d ask if Jim or John had a comment on that.

Jim Smith

No, I am good with that. The only thing I would add is to your question about non-performing assets and then the delinquencies is that, what’s happening is the flow from delinquency to non-performing asset continues, but the fact that new delinquencies are down significantly may bode well for the future migration into non-performing loans.

John Ciulla

Bruce, one other specific comment on that as we have mentioned several times on the call the delinquency category on the commercial categories is not necessarily always perfectly linked with non-performers. So we’ve said we take a very proactive approach on identifying non-performing assets. In fact, a majority of our commercial non-performing assets are still paying us current interest.

So we have many situations in the larger commercial categories and it’s the case in the anomaly that you’re looking at where we have CRE and asset-based loans that we identified, because we have financial information or liquidity situations where we believe the borrower can no longer for a sustained period of time service its debt, while they’re still paying us move them to non-accrual. They’ll never end up in that 30 to 89 day bucket, but they’ll go into the non-accrual bucket.

Operator

Your next question comes from Mark Fitzgibbon - Sandler O'Neill.

Mark Fitzgibbon - Sandler O'Neill

Based on the trends you guys are, seeing when do you think or when are you forecasting that Webster will return to profitability?

Gerry Plush

I think it's clear our view of the first step that I made an earlier comment on is around the provision expense, which clearly with the improvements that we’re seeing in our pretax, pre-provision earnings, our next big challenge is to ensure that we get continue to provide, continue to make sure that reserved levels are maintained appropriately at risk, but at some point in time begin to see that crisscross where we feel comfortable that given the business that’s being booked to replace the business that’s rolling off.

We feel more comfortable with the overall reserve levels and therefore, not necessary to continue to add either in additions to charge-offs or that we’re still continuing to be look at the reserve levels as being adequate and therefore not need to continue to replenish. So I think it would be safe to say that our view is that in the latter part of 2010 that’s certainly the internal view that we’ve got at this point in time.

Of course that takes into account a lot of things have to happen. We need to continue to see the positive trends in the economy. Obviously not see any other type of down leg here of risk, but I think that would be the view from us.

Jim Smith

Yes, and we’d like to surprise on the upside.

Mark Fitzgibbon - Sandler O'Neill

Secondly, for modeling purposes how should we be thinking about the effective tax rate over, say, the next couple quarters?

Gerry Plush

Yes, for a placeholder I would tell you that it's probably around 18% or so.

Mark Fitzgibbon - Sandler O'Neill

Then as you get into, say, 2011 when profitability is restored you’d revert back to sort of a normalized tax rate in the low 30%s?

Gerry Plush

Yes, I certainly think that you could be talking about high 20s, the low 30s.

Mark Fitzgibbon - Sandler O'Neill

Last question for you, do you think Webster is currently in a position to get back on the acquisition trail if FDIC-assisted deals presented themselves or non-FDIC- assisted deals?

Gerry Plush

I think our focus continues to be, Mark, to execute on all the things that we laid out that Jim was talking about in 2010. Certainly, if there’s an opportunity that presented itself that was extremely attractive in footprint we would consider, but I do not think that given our focus and the discipline that we have around the activities in and around our footprint that to do something out of market for us is anything you can be thinking about us doing in 2010 or beyond.

Jim Smith

Also, our view is that our currency is valued at significantly less than it may be worth and we take that into consideration in deciding whether to use it should an opportunity arise, so it may be a bit early for us.

Operator

Your next question comes from Damon DelMonte - KBW.

Damon DelMonte - KBW

Jim, I was wondering if you could give us a little perspective as to where in your footprint you expect to see the most growth opportunities in the next, call it, 12 to 18 months?

Jim Smith

If we do a good job on all the things that we’ve laid out, we should grow throughout the footprint. The point I was making earlier was that, we have a significant investment we intend to make in the Westchester County franchise, where we’re going to invest additional marketing and invest in additional people in that market.

We think we have just a very big opportunity to grow that market, albeit it's relatively small at this point as compared to the market overall and significant opportunity also in the Boston and Providence areas, but the things we’re talking about in terms of achieving superior service delivery status based on the metrics that we will be tracking and doing a better job with the enhanced capabilities we have for direct marketing using our now in-house database marketing capabilities.

Making sure that we invest properly, and making all of our delivery channels accessible when our customers want to do business. Those are the kinds of investments that create the opportunity to increase share in existing, even the denser markets, like Connecticut where we already have nearly 14% market share significant growth potential there.

Then the idea of doing a good job at selling more products and services to each customer, which is another metric we’ll be tracking very closely, enhances the opportunities to grow in the very core footprint. So I would say there’s opportunity for growth fully in and around the footprint and we intend to make the most of it.

Damon DelMonte - KBW

Gerry, with respect to expenses, could you help us from a modeling perspective frame out what a good run rate is? I know you had some higher expenses related to repossession of some property and what not, and I didn't know how we should look at that going forward.

Gerry Plush

Sure. If you turn to the way we laid things out, I guess it was on slide 13, I think what you could look for is a normalization in the comp and benefit line. I’ve spiked out some of the key items that created some of that noise. Certainly, in our first quarter, there’s still the rewind of taxes, so for FICO purposes everyone rewinds.

So there’s a little bit more expense that you’re going to see associated with that, but you should be looking at the normalized levels and I think you could easily pick that up from the payment from the quarterly reports.

If you were to look back at Q1 or the fourth quarter, there were reversals that took place that made those quarters look abnormally low in comparison with where you see the trend in comp and benefits, which is more in that $59 million or so range that you see in terms of the trends and you saw a number similar to that in the third quarter.

In terms of occupancy, I think you’d see some elevated level there. We have talked about that just based on the Boston and Providence expansion, but on the flip side, you’ll start to see as we take some of these other steps where we took charges some things could begin to come off.

So there’s more that we’ll talk about in future quarters around there, but I think you can see where the level ought to be there; just a comparison, again, and to take my comments into account. I think marketing is clearly going to stay at least, if not higher, than the levels.

Certainly we’re going to be doing some elevated efforts here in Q1 and in Q2 and then begin to see a little bit of a reduction in the third and the fourth quarter. So I would tell you that numbers above the range that we reported in the quarter. Certainly, as we’re out and being much more proactive in terms of our direct marketing efforts, in terms of our branding, our repositioning in a couple of the markets, and our positioning in some of the new markets I think you’ll expect to see some numbers there.

Outside services should come down. We certainly are spending more and more time trying to reduce our reliance on consultants. There’s obviously a little bit of a blip in the fourth quarter, but I would expect to see that we’re very committed as an organization to drive that number down and instead bring those resources in house where necessary.

So you may see a little bit of a shift, but a lot of pressure on us to reduce the reliance on outside services to fill the gaps and then I think the other numbers would be normalized. You know FDIC deposit insurance assessment; you got a pretty good idea probably now of where that trend number is lying.

As it relates to the foreclosed in repossessed, hard to tell you a number on the asset write-downs, certainly not something that we look at. A number I would say that is maybe a base case placeholders, until we begin to see some decline in the level of overall NPAs and specifically in REO and repossessed equipment, we’d expect that those numbers would remain in that $4 million to $5 million range, at least for the first several quarters of next year. So hopefully that’s helpful, gives you some color for each of the lines.

Damon DelMonte - KBW

I guess just lastly with respect to the margin, you had a nice bump up this quarter and you guys laid out nicely how you got that increase. What are your expectations in the upcoming quarters?

Gerry Plush

I think right now, we certainly would expect to maintain and then improve. We do have a significant number of CD maturities, again, in the quarter. We do not have, I believe, any borrowing maturities happening within the quarter so there would be very little help there. The slight offset would be Bruce and I and other members of the asset liability committee are certainly very focused on extending out some liabilities at this point as they begin to hedge towards what we think are the coming of rising rates at some point over the course of the year.

All I have to do is look at the blue chip forecast and think about the fact that there’s got to be some leveling off here of rates. So while I think there’s improvement of several basis points potential there that would be in and around the range of where we are to up a couple basis points in Q1. I think that’s probably a safe range to be thinking about.

Operator

Your next question comes from Bob Ramsey - Friedman, Billings, Ramsey.

Bob Ramsey - Friedman, Billings, Ramsey

To follow on Damon's question about margin, could you talk about maybe to what extent you have got loans that are at floors and when the fed does begin to raise rates will there be any lag to the benefits you could see in asset yields?

Gerry Plush

Yes, I think there is certainly been some floors established in 2009, but there would be some lag effect during the course of upward repricing, but the vast majority of the portfolio would re price up. Again, remember the single biggest component of our portfolio that is variable rate is on the consumer side. So you would begin to see the repricing take effect there. Let me see if I can comeback with a number that you guys could have on that one in a second.

Bob Ramsey - Friedman, Billings, Ramsey

Then I saw you all said you had submitted a capital plan to regulators to begin an orderly repayment of TARP. Within that capital plan is there any further conversions or rising or is there anything else on the capital front you all have planned, or are you happy with where the ratios are today?

Gerry Plush

I think at this point that we’re not contemplating additional capital steps. Clearly, we have the optionality through our direct stock purchase plan. We’ve got significant capacity there. There are additional opportunities for exchanges, but I think at this point we’re at pencils down on any additional rising until we see how things play out here. I would believe that our view is we’ve got great capital ratios and the way to begin to bolster those is to start having it come through earnings in future periods.

Bob Ramsey - Friedman, Billings, Ramsey

Then the last question I have for you guys is more housekeeping than anything else, but I can't get the $0.84 diluted EPS loss using the $54 million loss to common and the basic share count. I guess what is the share count, that’s in the denominator there? What am I missing?

Gerry Plush

Bob, I know we have got it. We’ll put something out. I’ll have Terry follow-up with you guys as a group to put that out there. Just knowing other folks that are waiting for calls we will get that detail stat out.

Operator

Your next question comes from Matthew Kelly - Sterne, Agee.

Matthew Kelly - Sterne, Agee

It's actually Matt Kelly. On the consumer fees and the regular changes have you guys done any work to kind of quantify what type of decline you might be able to expect as you look into the back half of next year and in 2011 on that line item?

Gerry Plush

Absolutely, we have. Our expectation is there would be pressure in those lines for sure. I think it's safe to say that our modeling on a go forward basis is that you could easily see reductions of anywhere from $5 million to $7 million a quarter potentially in and around that line, but we’re still continuing to work, not only on that but also working on our responses to that, so more information will be coming out on that, Matt.

Matthew Kelly - Sterne, Agee

Then just one other question on some of the funding costs. The CD maturities you outlined in the presentation $900,000. What’s the rate on those that are maturing?

Gerry Plush

I want to say that on that $900 million or so I think we’re probably looking at 1.75% to 2% in that kind of range.

Matthew Kelly - Sterne, Agee

Then last question on the borrowings that you are considering. What are you looking at for structure and term and what did those cost you, and what was that at so far or recently?

Gerry Plush

I think for folks to get some comfort, I’m looking at a lot of granularity there. I’m not going to pull down $100 million borrowings. We’ve added in $25 million increments maybe three times some FHLB advances, none of which, I believe are greater than 2% at this stage. We were looking at terms anywhere between, I think I mentioned three to five years.

As it relates to, we did take advantage of one of their blend and extend programs also last quarter, which I believe we fixed for the next four years a rate of around 3% and that’s actually a reduction in expense because I believe that was in excess of 4% in 2010 in the original plan that we had. So they are the types of steps that we are taking.

Again, Matt, we’re looking at both sides of the balance sheet. You can see clearly with the much more liquid assets that we’re putting in the investment portfolio, some of these beginnings of what I’ll refer to as risk management steps on the borrowing side and certainly, we think we’ll start to see some pickup in terms of our CD promotions, not necessarily at high rates, but some type of attractive package more in a blend of products, lots more to come from us over the next couple of months that you will hear about.

Matthew Kelly - Sterne, Agee

Actually, just to ask one more question just on slide 16 on the investment portfolio. What were the yields and coupons there on the new purchases, the agency CMOs, and the CMBS structures? What type of coupons are those adding?

Gerry Plush

Yes, I think we’re probably looking at on the CMOs probably in the 3% to 3.5% range.

Operator

Your final question comes from Collyn Gilbert - Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Just a follow-up on the expense discussion, specifically are you guys anticipating future severance charges in the first quarter?

Gerry Plush

Collyn, I think that you won't see our expectation is not for the kind of numbers that were posted certainly this last quarter. As part of ongoing operations there are always minor restructurings that are taking place in the various departments throughout the company. So, I would expect it to be de minimise, when you look at Q1.

Collyn Gilbert - Stifel Nicolaus

Then just in terms of how we should be modeling the preferred dividend expense going forward. Can you give us some color, at least into the first quarter?

Gerry Plush

At this stage other than the $5 million that you would be thinking about for the CPP, because there’s no word yet as to how that will play out, I don't really think I have got any other comment at this point. I know there’s a lot of noise in that line from the other true up from the Warburg transaction, but…

John Ciulla

Otherwise 8.5%, on the remaining $29 million of convertible.

Gerry Plush

Right, and there’s roughly $28.5 million at the convert preferreds at the rate that Terry just mentioned that you can be thinking about there.

Collyn Gilbert - Stifel Nicolaus

Then just along those lines, as you speak to the positive trends that are occurring on the pre-provision, pretax income, when do we start to see that improvement in the efficiency ratio? Do you have a targeted goal for the efficiency ratio?

Gerry Plush

Yes, and I think it's a combination. I don't think we’ve gone away from the fact that our belief, especially when you look at us against the peer group, is that there’s specific line items in our expense that need to be worked on, particularly in and around our occupancy and FF&E, which also includes some of our overall operating expense for IT.

So we’re very focused on that. I think part of the function of continuous improvement is that we are constantly looking at are their ways that we can be more effective and more efficient. “Should we continue to do everything internally versus is there a better solution externally?”

I think we’re just continuing to evaluate all our options, but I mean right now our strong view is just to continue to focus on area by area working across the company. Jeff Brown leads the continuous improvement team. It's very focused on how we look to help drive those numbers down.

It's very important to think about the fact that what we really need is just continued generation of revenue on the other side of that. We’ve got a platform in a company that has got a strong build out infrastructure that can support a larger organization. Part of our challenge really is that we want to growth the company.

We’ve had the last several years of flat growth in sort of a maintenance mode for a variety of reasons, obviously credit, capital, liquidity. Our focus now is to begin to grow the organization as we head into 2010. I think that takes a fair bit of the pressure off of just the expense side as we have got to go through and continue to reduce and reduce. Certainly, we’re very conscious of the fact those areas where we can be more efficient and I think the team is working on.

Collyn Gilbert - Stifel Nicolaus

When you guys engaged in the Webster-1 initiative, I’m trying to remember, what did you layout from that as kind of a targeted efficiency goal?

Gerry Plush

There wasn't necessarily a targeted efficiency goal. I certainly think that our view just that in and of itself, but certainly overall our goal is to get back to a 60% or better range. So very clearly, I don't think that as you think about us in 2010 that we’re going to be getting to those kinds of levels, but certainly as we think more strategically that’s absolutely imperative for us as an organization.

We’re acutely aware that as you all compare us against the peers, the top commercial banks, either $10 billion to $15 billion larger than us and slightly below our size and you sort of look at that $10 billion to $45 billion range that our ratio as it's currently reflected is just too high and it is a function of both on the revenue side of what enhancements we’ve got to do there as well as on the expense side.

So, absolutely very focused on that achievement in the coming year to two years, but certainly not something that I can tell you that we’re going to be doing in the next several quarters; we’ve got to gain some momentum as we build asset growth, additional revenue generating capabilities and in addition some more efficiencies that come out from the expense side.

Jim Smith

Collyn, let me just add a couple of things to that is to Gerry's point before, if you took out the occupancy and the equipment, we’d be pretty much at the median for the peer group. We also did achieve what we projected we would with regard to the total benefit from the One Webster initiative so every dollar that we committed to will have been achieved. I think the biggest outlier here is relative to what we originally were anticipating is the impact of credit.

So you have the lost income on the one hand and you have the higher expenses that can be associated with that, a portion of which are included in the calculation of the efficiency ratio. So I would say overall we’ve made very good progress in our 1-Webster efforts and as we have a reiterated here today 1-Webster is allowing well and we’ll contribute to continuing earnings optimization as we go forward.

Collyn Gilbert - Stifel Nicolaus

Then just one final question, Jim, maybe you could comment on your outlook. I know you started off the call obviously with a pretty optimistic view of where things could be heading, but specifically as it relates to CRE, that seemed to be one area that did see some deterioration as it relates to NPLs and net charge-offs. Just kind of your view as what you’re seeing in your current portfolio and then what you are saying in terms of pipeline for deals that are coming through?

Jim Smith

Yes, the pipeline is not robust, but we think it may percolate a little bit here in 2010 and there maybe opportunities for us, particularly in Southern England, where if you saw the comment about the Beige Book there even were some commenter saying the commercial real estate market looked like it was stabilizing a bit though at levels significantly lower than before.

So, first I want to say our commercial real estate portfolio has performed extremely well, very, very well. If you take at the res dev piece and look at the balance of it, we’ve had a good performance. I think it's a tribute to the experience and the discipline of our commercial real estate group.

Yes, non-performers are higher and we have put up reserves because we’re realistic about what we expect may happen down the line. At the same time, there will be opportunities for us in commercial real estate in the market. We’re a strong regional player, people will migrate toward us naturally at a time like this, and there could be opportunities under very favorable terms to put some commercial real estate on the books, but it's not as if we would do it at an outsized level.

The other thing we have going for us is our commercial real estate exposure, even today, is significantly less than you’d find in our peer group overall and the makeup of the commercial real estate book is much less oriented toward construction and we don't have a lot of leisure in there.

So it's a very solid book that we have that we think we can build off of as we go forward. Having said that, when we talk about the investments that we’re making in business lending, most of that will be in business and professional banking as well as C&I middle market lending in 2010, but definitely some opportunity including commercial real estate.

Collyn Gilbert - Stifel Nicolaus

So would you not necessarily subscribe to the view that commercial real estate, at least in the New England market, is falling off a cliff as some others might suggest? Do you see stabilization?

Jim Smith

No, we would say, it's weak, challenged, but it is not falling off a cliff.

Operator

Thank you. We have no further questions. I’ll now turn the floor back over to management for closing comments.

Jim Smith

Thank you. Thank you all for being with us today. Have a good day.

Operator

This does conclude today's teleconference. You may disconnect at this time. Thank you for your participation.

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Source: Webster Financial Corporation Q4 2009 Earnings Call Transcript
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