Webster Financial Corp (WBS) 2011 Q1 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's first quarter 2011 results conference call.

This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provision 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 might 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 these 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 first quarter of 2011.

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

Please go ahead, sir.

Good morning everyone, welcome to Webster's first quarter earnings call and webcast on this beautiful spring day in the Northeast finally.

Our earnings release and slides, along with accompanying supplemental information, are in the investor relations section of our website at WBST.com.

I will provide the highlights of the quarter, and Jerry Plush, our Chief Operating and Financial Officer, will provide a thorough review of the quarter's results.

Both Jerry and I will comment on progress to date on our strategic initiatives that you will find on slide 5, and then we will invite your questions.

Operating results continued the steady improvement of recent quarters as earnings climbed to $0.36 a diluted share.

Most notable in the quarter were the continuing favorable trends in credit quality and strength in net interest margin.

The margin widened 4 basis points to 3.44% from Q4, and 16 basis points from a year ago.

This margin expansion is important because it is a direct result of the pricing discipline that has been inculcated into every pricing committee, every banker and every individual pricing decision we make.

Proof of our progress is the meaningful narrowing of Webster's margin gap to peers in recent quarters.

As a result of this improvement and aided by modest growth in earning assets, net interest income grew 2.3% linked-quarter and over 6% year over year and total core revenue grew for the fourth consecutive quarter.

Loan growth was mixed in Q1 as loans overall were flat, but we made significant progress in key areas.

Commercial non-mortgage loans which reflect our core middle-market and small business lines grew $55 million from Q4 and stand 11% higher than a year ago.

This is further evidence that our early pledge to help finance the economic recovery is paying off with gains in market share.

Loan originations slowed from the near $1 billion pace in Q4 to $549 million but were 43% higher than a year ago with notable strength in business banking, commercial real estate, asset-backed loans and secured consumer loans, while residential mortgage loan originations were sharply lower.

Line usage was pretty flat in all business lines.

The pipeline in business banking is robust, consumer loans are up a bit and the resi mortgage pipeline continues to lag.

Part of the increased loan activity is attributable to the gradually but steadily improving business conditions in New England reflected in the Fed's most recent Beige Book which cites expanding business activity in most sectors in our region during February and March, even as retail and consumer -- and commercial real estate reports are somewhat mixed.

In addition to benefiting from a slowly improving economy, Webster is seeing in-market loan growth because we are winning market share.

Particularly noteworthy in recent quarters is the performance of our commercial bank where growth and profit are on the rise and our investments in adding bankers and cash management systems and pursuing market opportunities in Boston, Providence and Westchester County are paying off.

Rebuilding trust in banks is a critical challenge across the industry and that presents a competitive opportunity for Webster.

The most recent Greenwich Associates survey concludes that business owners increasingly recognize the importance and value in having a deep relationship with a homegrown bank that can deliver a full suite of financial products and services and do so with a personal touch.

Webster scored highest among the competition as the bank which values most long-term relationships.

The Greenwich survey found that almost one-third of small businesses and one-quarter of mid-size companies have recently shifted business away from a bank over issues of trust.

And these customers who rate us highly clearly indicate that Webster is not the bank offering the best pricing and terms which we take as a compliment.

We're seeing this power of relationship value not only in our core markets where we are best known, but also in our expansion markets of Boston, Providence and Westchester County.

Meanwhile Webster's credit story continues to improve as levels of non-performing assets dropped to the lowest level since the fourth quarter of 2008.

New non-accruals also dropped to their lowest level in well over two years; and classified loans, an indicator of future problem loans, declined 8% linked-quarter.

The lower level and continuing positive trend in challenged assets led us to reduce our provision for loan losses once again.

Still, we remain cautious regarding economic bumps that lie ahead and we plan to maintain vigilant coverage levels.

Our allowance for loan losses stands at 2.71% of total loans and 114% of non-performing loans at the end of Q1.

Turning now to capital, at March 31 the tangible common equity ratio increased to 7.10% from 6.82% at year-end.

Tier 1 common to risk weighted assets, which we view as a highly relevant regulatory capital measure, grew to 10.50% from 9.92% at year-end.

Clearly, our capital levels are well in excess of regulatory requirements and our internal target and we believe that we are already fully compliant with Basel III, including conservation buffers.

Our excess capital will enable us to pursue loan growth and to consider an increase in the dividend in the near future among other options for capital deployment, including mergers and acquisitions, though M&A is not a high priority just now.

As classified assets continue to improve, we may be comfortable running closer to our internal target for Tier 1 to risk weighted assets of 8.5% to 9%, subject of course to regulatory guidance as well as our own risk appetite which now gives us plenty of running room.

Optimization of our retail delivery system is another important initiative at Webster which I want to focus on this morning.

After the quarter's close, we completed the closing of five branches with minimal customer impact due to their locations in close proximity to other branches.

In fact, about 90% of affected customers regularly utilized banking services at other Webster branches, not to mention other delivery channels.

As a result, we expect to see minimal erosion of customer relationships and revenue from these closings and we will gain efficiency.

One of the factors driving our branch optimization efforts is our strategic decision to shift infrastructure investment from physical plant to electronic delivery as a more optimal use of capital.

As customers increasingly utilize multiple and increasingly remote channels to conduct their banking, we are making certain that Webster's delivery keeps pace with their needs.

For instance, since the introduction of mobile banking late in 2010, about 17% of active online users have signed up and are actively using mobile banking.

During the first quarter, users initiated 375,000 mobile banking sessions, by far the fastest adoption of any online service we have offered.

Moreover, the customers who have used our mobile banking rated Webster 4.3 out of a possible 5 stars when asked to score their experience.

Since we see electronic and mobile banking as key channels which we believe will create convenience, value and efficiency, we plan to continue upgrading our capabilities by introducing balance alerts via e-mails and text, envelope-less ATMs and remote deposit capture for consumers.

At the same time, the branch network will remain a cornerstone of the retail bank for the long-term.

It is an important tangible connection to our customers and a powerful reminder of our community roots.

What is changing is the nature of what occurs in the branch.

As ATMs, e-banking and banking by phone increasingly handle routine transactions, the branches are focusing more on individualized interactions with consumers and businesses, meeting their more complex financial needs like cash management advice or retirement planning.

We see our branch system evolving to a hub-and-spoke system with larger strategically located hub branch offices supporting a network of surrounding spoke branches in our various regions.

In the hub branches will reside deep expertise across a broad range of business and consumer products and services.

The surrounding spokes will be smaller, convenience-oriented facilities much like the 600-square-foot facility that we will be opening in Scarsdale later this year.

The spokes will draw upon the expertise in the hub branches as customer needs dictate while lowering both fixed and unit costs of the branch delivery system.

Expect much more discussion on delivery channel optimization in the quarters ahead since this is a high priority for us.

Customers' greater reliance on technology is not the only factor driving change in the branch network.

The pace of investment has been quickened by recent regulatory changes, such as the revisions to Reg E and the Fed's proposed rules for implementing the Durbin amendment.

These changes which diminish revenue and increase expenses threaten the economic profitability of our brand-centric retail model, so we are responding in ways that satisfy and create value for customers and enable us to achieve economic profit.

Our strategic priorities are listed on slide 5, a constant reminder of where we are focusing our capital and our energy.

I've touched on a couple of these in my remarks, including loan growth and DDA balances, and Jerry will cover the others.

We have measurement systems in place to monitor and report on our progress which we will be reporting to you regularly.

Now Jerry will provide you with a detailed analysis of the quarter.

Thanks Jim, and good morning everyone.

Let's start with a review of core earnings for the first quarter.

We are pleased to report continued positive results and reported pre-tax income for the first quarter of $44.6 million, and that is a comparison of $40.4 million for the fourth quarter.

Our pre-tax pre-provision earnings were $54.5 million compared to $52.9 million in Q4.

Positives for the quarter were a higher net interest margin of 3.44% and average interest-earning asset growth of $293 million in comparison to Q4, which obviously then resulted in higher net interest income, up $3.1 million.

Our non-interest income was down $2.75 million from Q4 and that is primarily from reduced nonrecurring gains on sales of investment securities.

Our core expenses were up $719,000 from Q4, less than 1%, and please note that the first quarter had $3.1 million of increased compensation expense that's specific to the quarter, and that is primarily seasonal increases in payroll taxes and 401(k) contributions offset by lower expenses in other line items.

There is some more details we will provide on specific revenue expense categories as we cover the next slide.

So when we compare reporting earnings to the pre-tax pre-provision number for the quarter, as we have done in the past we adjust for certain non-core items.

So here you can see there's four items that in the aggregate largely offset each other.

So specific in the quarter, there is a net gain of $377,000 on the sale of securities, the result of the sale of all the securities that we had been classified as trading during the quarter at a loss of $1.8 million.

And that is offset by some gains on the sales of equity securities of $400,000 and a net gain of $1.8 million from the sales of some short duration very high premium securities and then also one small trust preferred issue.

We also had a net recovery of $315,000 for closed and repossessed assets.

We also recorded a $292,000 provision for litigation and settlements, and this is primarily an accrual for post-judgment interest.

And we also had $273,000 in branch facility optimization expense, of which $188,000 of that related to an early lease termination payment on another (technical difficulty) facility in Connecticut which we intend to vacate by the end of 2011.

Also note that nearly $2 million in income from discontinued operations; that represents the completion of the earnout component of a transaction -- it's also reported net of tax -- that was associated with the sale of the insurance agency business three years ago.

The amount received was based on a percentage of revenue in excess of an established premium threshold at the time of sale.

We will turn now to the next slide to cover core performance.

So here on slide 8, you can see the core earnings drivers in Q1 in comparison to the four quarters of 2010.

The $1.6 million increase in core earnings reflects a number of revenue and expense items which we'll cover now in detail.

Our net interest income was $139.5 million.

It is the highest level in the five quarters shown on this slide and it was driven as previously mentioned by the increase in the net interest margin and the higher average earning asset balances in the first quarter.

This quarter's results continue to reflect the positive impact that Jim referred to in disciplined loan and deposit pricing, and we have been talking about that a lot on the prior calls and you can see it taking hold here again in the quarter.

In addition, the NIM was helped by the higher level of long-term interest rates which resulted in slower repayments of mortgage-backed securities and CMOs, and of course that means less premium amortization.

The NIM was also helped by an improved deposit mix, which more than offset the impact of declining residential and commercial real estate loan yields from refinancing.

On the non-interest income side, again, that decreased by $2.75 million.

So again, in the quarter there was $377,000 in gains on sales of securities compared to $2.3 million in gains in Q4.

We saw declines of $1 million in mortgage banking activities and $1.7 million in loan fees which were partially offset by an increase in deposit service fees of $314,000 and $1.6 million in other income.

We do expect mortgage banking in -- excuse me -- I think we said we expected mortgage banking to be lower in Q1 compared to Q4, and the decline in loan fees reflects the lower origination volumes in the quarter.

The slight increase in deposit service fees reflects a full quarter benefit from the implementation of some of our product redesign during the fourth quarter and the increase in other income reflects income from direct investments.

The $719,000 increase in core expenses from Q4 reflects a number of increases and decreases among various categories.

So comp and benefits rose $3.1 million compared to Q4 from the seasonal items I noted before, increased payroll taxes and benefits match expense.

However, we also noted on the fourth quarter call there were certain comp items specific to that quarter and the stock related expense and group insurance.

So what has occurred that in both Q4 and in Q1, we wound up having a higher level of stock-related comp expense of which approximately $400,000 in Q1 and $500,000 in Q4 corresponds to a higher valuation at those respective quarter ends.

Our March 31 stock price was up to $21.43, and that is in comparison to $19.70 at year-end and $17.56 at September 30.

The expense specific that we are referring to is related to payment of share awards in lieu of rewards of restricted shares that we did back in December of 2008 and again in 2009 with some of our management team members, not the executive management team.

Also, group insurance was $1.1 million higher than we would have expected in Q1 to a higher than projected volume of claims, and unfortunately due to a much higher number of catastrophic claims than projected for the quarter.

Q4 had shown a higher level of claims volumes as well.

Our expectations are that this should normalize over the next several quarters.

Let's move on to occupancy.

There, we saw an increase of $864,000 which reflects higher than expected snow removal costs from the severity of this past winter.

The $1.2 million increase in marketing expense was expected in conjunction with recent branding account acquisition initiatives and the $374,000 increase in FDIC expense reflects higher deposit balances.

We saw a decline in technology and equipment which reflected a decrease in service contract expense and we saw a $2.1 million decline in professional and outside services, which reflects a reduced number of specific projects compared to the prior quarter.

We also saw a $1.2 million decline in other expenses.

That reflects a decline in the provision for the loan repurchase reserve.

We recorded $720,000 in the first quarter in comparison to $1.1 million in Q4.

We also saw a reduction of $428,000 in loan workout expenses in comparison with the fourth quarter.

We will turn now to slide 9 and cover investment securities.

The portfolio decreased about $92 million in the quarter.

We had an increase of $139 million in held to maturity and that is offset by about -- declines of $219 million in the AFS portfolio.

We also had the sale of trading securities in the quarter, which total $11.5 million at December 31.

We are continuing to buy relatively short duration agency CMOs with limited extension risk.

We sold some higher premium agency MBS in the quarter.

The $86 million that we sold were at a gain of $2.8 million.

We also sold one trust TruPS security for a loss of $1 million.

Right now we have eight remaining pooled TruPS securities totaling $54 million in carrying value.

And as I mentioned before, we also sold some common equity securities for gains of approximately $400,000.

The portfolio's overall duration decreased slightly to 3.9 years after a jump to 4 years at December 31 at that reflects the rise in long-term interest rates during the quarter.

About 59% of the portfolio is held to maturity and that gives us protection to the capital position in a rising rate environment; and about 41% is in AFS and that consists of shorter duration investments, which is an excellent source of liquidity for us to fund our loan growth.

The overall yield was up 5 basis points following the rise in long-term rates that we saw during the course of the fourth quarter.

Also, as listed on the slide and worthy of note, the AFS portfolio includes around $36 million in unrealized gains as of March 31 and our held to maturity portfolio excludes unrealized gains of around $74 million.

We will turn now and take a look at slide 10, which focuses on loan mix and yield, and you will see the yields in the overall portfolio declined 4 basis points which reflects the strong pricing discipline we previously noted, even with the lower market rates of interest.

The resi and CRE yields declined by 8 basis points and 5 basis points respectively, and that reflects the impacts of payoffs and paydowns on the higher-yielding loans in the portfolio compared to the new production being booked.

Continued stability in the commercial and consumer yields helped moderate the effects of the declines in the other two segments.

If we turn to slide 11, you will see the growth that we've had in our core franchise lending over the past year.

The commercial nonmortgage segment represents our relationship-based activities with small and middle market businesses.

This segment increased by $55 million from December 31 and the increase of $170 million over the past year represents growth of 11%.

This increase is due to the growth initiatives that were outlined earlier today.

We saw further growth in the CRE segment in the quarter and a seasonal increase in asset based lending from a low point at December 31.

We think that this growth in core franchise lending is pretty impressive when you take into account that total loans were essentially flat from year-end after a continued reduction of $67.5 million in equipment and finance and a $47 million decline in consumer.

The consumer decline reflects the current preference among borrowers for the first mortgage product in response to the low interest rate environment, and it is important to note we continue to sell all of our conforming fixed rate 20- and 30-year mortgage originations.

We will turn now to slide 12 and take a look at asset quality progressions.

Here as we have done in the past we've provided a five-quarter trend in total non-performing loans, REO, repossessed property and past-due loans.

What you can see here is continuation of the overall favorable performance in all categories.

So as a reminder, like prior quarters individual credit and other performance data for our principal loan segments; that is all included in the supplemental information that we post on our investor relations section of the website.

We have also included this time a slide on troubled debt restructures in the supplemental schedules, and this details balances that are accruing, non-accruing yields, before and after modifications, and total loans modified greater than one year, and that shows strong performance of the loans that have been modified.

So turning back to slide 12, you can see that non-performing loans continued with what is now six consecutive quarters of decline.

We will go into more detail on that in the next slide, but a decline of $11.7 million in NPLs since December 31 was supported by a further decline of new non-accruals during the quarter which are down 11.6%.

Note that over a third of our NPLs or about $100 million are paying as agreed.

We continue to actively identify and address problem situations through loan modifications.

The REO and repossessed equipment portfolio was essentially flat to the quarter after a decline in Q4.

Our inflows matched the outflows of about $3 million in the quarter.

Our past-due loans have been below 1% of total loans for four quarters now and were 76 basis points at March 31.

Now you will note there is a slight increase from year-end, and that principally reflects an increased net in the CRE category of $11.2 million.

There was one credit for $13.5 million that contractually matured during the first quarter.

This credit is paying interest and it is expected to refinance in the second quarter.

So you can refer to the tables included in the press release for some additional detail on these progressions by loan segment.

We will turn now to slide 13, and here again we have provided a reconciliation of the NPLs over the past year.

Our new non-accruals were $68.9 million, again an improvement of $9 million from what we recorded in the fourth quarter.

We saw a combined decline of $19.9 million in resi and consumer slightly offset by the combined increase in $10.9 million in commercial and CRE.

We saw continued progress in our cures and exits.

You combine that with charge-offs and transfers to REO, we had a lower level of non-performing loans for the quarter.

A steady decline in the level of gross charge-offs since the fourth quarter of 2009, and it's important to note just 7.7% of our troubled resolved loans in the consumer channels since March of 2009 have resulted in foreclosure.

And this demonstrates our continued commitment to keep borrowers in their homes.

Our re-default rate on modified resi and consumer loans is running at a little over 11% and that continues to have a favorable impact on our results and is reflected in our cure numbers once again this quarter.

Performance here has been very solid in comparison to industry rates, and again, it reflects our overall approach to successfully working with at-risk borrowers.

Also note before we turn to the next slide one more comment on non-performers.

We noted today that we are continuing to explore all opportunities to expedite our reduction to non-performing assets.

We recognize the impact that this has been having on operating results and we continue to look for ways to minimize that.

So we will turn now to slide 14 and take a look at the allowance for loan losses.

You can see here the provision for loan losses declined for the sixth consecutive quarter.

The provision was $10 million in the quarter, noticeably below the net charge-offs for the second quarter in a row which were $33.7 million in both Q1 and in Q4.

Being able to record a provision less the net charge-offs reflects the continued improvement in key asset quality indicators, including the classified assets which declined over $70 million in the quarter as well as the overall adequacy of the allowance as it relates to coverage to non-performing loans.

$33.7 million in net charge-offs are after $4.2 million in recoveries in the first quarter and our level of recoveries was relatively consistent on average with the four prior quarters.

If you look also note the allowance for loan losses now represents 2.71% of total loans.

Our coverage ratio is at about 114% of our total non-performers.

So, again, even with lower provisioning in first quarter our coverage of our non-performers remains well above 100%.

We have got details again available on the supplemental slides and the website.

You have got five-quarter trend statistics and information on each of the loan segments posted there.

Okay, we will turn now to slide 15 and we will take a look at our total deposit mix and cost by product.

So here, you can see total deposits increased by 3.8% or $560 million over December 31.

Our demand deposits are over 15% of the total deposit base compared to 12% a year ago.

That is down slightly from the 16% at year-end.

But our core to total deposit ratio improved to 78% compared to 74% a year ago and our loan to deposit ratio went to 78% compared to 81% at year-end.

The deposit growth in Q1 reflects particular strength in the health savings account area as well as in money market and savings deposits.

Combined, they all grew $496 million.

The first quarter is clearly the seasonally strongest quarter for our HSA division and we saw growth there of 15% in the quarter.

You can see this unit is rapidly approaching the $1 billion level in deposits.

We had growth in money market deposits that reflect seasonal strength in the government business and the growth in savings reflects seasonal patterns and customer preferences in the Retail segment.

Our core deposits have grown $644 million, or over 6% over the past year while CDs have declined $513 million over that same time frame.

So with that improved mix, our cost declined 4 basis points in Q1 and 28 basis points from Q1 a year ago.

We still don't expect further significant declines on the CD side either in balances or the cost due to the low level of maturities in coming months.

We continue, though, to evaluate opportunities regarding rates in all of the account types, where possible.

We will turn now to slide 16 and we can take a look here at the deposit mix by line of business.

So, again, as we've noted before, we think one of our competitive advantages comes in deposit gathering across five lines of business that are shown here.

It is noteworthy to note again we brought the cost of deposits down in the lines of business that you see here while showing significant overall balance growth in four of the five lines this quarter.

We will turn to slide 17 and take a look at borrowing mix and cost.

You can see some changes that have happened here -- the strong deposit growth that we had in the quarter supported a decline of $599 million in short-term borrowings during the quarter.

As we had mentioned on our earnings call in January, there was a temporary increase in short-term advances at the end of Q4 to fund the year-end asset growth.

The level of reduction of borrowings during Q1 that took our ratio of borrowings to assets down to 10% at March 31, and that compares a range of 11% to 14% in prior periods.

The decrease in the cost of borrowings just really reflects higher cost of maturities both in Q4 and Q1.

We do expect there could be some potential for an increase in borrowings due to seasonal outflows in government deposits in Q1 -- or, excuse me -- in Q2, but that is only of course if that's not offset by new deposit inflows in other areas.

So before I turn things back to Jim for his concluding remarks, let me provide a few comments on expectations at this point for the second quarter.

So of course, let's first cover the NIM.

Absent changes in long-term rates, we would expect the NIM to be in a slightly lower range than the high point of 3.44% we just reported in Q1.

So even with the discipline we have been referring to in loan and deposit pricing, yields on new lending and the securities that coupled with the paydowns of higher coupon loans and securities, you see some impact on the earning asset yields like you did this quarter.

So, accordingly, we believe a range of 3.39% to 3.44% is more likely for the second quarter.

Overall, average earning assets we would expect to be at slightly higher levels in the second quarter.

We have rebuilt our pipeline in Q1.

Our expectations would be for net loan growth in Q2.

We would expect at this point to maintain our investment portfolio balances.

Regarding credit, positive trends that we experienced in all the key asset quality metrics continued through Q1.

Assuming that continues to hold up and show improvement, I think it is safe to say you can anticipate a continued low level of provisioning in the second quarter just like you have seen in Q1, and even potentially lower.

On the core non-interest income side, we expect that to be relatively comparable to Q1, and again that is exclusive of mortgage banking activities and any gain activity or fair value adjustments.

On the non-interest expense side, we would expect compensation to decline exclusive of those Q1-specific items.

Again, the seasonal tax and benefit match declines should come through.

We would think that core expense should be in that 124, say, to 125 range.

And that is exclusive of foreclosed expenses and write-downs.

We saw a low this past quarter.

If you look at the last four quarters, on average it ran about $2.5 million to $2.75 million.

It is important to note that we are continuing to evaluate new ideas to reduce expenses, including opportunities for facilities consolidation and also additional steps in distribution optimization that Jim had referenced.

We believe this can create meaningful savings later in 2011 and in future periods.

Since year-end we have three corporate facilities that we have either sold, are under contract or intent to sell and we've got another we just announced our intent to vacate.

And we are continuing to look for additional opportunities, including re-stacking to optimize the use of space in all our primary facilities as well.

Regarding branches, as noted previously in addition to the five we just closed, we would expect to announce additional distribution optimization initiatives.

That could be moves, combinations and potential closures.

We hope to be announcing that shortly.

We really recognize generating efficiency in other areas and executing on them for savings are more than necessary for us given our goal of improving efficiency to 60%.

And we also know there are still some unknown costs likely with financial regulatory reform.

So more updates on these efforts will be forthcoming in the coming quarters.

It's important to note that also an addition to the withering focus we are having on the expense side, we are continuing to focus as well in optimization on the revenue side to improve that ratio.

Let's turn now to think about the tax side.

Our estimate on the effective tax rate on a non-FTE basis for the quarter as well as for the year would be at 29%.

Also then, regarding fully-diluted shares, I'd assume around 92.6 million for the second quarter.

So that concludes my remarks.

I will turn it back to Jim to make his.

Thanks, Jerry.

As you can see from our steadily improving results, we're making progress toward our overarching goal to increase economic profits.

We are committed to improve our absolute and relative performance in order to rank among the best performing mid-sized banks.

Our strategic initiatives are chosen and monitored with those goals in mind and we understand the importance of swift and competent execution.

Even as we invest in the future, a significant portion of our effort is being devoted to improving the performance of our existing businesses day after day.

We have chosen measurements to track our progress on our strategic initiatives in a way that is transparent to our investors, and rest assured that our compensation is closely aligned with successful execution of those plans in creating economic profits and increased value for shareholders.

We look forward to sharing our progress with you in the coming quarters.

That concludes our prepared remarks and now we are happy to take your questions.

(Operator Instructions).

Bruce Harting, Barclays Capital.

So on slide 11 there, the commercial nonmortgage continues to show good growth.

Can you comment on the yields or the types -- loan structure you are getting there in terms of term and duration?

That is the part of your business I assume is coming with the Boston buildout.

Are you getting -- compensating balances with that?

I will take a crack at that first.

On the commercial non-mortgage side, we saw in particular really strong growth in middle-market.

I think it is safe to say that we saw it throughout the footprint.

So you can think from Boston to Westchester that we saw activity.

I don't think that we've -- I think we feel very good.

Everything has hurtled in terms of the capital that we have assigned to each of the credits.

Our folks are very focused that it is not just about gathering the loan balances, but it's about the relationship.

And I feel confident in saying that in all of these cases that we are getting the totality of the relationships as much as physically possible.

Thanks, and just last and I will get off here.

The provision, is that -- I see that obviously direction of charge-offs flattening a little bit in the quarter.

Can you comment on that?

And then is this as much reserve release as we will probably see for now?

My view is we had booked significant provision over the last several periods in recognition of the risk that we had in the portfolio.

And I think that we are at a stage where as we continue to book new credits, as we have continued to effectively risk rate and monitor the portfolio in each of the respective areas, we see that performance just continues to improve in a lot of the areas.

And that just enables us to feel much more confident.

I think that comes through in the lower level of classified assets in the quarter that we referenced, both in Jim and as well as in my remarks.

And I think it is very much reflective of a view that we will continue to see this type of spread.

And, again, this assumes all the indicators continue as we would project them to, that we would be able to continue to report a much lower provision similar to the way we did this quarter.

And in my comments even potentially better because I think we are just utilizing what we had built up with really strong coverage ratios, still well in excess of the NPLs, fewer new non-accruals, relatively stable.

And again that one credit that I mentioned in particular that is listed as a past due, it is a contractual maturity and it is paying.

So I think all the indicators would lead you to feel very comfortable that you could see us continue to charge probably comparable levels in the next several quarters to keep moving through any of the problem credits that are in the portfolio, just based on, again, that trajectory of past dues and non-performing levels and classified levels all in that same downward descent that we have been talking about.

Okay, thank you.

I just want to add to that if I could that, given the high coverage that we have, both in terms of loans and of the non-performers themselves and what we would call both quality of the non-performing assets themselves, that if there is continuing improvement in the non-performing categories, that it is reasonable to expect further reduction in that provision.

Gerard Cassidy, RBC.

The question I had was in the other income.

I may have missed it, so I apologize -- but in the other income line item in the non-interest income section, what was included in there, Jerry?

Yes, we have direct investment income in the quarter that showed an improvement, so that's what's reflected in there in Q1.

And how big was that?

Is that primarily private equity type of income?

It's in a number of different funds.

And we have been either liquidating positions or -- to make sure that what we get in returns continues to be favorable.

So you see the combination of both that are coming through in the other income side.

Okay, the other question was, in your securities portfolio you took down the availables for sale and built up the held to maturity part of it.

What is the thinking behind that?

Just in terms of the type of securities that we bought, it just tends to be -- there is some additions on the CMBS side that we added to the portfolio that meet our criteria.

There is some in-footprint municipal business that we booked in the period, so when you start to look at some of the municipalities that we serve in and around the footprint, and the balance is really the agency CMOs that I had mentioned.

Generally speaking, when you think about the portfolio, we continue to see pretty good pre-pay speeds in both.

I think you would see some bouncing around of that percentage so that you may see that with the slowdown in the pre-pay speeds I think also affects that in any given quarter.

I would not put too, too much into that we are trying to weight it more to held to maturity versus available for sale.

I do think it has got an incredible amount of liquidity available, as I had mentioned, to have 40% plus of the portfolio available to liquidate if -- to replace loans of course if we wanted to.

But I just think that part of the idea is that we will not have this really get much more heavily weighted with more in held to maturity.

I do think it is important to note though that what is in HTM is obviously protected capital-wise because you don't have the volatility of the mark-to-market because the AFS marks, as you know, Gerard, you're including in your equity and the HTMs you are not.

Right, right.

And do you recall, what where the yields, the incremental increase in the agency CMOs in the held to maturity section?

That was where you showed the best growth.

And what were the yields vis-a-vis what you had in the fourth quarter and the pickup there?

Yes, you're probably in the 3.25 or so range.

Again, remember that part of the improvement comes from -- is the long end that remain elevated.

You've seen a slowdown in pre-pay speeds which lessens the amortization of any premiums you pay.

That has also boosted yields as well.

We've got about $75 million in cash flow that comes in that portfolio as well per month.

Okay, and then going back to the commercial loans which you guys are showing some nice growth, I noticed on slide 3 of the supplement that the net charge-off number in the first quarter jumped considerably for the commercial non-mortgage and your new non-accruals also jumped up.

Can you give us some color on what went on there?

Yes, we had one credit in particular that we took a charge on during the quarter, really just contiguous to the footprint.

It had been a credit that had been on the books for a number of years and, you know, which is just the facts that came out in that one in particular.

I really am not going to disclose too much more, other than to say that I think there is -- continues to be stress that pops through in certain credits in the environment.

We had not had any exposure or losses like that in the middle-market side, and occasionally there is going to be something like that.

I think probably in the time period I have been here, I can't recall something anywhere near that size that has popped up, actually even in aggregate.

So the market performance for the folks and the strength of that portfolio have been outstanding.

So I think it is just occasionally you are going to have something that pops like this, a case that will come out like this one.

When we get to normalized charge-offs for Webster possibly in 2013 or maybe sooner, what do you think the normalized loan loss reserve to total loan ratio will end up?

I understand, obviously, reserves are driven by the classified loans, but from a GAAP standpoint we all look at it as reserves to total loans.

Do you think you will be comfortable or the regulators would be comfortable with reserves less than 2% of total loans when we get to that normalized state?

Yes, you know, Gerard, I certainly would hope so.

That is our thinking.

If we were to look under a variety of scenarios that has been sort of the thoughts from our standpoint that you could expect to see that going into that 2013 or so time period.

Great, thank you very much.

Mark Fitzgibbon, Sandler O'Neill Asset Management.

On the press release you mentioned about opportunities to expedite further reductions in NPAs.

Does that imply a bulk sale?

And if so, should we expect meaningful additional charges to do these sales, or are the loans already marked close to potential sale prices?

I think what it implies is that we are continuing to evaluate all opportunities.

What we reported this quarter was obviously continued positive downward trend.

Heretofore, we have not looked at much beyond trying just to continue to work through credits.

We are going to take a look across the board at a variety of options.

It does not mean we will or we won't do something.

I think what we wanted to make sure that folks know is that there has been a lot of questions that we have been getting asked about the level of NPAs and the significant impact.

You can see we break out our loan workout expenses.

This is the first quarter.

That is why I specifically noted it.

We have been averaging around $2.5 million to $2.7 million a quarter -- and that is in millions of dollars -- just in the foreclosed and expense lines.

And then you couple that in with the workout expenses, you couple that in with the personnel that we've got dedicated and focused on doing this, you're talking about millions of dollars of earnings impact that are happening on a quarterly basis.

As we think about efficiency, as we think about the return of as much cash into our earnings status as possible, I think we are just making sure that folks know that we are looking at the full array of alternatives that are out there.

Okay, and then secondly, you talk about potentially being in a position soon to raise the dividend.

Do you have a target in mind for the dividend payout ratio longer-term?

We do have a target.

I would say, over the near-term we probably would be thinking in the area of 10% to 20%.

Longer-term that could rise a bit, but it would depend upon what the other capital alternatives are, what would be the role of M&A at that point, at what rate would the portfolio be growing where we'd capitalize that growth.

So we take all those things into consideration.

Okay.

And then, lastly, I know you mentioned you expect I guess some balance sheet growth in the second quarter.

Should we expect do you think between now and the end of the year for the balance sheet to grow much?

Our expectations are that we have got a bigger, deeper team.

We have had the geographic expansion and we've got continued emphasis throughout the footprint.

So our view is -- and again why we've tried, Mark, to split out in particular the pullback that we've had -- and by the way, we are even going to go back and add personnel into the equipment finance division, because, again, there we have focused and pulled back between that Philly to Boston corridor comparable to or similar to the way we have thought about asset-based lending as well as commercial real estate.

So we are going to be adding personnel on the sales side there.

So I would expect you to start to see some stabilization in that.

If you take that and you couple it with what we think is a pretty robust pipeline, our expectations are that the teams out there are being able to generate some net loan growth.

We have given the specific view that it is not our intent to be growing the investment portfolio.

We continue to say that we'd keep it in and around the level where it is.

So overall, our expectations are that we would start to see the similar pops in that loan growth from the activities that we have.

Now of course, you know, that assumes that we continue to see the response that we have had as well as the economic conditions here as Jim was referencing earlier.

That all maintains that is our expectation that you would start to see growth.

Jason O'Donnell, Boenning & Scattergood.

Jerry, can you just talk a little bit about your strategy in the municipal portfolio?

I'm wondering how much exposure you have outside of the New England region and how concerned you are about credit risk in that portfolio?

Yes, good question.

We look at this all the time.

It's about a $670 million or so portfolio.

It has served us extremely well.

It has got really good book yields close to 6.6%, pre-tax about 435.

We monitor this.

What we like about the portfolio and maybe the best way to describe it; it is geographically diverse.

There is a fair bit that is spread throughout the rest of the country, and it is fairly granular.

We have had a policy in place to try and keep everything from $5 million and down, that the vast majority of these credits you can see are $1 million to $2 million chunks.

There is an awful lot of this that are school districts, and they are, in most of the cases with the school districts, and they are all general obligation -- I think 98% of the portfolio is general obligations.

We don't rely on the credit -- the external ratings.

We have been spending a lot of time doing our own credit work on these.

We are methodically going back through the portfolio particularly on all of the stuff that is either -- there is a number of the firms where I think or the ratings where you would sit there and say, we are going to continue to do a little bit of belts and suspenders and do our own legwork on there.

So I would say that the progress we have made to date has been pretty favorable from the risk management standpoint in terms of how we have assessed the portfolio.

And I hope that is helpful in trying to address probably some of the questions, additional follow-up questions you might have.

Yes, that makes a lot of sense.

That is all I have.

Thanks very much.

Ken Zerbe, Morgan Stanley.

So the first question is just on the NPL improvement; I think it was down like 4% this quarter.

Is there -- does there come a point where you just don't see a lot of NPL improvement?

I mean, basically, if it's a lot of CRE, which just takes years to work out, or -- I mean, at what point does the NPL improvement reductions really start slowing down, or have we already hit that with the 4%?

I would say that our expectations are that I think we knew line of sight going into the quarter that we had not projected forward that there would be -- you know, you are going to have some quarters where it is going to be greater acceleration on some of these credits, just in terms of timing.

There is going to be others where it will be a relatively lower quarter in terms of improvement the way we [sold] this time.

You do have to think about, and it is one of the reasons we break it out, there are the modified credits that are in the portfolio.

We have got those clearly segmented out in terms of where we have modified -- I'll call it, in quotes, done the restructures.

So that stuff, you would expect that that would stay around for some period of time and that will take quarter to quarter as you look through that.

It's going to be challenging to say that you can move.

I mean there is a number of these credits that we will be able to work through within the period.

There is others that we would say that we are going to be able to do over the course of the year.

There is others that, I think to your real question, it's just what you've got to go through in terms of the process.

The real short answer is going to be that we have signed up for the overall target of having 25% reductions in the levels here.

And I think we are on our way in terms of the progress that we made in the quarter.

We have got some expectations as we look forward in terms of the aging and the prospects for a number of these to continue to make meaningful progress towards that goal.

Alright, so basically sell off the longer-term stuff and work through the shorter-term stuff?

I guess that makes sense.

Just on the loan balances, so obviously you had the big end of period growth at the end of fourth quarter.

So then this quarter the average loan balances went up a lot, but the end of period growth actually stayed relatively -- it was up a little bit.

I guess I'm thinking more of commercial.

Is there a certain aspect of seasonality of that that we saw the slowdown in the end of period growth, or is it just more lumpiness?

I'm just trying to get a sense of the end of period growth slowing down.

Let me comment on that.

The fourth quarter really was extraordinary in that the originations were close to $1 billion and nearly half of that was in the commercial categories.

And that is seasonal, and generally there is an uptick in the amount of originations on the commercial side in the fourth quarter.

And then you look at Q1 at $550 million or so, it was up over 40% from Q1 last year, more in line with what we might expect.

So we're not bothered by the fact that it was significantly lower than in Q4.

The fact that on top of Q4 that we originated at that rate and showed strength particularly in some of the commercial categories we thought was actually a good report.

We have a strong pipeline on the commercial side as well, so we expect we may see some continued growth there.

Okay.

And just last question, can you just remind us your thoughts on the equipment finance business?

Obviously it has been running off.

What is the short-term and the long-term potential of that business?

We have just approved additions to the group to double the work force across what we will call now pulled back footprint.

We want to originate between that similar footprint that we have done in CRE and ABL from the Philadelphia market up through our markets here throughout New England and up through Boston.

The sense is that, I think you would continue to see some paydowns in that portfolio.

There continues to be a segment of that portfolio that you probably recall where aviation credits -- and that is really not a focus going forward, so we are just going to continue, even though that's got longer lives, you will continue to see that just pay down over time.

But we will get to a normalized level.

I think we are probably a quarter or two early to give you a little bit better indication of what we think we could start to see some leveling off there.

I would expect to see some continued decline in Q2 there.

But then, again, as we start to see the impact of the existing team which did generate I think $19 million or so in volume, get bolstered by the additions to staff and start to see that we're beginning to start to generate enough to stabilize that portfolio size-wise.

I was going to say that, it's probably safe to say that if you were to look at a target range in that portfolio, you could continue to see us get down anywhere in the 550 to 600-plus range just from the continued paydowns.

You saw that kind of reduction of course in the portfolio.

I think we had a 720 or so year-end balance, and you saw what the reductions were in the period.

So I think it is safe to say that we should try and be seeing some level off in and around that range.

So could I just add to that, when you are doing the near-term, long-term that on the near-term to Jerry's point we are doubling the sales force that will generate additional volume, and that volume will be at higher margins than we were achieving in the past.

And we expect that as a result of that, that we will stabilize the portfolio at about its size.

It may begin to grow from there longer-term when it demonstrates that it can earn its cost of capital.

And that is the challenge here.

And I think we have done a good job of allocating capital down to the business units, and then judging them accordingly based on their growth and contributions.

And so longer-term, we are expecting that the equipment finance group will earn its cost of capital, which would be a significantly better return than we are generating today.

Okay, great, thank you.

Steven Alexopoulos, JPMorgan.

It looks like the duration of liabilities has shortened a bit, just given the mix shift out of CDs and the home loan bank advances and more into accounts like money market.

Can you talk about the balance sheet strategy on the liability side as you start thinking about eventual rising rates and what this might mean for the margin in 2011?

Yes, great question.

One of the things we have not really emphasized probably enough is that we are replacing CDs.

There is clear customer preference, though, on the shorter end there to -- as well.

But I would say that I think we added brokered in the quarter.

We're continuing to do a lot of small as well call it incremental moves as we manage our way through.

You have to think about all of the borrowings that we currently have is that they are all term and fixed.

So you will start to see more and more as we begin to step.

But I want to make sure, though, it is clear that there has been a conscious decision to work at this as opposed to a series of large trades.

We have been doing a lot of what I will refer to as smaller incremental transactions along the way that we feel pretty comfortable with the moves that we have been making.

I will give you an example.

I saw Valley advertising a six-year CD at 3%, just when they are trying to push out the duration of their liabilities.

Any chance you would think of something like that, even though it would put pressure on the margin?

I think we are open to extending term and continuing to take a look at rate on the CD side.

In fairness, I think we are at a 2.75% at five years.

So, hopefully, that gives you a little bit of indication that we would be willing to get that kind of -- or lock up the money for that kind of term at that rate.

The demand is a real question in terms of -- you have certainly got some folks that will migrate towards that and they'll feel comfortable because they want the comfort of knowing they have got the consistent return, as you can imagine, obviously, with where the rates have been.

But I think it continues to be a little bit of a challenge to say that you are going to get significant volumes and work your way there from an asset liability management standpoint, solely by just doing it on the CD portfolio.

I think it is going to come from a series of transactions that we'll continue to add.

And, again, as I had mentioned, we did the increase on the brokered side, which we probably should have made more of a highlight of.

We continue to do those type of moves to get some extension there.

And maybe just one final question.

It looks like the unfunded commitments declined a bit on the commercial loans.

Is this more a function of just customers drawing on lines, or is it from borrowers actually reducing the size of the line?

Because I would have expected that to be a little bit higher here.

We'll say it is a little bit of both, just a marginal increase in -- almost barely a perceptible increase in usage, offset by a decline in overall commitments.

The trend you are still seeing play out in terms of borrowers cutting the size of the line?

Yes, we are seeing that.

It is not a big thing, but there is some of that.

In some places.

we encourage them to do that.

Okay, thanks.

Damon DelMonte, KBW.

Most of my questions have been answered, but I just wanted to circle back on the dividend.

The decision to raise the dividend at some point in the future, does that come from an internal discussion, or are regulators involved?

That would come from an internal discussion, but we are very careful to stay close to our regulators in any matters that regard capital deployment.

So we would do both.

Okay great.

And Jerry, I'm sorry if I missed this, but do you expect the marketing expense to stay at a run rate like we saw for this quarter?

Damon, I think that, typically, you would think of marketing as we get out of the gate and that you would see a real high point because we did a fair bit of brand in the quarter, as well as a fair bit of follow-up.

I would say that it may not be at the absolute peak in terms of the number, but you are within a couple of hundred thousand when you start to think of Q2, Q3.

You know, the real trail-off would obviously have been, as you have seen us in the past, would be more towards Q4.

Okay, that is helpful, thank you.

And then I guess the last question is regarding Boston and your expansion into that market.

Could you give us an update on how the flagship branch is doing and what the plans may be to open up some new branches as well?

We continue to track right on plan.

We have seen really great reception to the team there.

They continue to add -- I mean, clearly, they were part of the growth that we reported on in the middle-market side.

We are actually evaluating what are our next steps as we think about the buildout.

We have been spending a fair bit of time and energy in and around private banking which we talked about at a number of the conferences this past quarter.

And, certainly, the Boston market would be no exception to try and add personnel there.

We're also continuing to evaluate our consumer strategy because it has been predominantly up to this point in time very much focused on the commercial and the government side of the house.

I think it is fair to say, Damon, that over time, though perhaps not immediately, that we will expand our presence in that market either through opening additional branches or through acquisition.

Okay, that's helpful, thank you very much, guys.

Bob Ramsey, FBR Capital Markets.

Most of my questions have been answered.

Just, one, I appreciate the additional TDR disclosure that you all gave, and I was wondering if you could provide any additional color on the commercial real estate piece in terms of maybe an updated loan to values or debt service coverage ratios?

You know, most of the increases you noted was in and around CRE.

It really is about folks on the contractual maturity side.

All the credits are -- we have got good occupancy.

We've got reasonable collateral.

There continues to be really good working relationship with all of those borrowers.

A lot of this stuff is obviously debt service covenant related.

I would daresay that we have been following exactly what we will call the sort of holding to our internal standards when we look at these deals.

And we see some change in terms of cash flow at any of these credits that, we are certainly -- if we were trying to get a 1.2 times coverage and it's going down to 1.15, that is probably a little bit of a signal, but not necessarily, you know, what is going to raise every flag.

But I have to say that, if it becomes a little more meaningful than that, then we are obviously looking at all of those deals to look to restructure.

And we are classifying them all as TDRs.

We have worked a lot with our external accountants.

We have worked a lot with the regulators.

They feel that we are following this to the spirit of the regulations.

So, we continue to think that as we work through that you could continue to see -- and, again, because of the size of these credits, all you have to have is one or two in a quarter to get a sizable increase.

You get a $30 million or so increase; it's only a couple of credits that will top that number.

I mean, overall, just for the benefit for folks that hadn't seen the disclosure, the overall TDRs increased by $41.8 million, and $31.6 million of it was centered around CRE and a little bit around the consumer resi side.

Okay, and I know in the 10-K you also give what of the reserve is allocated to the TDRs.

Was there much of a change in that first quarter from fourth, or is it in the sort of ballpark?

No, and our intent is to keep the disclosures pretty robust, so when you see the 10-Q, I think you will see all the details in and around that.

It is probably also worth noting that the playing field is about to level.

I think we have been out front in terms of the detailed disclosures we have been making around TDRs.

And I'm also hearing -- you know, and so we think that you'll start to see much more comparability to that from other players as well.

What we thought would be really helpful was to put the yields before and after, and also to show, as we -- we think it's another really important component is what is still chugging along a year -- greater than a year for modification and how well that is continuing to do.

So I hope everyone else finds those disclosures helpful as well.

Great, thank you very much.

Dave Rochester, Credit Suisse Group.

Just a follow-up on the origination question from earlier.

Do you have sense for whether any part of that decline in production could have also been somewhat linked to a pickup in competition for C&I in your markets during the quarter?

And if so, where are you seeing that coming from and how do you expect that will change over the year?

Are you thinking that pressure could perhaps intensify?

Is that embedded in your loan growth outlook?

Just a little color there would be great.

We would say that, as the economy continues to improve, that we would expect that competition will intensify, but there will be more opportunity as well.

We have got a number of big players that are in the market and are strongly competitive, as are we.

And then we believe we have certain advantages, including our localness, our knowledge of our clients, as well as the high quality the product and service suite.

So we think that, given our position in our markets, that we have an advantage as the local homegrown banker that will enable us to continue to grow relative to the competition without having to sacrifice on price and terms.

So, yes, we do expect that there is going to be competition.

It is going to be intense, particularly for highest-quality loans, and we think we will do quite well.

Where are you seeing some of the strongest competition today, in what segment?

Is it coming from the regional banks, the large banks?

I would say all of the above.

We have sizable regional banks in our market, plus some of the really big banks as well.

So we've got all sorts here.

I would say that in the middle market in particular as well as in the upper end in commercial real estate, that the competition is intense right now.

But I would not say that our share was declining in Q1 because there was more competition.

If anything, I would think we made further inroads relatively speaking in that quarter.

And we expect that's going to continue.

All right, great, thanks guys.

John Pancari, Evercore Partners.

On the capital side, can you talk about your outstanding TruPS and what your plans are around -- I believe you have about over $200 million in TruPS outstanding and how the Collins amendment may influence what you do around that?

There's two big issues.

You know, we had thought around the $136 million or so that are remaining in the one issue that we like when you start to think about the cost of those, it is only 7.5%.

It obviously continues to be included in the capital calculation.

We are just continuing to evaluate does it make sense to hold beyond or whether we -- is there some regulatory change that would take place?

I think everyone is aware of the modifications that we -- or the notifications that we sent out to the holders there, so we did not have the issues around having to issue more common equity or replace that in the capital stack, so we have got all that optionality.

At this point, there is no immediate plans, but again that can change just based on what happens in terms of regulatory actions from a guidance standpoint.

Okay, and then one more thing on the credit front.

Can you just help us quantify the change in the classified assets that you saw in the quarter?

Yes, I believe I gave the number previously; just give me a second.

Yes, sorry if I missed it.

It was a decline of 8% or $70 million (multiple speakers) overall in classified.

Okay.

And then lastly on the loan front, again, sorry if I missed this, but can you talk a little bit about your commercial utilization rates and where that stands right now?

So we don't have a flat number to give you right now, but we will follow back on that.

But we would say utilization was up a skooch in the quarter.

Got it, all right, thanks for taking my question.

Collyn Gilbert, Stifel Nicolaus.

This is the longest call ever and I am not helping it by asking three questions, but I will make them really quick.

Jerry, just to follow up, when you talk about the net loan growth that you are expecting in the second quarter, what does that assume in declines on the consumer and resi mortgage portfolios?

Yes, it assumes that you would see that that would level off.

I think we actually had net growth, albeit de minimis, on the resi side.

What continues to happen, and we actually had good production.

The consumer team did a good job there.

We continue to see a pretty good amount of paydown.

There is no question that it is a combination of paydowns on the remaining home equity loans, clearly hasn't been the product of choice.

There certainly has been a migration towards wanting to have the lines and certainly because of the rates available on lines versus loans right now.

But you know my sense is, again, it is really more stabilizing on the commercial side.

A lot of the emphasis, a lot of the investment that we have placed in the organization has been in small business and in middle market.

CRE continued to contribute.

You saw contributions from ABL.

We think that there will be a leveling off, again, in the equipment finance side.

In the near term, there may be continued pressure, but over the course of the year we see that level off.

So that is the basis under which we feel pretty good.

Okay so just --

(multiple speakers) [expect] resi -- don't think of that as meaningfully increasing, but I think you'd continue to see some moderation on the consumer side.

Okay.

And just quickly, what are the largest relationships that you have right now on your watch list, or on the classified list?

As we talk about TDRs and it being lumpy and some larger size credits in there, I'm just trying to get a sense of the largest credits we should be keeping an eye on.

Yes, you know, it is not that we are talking about $20 million plus lumpy credits.

When I refer to it, I think what we have seen typically has been what would be in the wheelhouse for us as an organization.

So if you were talking about a commercial real estate deal, you could run anywhere between $7.5 million and up to $20 million that could be in and out of those buckets.

Okay, so nothing greater than, say, $35 million or so on the watch list?

Yes, well remember, we have really avoided the tall trees, and I think that that is probably what you won't see us having that much of a swing.

There is a couple of credits, but you just don't have -- where we have monitored, but they are not the ones that you are going to -- from my understanding, anyway, at this point, there really isn't anything that skews one way or another.

I think what happens with borrowers is happening to somebody who's got a $7 million exposure as much as somebody who's got a high teens or low 20s exposure.

Okay, that is helpful.

And just one final question, Jim, when you talk about dividend and capital, when do you think the time line is for you to start to look at M&A in terms of acquisitions?

What we have been trying to do is stay very focused on the strategic initiatives and make sure that we are doing well what we are supposed to be best at, and continuing to improve and increase the return relative to our cost of capital.

And that is occupying the vast majority of our time.

And we actually have been reticent to re-channel some of those resources and that energy to these outside activities.

We also feel that we want to be able to use our currency in M&A, and in our view there is significant potential room for valuation improvement, which would make M&A more attractive to us as well.

But we are always open to possibilities, particularly like-minded institutions, that show -- that share our vision of what we can be together, and we expect that those opportunities will be available to us, I would not say immediately, but I would say that over the intermediate term, that we would be quite interested in pursuing some M&A.

Okay that is great.

That is all I had.

Thanks guys.

And we want to thank you for the upgrade.

You are welcome.

Matthew Kelley, Sterne, Agee.

I wanted to get back to the securities portfolio and just get your thoughts on preparing for some of the new liquidity requirements longer-term, Basel III, net stable funding.

Looking at a $5.5 billion securities portfolio, that is a pretty high yield relative to peers.

And so if we do stay in a static rate environment and it is a static size [that's], again, $5.5 billion, where would you anticipate yield and average duration going to just over the next couple of years?

I assume the new securities you are purchasing are much shorter duration, lower risk type of investments.

That is a tough one to answer just from the standpoint, if you are looking at -- and let me just give you a sense of the way we are thinking about it today.

We certainly anticipate that somewhere towards, I would say our expectations towards the end of 2011, that you begin to see more of a rising rate environment, which explains why we have tended to want to stay on the shorter side.

We know that we're getting very adequate cash flow out of the securities portfolio right now.

We're not looking to build the portfolio or, if anything, we are actually putting it to a limit.

And as you saw, we had a little bit of contraction here in this quarter, really not adding anything of significant long duration into the portfolio.

I think you will see some pressure on the yield.

I mean, part of what has happened, as rates have gone up, you have just seen the pre-pays slow.

At some point, you will cut through that; I think that that will moderate out.

So we have had some improvement.

It has been because you have had premium amortization that has slowed down as a pretty significant contributor.

My sense would be, it's going to really depend I think on the rate scenario that you see.

And I want to just reiterate, I feel very comfortable that to the extent that you are holding in and around 45% or so of this portfolio that is available for sale, we are really indicating that our clear preference would not be to have as sizable portfolio, but to have -- to be able to use some of that from the cash flow standpoint to be able to reinvest on the loan side.

I think it's great to be reporting a 78% loan to deposit ratio because it is pretty strong in comparison to a number of other folks.

But our clear view would be that, somewhere along the line as rates begin to rise, you will start to see deposits seek higher returns and you may see some pressure there.

It is going to serve us well to have had this good size of a portfolio and not much of a portion of it in AFS, and also to have bought securities that have really strong cash flows to them.

Okay.

Would it be fair to say that the new purchases relative to the existing portfolio yield are down 75 to 100 basis points on average, or -- I'm trying to get a sense of how it is changing.

Yes, I mean you know, I think we are talking about yields in the 3.25 range in comparison to when you're just looking at the overall yield of that portfolio, and, frankly, should be talking even less depending on what duration you want to be looking at.

Yes, okay, all right, thank you very much.

Christopher Nolan, CRT Capital Group.

On a 30- to 89-day past due, I saw a big jump in the commercial real estate to $22 million from $11 million in the fourth quarter.

Can you give a little color around that, please?

Yes, I'm sorry Christopher, you are referring to this quarter or (multiple speakers)

Past-due jump from a single --

Yes, we just have a single credit that went through contractual maturity that we -- it's paying current.

There is actually an agreed-upon term sheet, and our expectations are that that will be refinanced sometime in the next, I would hope to be the next 30 days or so.

Great, thanks for taking my question.

Andrea Jao, Cowen & Co.

There has been material improvement in your profitability metrics, for both ROE and ROCE.

I was wondering from these levels how much more improvement we can expect and kind of what your longer-term target are for both ROE and ROCE?

Sure.

Let's just say that the longer-term targets.

at least over the near to intermediate term, are in excess of our cost of capital.

And that is what we talk about every day.

So if you're looking at a 7% return on equity, then ideally that number increases significantly, and we have got to implement the initiatives that make that happen, including improvements in pre-tax pre-provision, improvements in the efficiency ratio.

So all of the things that we are doing are intended to drive operating leverage so that we can continue to increase those returns.

And your estimates for cost of capital are still in the 9% area?

No, no, we are higher than that.

I would say we're probably up around 11% range.

Okay.

My follow-up question is, perhaps you can share your interest rate outlook, both for the level of interest rate and the yield curve, at least for the remainder of 2011.

I think our view is, we continue to see, we think rates will remain fairly stable I think in this next 90-day horizon or so.

But our view is that you begin to see an increase towards the back end of the year.

I think that's probably a view that is consistently shared by a lot of folks.

But -- and that's -- and hence, why there is a fair number of the conversation that we are having that you start to see some step-up maybe later in the third quarter or going into the fourth quarter.

But that is why with some of the liability extension things that we have talked about, we have been doing things on an incremental basis to begin to build toward it.

And, obviously, I think it continues to be something that will be a key focus for us over these next couple of quarters.

(multiple speakers) -- but we really need to have as much stability.

You know, it is great to have the capital strength.

Our capital level obviously is a big help.

The higher balances that we have got in the noninterest bearing accounts is going to be a big help.

The focus that we have on getting core relationships with so many customers is going to be a big help in a rising environment.

But there is no question that there is additional action steps that we are contemplating to extend the liabilities in the coming periods.

And last but not least, a housekeeping question.

Did the yield on securities, as well as the net interest margin, actually benefit from the number of days this quarter?

And if so, your margin guidance, is that already included in your margin guidance, or should we factor that in over and above your margin guidance?

Thank you.

No.

There is nothing in there about number of days.

This is solely just looking at from the margin that was recorded and the guidance.

The view is that we continue to see -- that, again, if you look at where rates are today and assuming that that holds, that we should be in and around that range of guidance that we gave.

Okay, so just to clarify, number of days, no impact on the margin this quarter?

Correct.

There are no further questions at this time.

I will turn the conference by back to management for closing remarks.

Thank you.

Thank you.

Thanks for being with us today, everybody.

Bye-bye.

Thank you.

This concludes today's conference.

All parties may now disconnect.