Webster Financial Corp (WBS) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation's first-quarter earnings 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, and business and financial performance.

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

These forward-looking statements are subject to risks, uncertainties and assumptions, as described in Webster Financial's public filings with the Securities and Exchange Commission, which would 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.

Good morning, everyone, and welcome to Webster's first-quarter '07 investor call and webcast.

I will provide some highlights and business context for the first quarter, and Jerry Plush, our CFO, will provide details on our financial performance.

We also thought it would be useful to provide information with regard to Webster's construction lending activities, as well as any exposure to subprime mortgage loans, given that these activities are topical today.

Bill Bromage, our President and Chief Operating Officer, will provide those remarks.

Also with us today is Jim Sitro, who is helping out in Terry Mangan's absence on a short-term medical leave.

Our remarks should take about 30 minutes, and upon conclusion we will be pleased to respond to your questions.

In our earnings release, we reported $0.62 in diluted earnings per share in the first quarter compared to $0.67 in Q4 '06 and $0.82 in Q1 06.

The Q1 '07 EPS includes previously announced charges related to ongoing restructuring costs and the closing of a mortgage banking subsidiary.

Also included in the first quarter are seasonally higher compensation-related expenses and a write-down of a Florida construction loan.

Excluding these adjustments noted in the earnings summary, EPS would have been $0.73 per share.

In reconciling Q1 '07 to Q1 '06 EPS, it is useful to consider that, adjusting for year-over-year seasonal compensation costs and other charges, Q1 '07 was lower than Q1 '06 by about $0.13 a share.

About half of that $0.13 came from investments in people, primarily customer-facing personnel, including in the Massachusetts-Rhode Island market, in de novo branches, in HSA Bank, and also related to compliance and regulatory personnel.

While we recognize that our investment in people has contributed to negative operating leverage in recent quarters, we expect these investments will contribute to positive operating leverage in the second half of this year.

Most of the balance of the EPS difference can be explained by higher short-term interest rates versus a year ago, a higher provision for loan losses, lower security gains, and to our decision to build capital rather than buying back shares in connection with the NewMil acquisition.

I want to address right up front what we're doing to improve our performance.

First, we have completed our balance sheet repositioning in Q1 with the securitization of $633 million of mortgage loans.

With borrowings, securities and resi loans down significantly, and continuing strong organic growth in commercial and consumer loans, the positive effects of the repositioning are clearly evident in our net interest margin, which rose sharply to 3.41% in Q1.

Our tangible capital ratio at 6.74% compares to 5.48% a year ago and now exceeds the peer group average.

Our progress has been rewarded with a recently announced upgrade from Moody's and a positive outlook from Fitch.

Our focus now shifts more toward building regulatory capital ratios and optimizing our capital structure to support our growth.

Our enhanced capital position gives us increased flexibility in capital management.

To that point, we announced yesterday an 11% increase in the regular quarterly cash dividend to $0.30 a share.

We also have greater capacity to undertake share repurchase programs and to make acquisitions in pursuit of our vision.

We have made considerable progress as regards our strategic and organizational review, which began in Q4 '06 and should be completed by the end of June.

We closed the mortgage banking subsidiary we acquired as part of the FIRSTFED transaction.

We restructured our insurance operations to boost our operating margin.

We outsourced the back office for Webster Investment Services, which is our mutual fund and annuities distribution unit.

We terminated mezzanine lending operations and discontinued construction lending outside of our primary market areas.

We are narrowing and sharpening our focus on the businesses we know best and which will help us achieve our vision to be New England's bank.

Aside from the announcements made today, based on the progress of our strategic review, we have set higher operating margin goals for our high-efficiency-ratio businesses such as mortgage banking, insurance, and Webster Financial Advisors.

We are managing expenses aggressively, with the expectation of achieving positive operating leverage in the second half.

In order to control expenses, we have reduced the number of approved '07 projects and we have implemented selective hiring freezes in certain business units.

We are confident that these efforts will be rewarded in the second half of this year.

I want to call attention to Webster's strong underlying business momentum, which is evident in the growth we have experienced in both commercial and consumer lending.

Aside from the NewMil acquisition in Q4 '06, commercial loans, including commercial real estate, and consumer loans grew 9% from a year ago as we continue to place the highest emphasis on building these portfolios.

Commercial loans, including commercial real estate loans, now total $5.4 billion and grew by almost 10% from a year ago.

Commercial loans now comprise 44% of the total loan portfolio.

Growth was led by C&I loans, which were up 13% from a year ago, and excluding the NewMil acquisition were up 12.7%.

Included in our C&I portfolio are small business loans, which increased 27% from a year ago, and excluding NewMil were up 22%.

Recently, Webster received a 2007 Small Business Administration Excellence in Lending award, one of two banks in the country to earn this special recognition.

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

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

The portfolio yielded 741 in the quarter, up 53 basis points from a year ago.

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

These characteristics underpin our favorable chargeoff experience and overall asset quality.

Our commercial real estate portfolio totals $1.9 billion and consists of $1.1 billion of institutional-quality real estate with long-standing relationships, while the other $800 million represents owner-occupied and non-owner-occupied loans from middle-market and small-business lending.

NewMil added $147 million of commercial real estate loans in Q4.

The total CRE portfolio yielded 7.14% in the quarter, up 20 basis points from a year ago, and as with the C&I portfolio, credit performance has been strong, with virtually no CRE chargeoffs in the past decade.

The consumer loan portfolio now totals $3.2 billion, and excluding NewMil, grew 12% from a year ago.

Consisting primarily of home equity loans and lines, the portfolio yielded 7.05% in the quarter, up 40 basis points from a year ago.

The annualized net chargeoff ratio was an unusually high 23 basis points in Q1, up from the low single digits we usually experience.

We expect to see chargeoffs continue in this range for the next quarter or two, primarily from higher combined loan-to-value loans.

Excluding the $300 million of residential loans received from NewMil, resi loans declined almost 30% from a year ago, in part due to the two securitizations that took place in the fourth and first quarters, as well as our decision, starting in July last year, to sell all rather than most conventional fixed-rate mortgage originations into the secondary market.

Currently, resi loans comprise 30% of the loan portfolio.

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

Turning to deposits, total deposits amount to $12.5 billion, $600 million of which came from NewMil.

Excluding NewMil and the planned reduction in brokered deposits, deposits grew 2.6% from a year ago.

Consumer preference across the industry is for higher-yielding deposit products, which has had a compressing effect on net interest margins.

And our experience has been no exception, as CDs are up $540 million year over year, accounting for most of the deposit growth.

As expected, we did not open any new branches this quarter and plan to open four or so branches in Q3 and Q4 this year.

Our de novo program had total deposits of $752 million at March 31 compared to $624 million a year ago, an over 20% increase year over year.

The de novo program is an essential part of our build-and-buy strategy, enabling us to expand our retail presence and creating opportunities for us to deliver our bank-wide products and services to consumers and businesses in new market areas.

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

Turning to HSA Bank, we now have $357 million in deposits in this division, an increase of 35% from a year ago, with an average cost of 2.9% and over $40 million in brokerage accounts.

In the first quarter, we added over 16,000 new HSA accounts.

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

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

I will now turn the program over to Jerry Plush so that he can provide full details on our financial performance in the first quarter.

Thank you, Jim, and good morning, everyone.

We continue to show considerable progress in improving our performance, as measured by select key ratios.

For example, our tangible capital ratio improved to 6.74%.

This is up from 6.46% at 12/31/06 and 5.68% at September 30, 2006.

Our loan-to-deposit ratio also improved to 98%.

This is down from 104% at the end of Q4 and from 106% at the end of September 30, 2006.

Our net interest margin also improved, as Jim mentioned, to 3.41% in the first quarter.

This is in comparison with 3.23% for the fourth quarter of '06 and 3.01% for the third quarter of '06.

We are truly seeing the benefit of the balance sheet repositioning and our focus on commercial and consumer lending.

While today we reported $0.62 of diluted EPS in the first quarter on net income of $35 million, these earnings are inclusive of one-time items.

All of the following amounts that I will talk to are pretax.

This includes $2.3 million related to the previously announced closure of PMC, $2.2 million in severance-related charges, $700,000 in loss on the writedown of a construction loan in Florida, and $4.7 million in seasonal expenses related to 401(k) plan and payroll taxes.

If you exclude these items, net income would have bee $0.73 per diluted share.

While our performance this quarter was clearly impacted by a number of charges, positive trends are beginning to show through in the results.

The most significant driver of performance is the continued improvement in the net interest margin, as previously mentioned.

However, the total benefit of the higher NIM is, for now, partially offset by the fact that average earning assets are lower by $1 billion from a year ago, and this is the result of our repositioning action.

Our intent now is to build on our earning asset base in the form of higher-yielding commercial and consumer loans in 2007.

The yield on total loans increased to 6.74% or 5 basis points higher when compared with the fourth quarter, and it's up 41 basis points from 6.33% a year ago.

The higher yield in commercial, which includes commercial real estate and consumer loan categories, in aggregate grew by 5% on average from the third quarter.

The yield on securities increased to 5.97% compared with 5.72% for the fourth quarter and 4.77% a year ago, again reflecting the positive effects of the repositioning actions we took in the latter part of 2006.

On the funding side, the cost of deposits increased to 2.87% or 1 basis point over the cost of deposits for the fourth quarter and 71 basis points higher than the 2.16% reported a year ago.

At the same time, the cost of (technical difficulty) was 4.75% in the first quarter, which is down from the prior and up -- excuse me, down 66 basis points from a year ago.

Total FHLD borrowings declined by $1.7 billion from a year ago, and it's important to note that we've really reduced our reliance on borrowings.

Our total noninterest income was $57.4 million, which was up from $51.4 million in the fourth quarter and $55.2 million a year ago.

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

Deposit service fees totaled $25.4 million for the quarter and this is compared with $25.5 million in the fourth quarter and $20.9 million a year ago.

Our insurance revenue was $10.1 million in the first quarter in comparison with $8.3 million in the fourth and $10.7 million a year ago.

Our insurance revenue in the fourth quarter did reflect a reduction in contingent commission income of about $1.3 million.

Our loan-related fees were $7.9 million in comparison with $9.6 million in the fourth quarter and $7.8 million a year ago.

Our fourth-quarter results included $2.4 million in commercial real estate prepayment penalty fees.

Our wealth management fees were about $6.9 million in comparison with $7.2 million in the fourth quarter and $6.4 million a year ago, while our other noninterest income was $1.8 million for the quarter in comparison with $3.7 million for the fourth quarter.

The fourth quarter did include a $1.4 million gain on the sale of properties, and our results a year ago were [$1.8] million.

Our mortgage banking activities totaled $2.2 million for the first quarter, and this was inclusive of the $700,000 loss that we took on a construction loan in Florida, as we have previously reported.

For the fourth quarter of '06, our mortgage banking activities were $2.9 million, and $3.3 million was reported a year ago.

We had $541,000 in gains on the sale of securities in the quarter compared with $2.7 million in losses from sales of securities in the fourth quarter and $1 million in gains from a year ago.

Our fourth-quarter results did reflect a $2.4 million loss on the completion of our AFS securities portfolio repositioning.

Turning now to noninterest expense, they totaled $131.3 million compared to $122.6 million in the fourth quarter and $119.2 million a year ago.

Our first-quarter results include one-time charges of $2.3 million from the closure of PMC, as previously discussed; $2.2 million in severance-related expenses associated with insurance and other lines of business, including outsourcing at [West]; our results also include seasonal charges of $4.7 million for payroll taxes and the 401(k) match.

The first quarter of '07 and the fourth quarter of '06 also both include approximately $3.4 million in additional run rate expenses related to the NewMil Bancorp acquisition that took place in October of '06.

Our fourth-quarter expenses were impacted by one-time NewMil acquisition costs of $2 million and, as I just mentioned, the additional costs of approximately $3.4 million of NewMil's ongoing operations.

Turning now to credit performance, our net chargeoffs exceeded our provision by $2.3 million this period.

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

Our allowance for credit losses was 1.24%.

This is higher than the 1.2% that we reported at December 31 and at September 30, respectively.

We will continue to evaluate our provision on a quarterly basis to reflect the risk associated with our focus on commercial and consumer lending, which we recognize as a significant asset mix change when you compare prior periods.

Also, as we have previously announced, we called our Capital Trust I and Capital Trust II securities at call prices of 104.68 and 105, respectively.

Our second-quarter results will reflect the net pretax charge income of approximately $6.9 million, which is related to the redemption premium and the writeoff of unamortized issuance costs.

As we have noted in our press release earlier today, we continue to evaluate replacing these legacy trust-preferred securities with enhanced trust-preferred securities which will have greater equity content for rating agency purposes, and depending on the interest rate environment, we may replace the legacy trust-preferred securities at a reduced cost or elect to enhance our capital level by issuing a higher dollar amount of enhanced trust preferreds.

There will be no impact to earnings per share in future periods as a result.

Looking ahead to the second quarter of '07 and then on to our priorities for the balance of the year, we expect the net interest margin will continue to improve and approach 3.45% for the second quarter.

The strategic review -- we previously announced that we initiated this review at the end of September of '06 and that we are undergoing a comprehensive review of the bank and all lines of business.

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

As Jim stated earlier, we began to execute on select action steps this past quarter, and it's our intent to complete this process by the end of the first half of '07.

We will, as decisions are made, update everyone accordingly.

Looking now at expenses, our first-quarter results reflect one-time charges as we began to focus on expense structure and reductions during the quarter.

Outsourcing of WIS is an excellent example of where we believe we can effectively reduce our run rate expenses.

The closure of PMC will reduce annual run rate expenses by $3 million.

We believe there are more opportunities to improve and to reduce expenses in areas like professional services and other expenses.

At the same time, we plan to continue to prudently invest in de novo branching in the second half of this year, as Jim mentioned.

In addition, through selectively hiring business development officers and investing in new technology to compete, balancing the need to invest in our future while reducing expenses from low-contribution lines of business, or centralizing shared services functions is key to accomplishing this expense goal.

Regarding our priorities for the remainder of 2007, we recognize the need to correct the negative operating trend.

Even with all the improvements in capital, in NIM, and a stronger balance sheet, it is essential that we show positive operating leverage and improved operating efficiency.

Our focus for the balance of 2007 is on doing just that, and we believe, once we complete the next stages of the strategic review, we will demonstrate this in our performance.

I will now turn the program back to Jim.

Thank you, Jerry.

I am going to ask Bill Bromage if he will discuss construction lending and Webster's minuscule subprime exposure.

Thanks, Jim.

I appreciate the opportunity to update all on the status of our loan portfolios.

Timing is appropriate, given what we have been reading about trends in the residential lending and housing markets broadly, and our own comments with respect to recent developments in this sector.

My comments today will focus on the three forms of residential construction lending we are active in -- our national wholesale lending, our retail construction lending, and residential development or commercial real estate, and on our exposure to subprime lending.

Webster considers residential construction lending to be a core competency.

We have had a long and successful track record in this space.

In fact, our founding principle at Webster was to help families build and buy their homes.

In addition to the residential construction lending activities in national wholesale, which we will focus on in a moment, we have been a leading residential construction lender in our market through our retail origination channel.

In addition, we have also been successful in residential development lending to builders through our commercial real estate team.

Let me start with our residential construction activities and national wholesale lending platform.

In late 2004, we initiated a program to leverage this national wholesale lending platform by offering residential construction loans to end buyers through that channel.

As of March 31, that program had a portfolio balance of $168 million in outstandings.

Of the total outstandings, approximately 20% is in our New England market, with 18% in Florida, which I will comment on in a moment, and the remainder fairly well disbursed through our regional offices.

Market weakness, especially in Florida, is well documented, and we are following this portfolio closely.

As for Florida, we have previously reported we have $31 million in outstanding as of March 31.

Of that total, we have suspended the accrual of interest on $12 million, as those loans were utilizing interest reserves to fund interest payments, which was deemed to no longer be warranted, based upon the prospects of future performance.

We also reported chargeoffs of $2.8 million on this Florida exposure.

We ceased our national wholesale residential construction lending activities in Florida in the fourth quarter and curtailed all-new residential construction production from this channel outside of New England and New York in the first quarter.

AS for our retail residential construction lending in New England, we have had a long and successful track record in this activity.

We have a total portfolio of $146 million in outstandings as of March 31.

The portfolio has had an excellent track record with respect to credit quality, with no chargeoffs in the last five years.

The total March 31 nonperforming statistics include one $3.8 million credit on a home in Fairfield County, which is fully collateralized based upon a recent appraisal.

The retail residential construction channel does not offer an interest reserve feature in its products, nor, for that matter, does the national wholesale channel offer that feature going forward.

Let me turn for a moment to the commercial risk versus consumer risk by spending a moment commenting on the highlights of our residential development activities with homebuilders.

This activity is part of our commercial real estate line.

Here, we lend to homebuilders who operate within the New England marketplace.

As of March 31, our outstandings were $220 million under commitments of approximately $400 million.

Our cadre of builders is high quality, and our underwriting standards strong, as evidenced by a stellar credit quality track record over a number of years.

Over the past five years, we have not had a single chargeoff.

We do not have interest reserves on this product category either, which is a distinguishing feature generally for this category.

While we consider each of these areas as a separate portfolio segment, you can see that the outstandings of $168 million in the wholesale residential construction, $146 million in the retail residential construction, and $220 million in the commercial residential development, we have an aggregate total outstanding level of approximately $535 million.

In this context, our exposure to the national portion of our residential construction is relatively small and manageable.

As to the question of subprime exposure, we define subprime as any loan with a FICO score of less than 620 at the time of origination.

Other than in limited exceptions, we do not put mortgage or home equity loans originated as subprime into our portfolios.

With respect to the residential portfolio, we do book HOPE loans, which are originated under our CRA program in the portfolio.

These total about $34 million on March 31.

And as to both residential mortgages and home equity loans, we will consider making an exception to a retail customer with good balances if we deem that as warranted.

These exceptions approximate 1% of these portfolios.

In some instances, we do originate subprime mortgages through our national wholesale channel, but only against commitments from qualified investors for this product.

I want to make a brief comment as to repurchase of loans sold to others.

Our investor contracts specify two categories of repurchase.

The first would be early payment default and the second is material misrepresentation or underwriting error.

We have purchased approximately $12.5 million for $400,000 in losses in total over the past five years.

With that, Jim, I will turn it back to you.

Bill, thank you very much.

And also, I think that those participating in the call will find the granularity quite useful.

In closing, I want to emphasize that Webster is very well prepared and committed to pursue our vision to be New England's bank.

The progress that we have reported in recent quarters, including our balance sheet repositioning, continued solid deposit growth, and strong organic growth in commercial and consumer loans, and substantial improvement in both our net interest margin and tangible capital, has brought us to a strong competitive position as the largest bank based in New England.

Our potential to grow and prosper is great.

Thank you for your interest in Webster and for participating in today's call.

We will now be pleased to respond to your questions.

(OPERATOR INSTRUCTIONS).

Jared Shaw, KBW.

I just had a few questions here.

The first is, Jerry, you are talking about the strategic review results, seeing some announcements or potentially a reconciliation in the second quarter.

Would we expect to see the decisions on that announced by second quarter, or are you internally finishing everything up second quarter, and then down the road we will hear the results of those?

That is a great question, and I would tell you that at this time, it could be a combination of both.

We are actively working towards trying to have everything completed by the end of the second quarter, and our hope would be to have everything announced.

There could be an item or two that we would talk about, but not necessarily have complete resolution to.

And then you were talking about the buybacks, not doing many buybacks right now and growing the capital.

At the time of the -- or specifically, I guess, associated with the NewMil acquisition, at the time of the announcement, though, you had indicated that you are going to be buying back 20% of the stock and that doing that would make the deal accretive in 2007.

Is the NewMil deal still accretive if you are not buying back that stock in '07?

I would comment that it is not.

It is neutral without the buyback.

So it is just not dilutive, but it is not accretive either.

Correct.

And then finally, on the de novo side, you said that you are still focused on the de novo growth.

But it seems like the shift is away from Westchester County now.

Could you give us an indication of where you would expect to focus the de novo growth?

Sure.

It is always the question of limited resources, lots of opportunities.

There's many places that we would like to go.

As we look at our franchise and we look at our commitment to be New England's bank, we see that there are significant opportunities in markets that may not be quite as attractive to other major competitors.

And you have seen us focusing on the markets in and around the Springfield area as we considered Hartford/Springfield to be an economic corridor and we want to get up near the Mass Pike so we can start going east from there toward Boston.

There are opportunities for us to expand in and around the Providence market that we think are pretty attractive.

There are still a couple of gap in between the Eastern Connecticut franchise and the Rhode Island franchise that we want to be considering.

And we do have some continuing interest in expanding in Westchester County as well.

And so what we have to do, particularly given that we have cut back on the number of de novo branches that we are opening in a given year from what we originally expected would be nine or 10 in '07 and '08, we are back to around six this year and maybe that or a little bit more next year.

We have to be quite selective.

So what we are going to do is, according to all the analysis that we do, we will open in the areas that we think are most attractive and meet the highest standards that we have for de novo branching.

So I don't want to give a runaround in the response but to say that there are lots of opportunities here.

We're focusing on the ones that will create the greatest value and advance the vision.

Have you opened any in the first quarter?

We did not open any in the first quarter.

We have plans for -- the plan is for six.

It could end up being five in '07.

But spaced pretty evenly throughout the rest of the year?

Most of them in the second half, at least four in the second half.

Mark Fitzgibbon, Sandler O'Neill & Partners.

First, I wanted to touch on the buyback a little bit more.

With your tangible capital ratio up around 674 and with the stock price having come in from I think 51 or 52 down to its current level, and loan growth being sort of slow last quarter, I guess I am curious why you would not be buying back the stock.

Let me just say, Mark, that you have outlined a scenario where we might well consider buying back stock.

But we were quite clear in our commitment to building our capital ratios, particularly tangible capital.

And you has seen that that has paid off, particularly if you look at the upgrade that we had from Moody's and the positive outlook by Fitch.

And we think that actually is going to be reflected in our borrowing costs as well.

We also look at the intrinsic value of our shares.

And to the extent that we think that Webster is a very attractive investment and we have additional excess capital that we could deploy for that purpose, then by all means, we will be considering it.

You also saw another use of capital is to raise the dividend, which we have done again by 11% in the announcement that we made yesterday.

The additional capital also puts us in a stronger position relative to possible acquisitions that we may make.

And then, of course, to the extent that we do have strong loan growth, we will be able to support that growth with the higher capital levels.

But a repurchase program is very much a possibility.

With respect to acquisitions, do you think activity is going to pick up in the New England market here in '07?

And what are the attributes of the kinds of companies that you might be interested in buying?

Well, I think we have always tried to be quite open in talking about making partnerships generally that would be considered as strategic alliances with partners that share our vision of being New England's bank.

And we continue to pursue those opportunities.

And that could be with institutions anywhere from about our size to institutions that are relatively much smaller, let's say down to the $500 million to $1 billion asset category, that are either in or near our existing markets.

So it enables us either to consolidate or continue the expansion consistent with our build-and-buy strategy.

We do think that the pressure on short-term funding costs, as well as the regulatory pressures, may induce some potential partners to decide that they want to take a partner.

And we hope that they will consider us to be the relationship that they would desire the most.

I don't want to predict what the level of activity will be, but I think there is a likelihood that there will be some.

And then two last quick questions.

One, Jerry, if you could share with us what you think the normalized tax rate is going forward.

And Bill Bromage, I wondered if you could just size the Alt-A portfolio for us as well.

Mark, I am going to asked Greg Madar, who is also sitting here, to answer that one.

Our effective tax rate -- as we approach each year, we estimate what it will be for the year.

It is currently approximately 32%, slightly lower.

That is our expectation.

At this point, we don't see much dramatic rise as we go out to future quarters.

Mark, help me out with what you might be defining as Alt-A, because in the industry --

If you define subprime as less than 620, how about from 620 to 700?

Could you ballpark the size of that portfolio?

620 to 700?

Bear with me one second.

I can do that.

The size of that portfolio, actually, I don't have that data readily available for our residential mortgage portfolio.

Our equity portfolio, that is approximately $600 million.

That $600 million is a little under 20% of [footings] in that portfolio, and 80% of that or more is over 650.

We will get you the number on the other.

Andrea Jao, Lehman Brothers.

Earlier in the call, you mentioned that commercial and consumer growth will offset the decreases in mortgage.

For the remaining quarters of the year, what kind of loan growth do you think that translates into in terms of total loan growth?

This is Bill.

I think that for the balance of the year, our expectation is that our loan growth in commercial and consumer would be consistent with what we have experienced last year, if you well.

We tend to go through a quarterly cycle.

The first quarter can be soft in relation to December.

But if you look at year over year, as Jim pointed out, that is strong, and our expectation, absent an economic event that we don't see at this point, is that we will be able to sustain that type of performance.

I would offer that part of that needs to be factored into the home equity lending market, which we have a successful program in, is one that, given the whole housing environment, we watch closely.

Andrea, I will add to that that I'd mentioned in my remarks that we expect that the consumer and commercial loan growth will be great enough that it will more than offset the paydowns in the resi portfolio.

So we are looking for net portfolio growth.

How do you foresee that portfolio growth will be funded, given it appears that some customers still prefer higher-cost deposits.

Do you see a mix of deposits versus borrowings?

Do you see -- [do you just stay up] on deposits?

Well, ideally, Andrea, it would be funded through deposit growth, and part of what we were saying before is we are fortunate that we have some diversification in deposit gathering.

So we have, not only within the market, we have deposits we will gather from de novo branching as we expand the market.

We have our HSA Bank, which is providing core deposits to us as well and growing fairly rapidly.

To the extent that loan growth is faster than the deposit growth, we have the choice of either selling off some of those loans or going through the wholesale borrowing market.

Our inclination is not to have significant growth on the wholesale side.

Perfect.

Last question -- have you considered early adoption of 159?

Yes, we have considered that.

And since one of our experts is sitting here, Jerry told me I should have Greg Madar respond to this.

Thank you.

Yes, we did, from February 15, when the standard was issued, as thorough an evaluation as we could based on what out there, taking counsel from our auditors and the like, and determined at this point it was not an opportunity to early adopt.

But we can continue to evaluate it for adoption at 1/1/08.

Andrea, this is Jerry Plush.

I just want to add that if you were to step back and think of all of the balance sheet restructuring that we have done to date, inclusive of the significant securities portfolio restructuring, in effect we have already taken quite a bit of what may be considered something that other organizations may be considering in early adopting 159.

There really isn't a significant amount, from our perspective, that we were really looking at as well.

Collyn Gilbert, Ryan Beck.

Just a housekeeping question -- on the $4.7 million that you guys had on the payroll taxes and the 401(k) match, that is just part of your normal business, right?

It was inflated because of the seasonality, but that wouldn't necessarily be considered a charge, would it?

That is correct.

And the expectation is that you see that type of seasonality in the first quarter of each year.

So it's of particular note because of the way incentive compensation gets paid out, as well as the fact that everyone restarts, in effect, or resets as of the beginning of the year.

So you also then see on an incentive compensation basis from the prior year, you would also see, then, the 401(k) implications as well.

And then I think you had footnoted that about 25% of that $4.7 million could be recurring in the second quarter.

Is that right?

Yes, we did.

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James Abbott, FBR.

I was wondering if I could get a sense on the yield on the incremental C&I loans.

As that is the key growth component, I was wondering what the yield is on that and how those are generally priced.

Is it prime driven or is it LIBOR?

I can tell you that the pricing in the commercial book is generally LIBOR based.

We have looked at prime based, but that is not what we see.

The pricing in that market, I'm sure you have heard this from everybody, is tight.

There isn't an asset class, really, that is enjoying robust spreads.

That said, we are seeing some prime-based financing in our asset-based lending portfolio, which is a growth sector for us, and we do well there.

We also see prime-based financing in our residential development, in the commercial real estate that I spoke about earlier, and we see some spreads over prime in that book.

Otherwise, the trends in the market are spreads that probably average 200 to 225 on new transactions, on average, over LIBOR going into our book.

And then on the asset-based lending, I am assuming that is inventory or accounts receivable.

Is that prime plus a half, or--?

More in that category, yes.

It is not more than that.

And what I'm saying was some of that is LIBOR, some of that is prime.

I was just saying, that is a category where in fact we do see some prime lending.

And that is all -- and I say all -- 90% to 95%-plus of that portfolio is secured by receivables in inventory.

And then one final follow-up on the yields.

On the construction, is that -- have you seen some weakness in the construction pricing, or has there been some strength?

I've got some companies telling me they are actually seeing strength in construction pricing because some of the larger lenders have backed away from the market.

I don't have the recent experience we have in that category.

I would have to get back to you with that.

And then I guess as a follow-up question related to the yield also, if you could give us a sense on the pipeline of those types of loans, the C&I.

Is it expanding from where it was three months ago?

Is it fairly stable?

I would not say that it is expanding.

I think our pipelines are stable.

Our pipelines have been strong and they are stable.

We've got some -- we go through strong pipelines in commercial real estate.

We will close some loans in the pipelines -- you are replenishing the pipelines.

So there's that -- with the caveat at that degree of volatility, we're not seeing the pipeline vary because of market conditions.

We have deliberately structured our commercial lending activity with a variety of growth engines, if you will, whether it is asset-based lending, equipment finance, commercial real estate, middle market, some certain specialty industries we pursue.

And as a result, we find one is strong and another is not.

The aggregate assessment at this point was that our pipeline continues to be strong and support our growth initiatives.

There are no further questions at this time.

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

I just want to thank you all for joining us.

Have a good day.

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

You may disconnect your lines at this time.

Thank you for your participation.