Webster Financial Corp (WBS) 2013 Q1 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's first-quarter 2013 results conference call.

This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster Financial's conditions, 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 differ materially from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K, containing our earnings release for the first quarter of 2013.

It is now my pleasure to introduce your host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, Mr. Smith.

Good morning, everyone.

Welcome to Webster's first-quarter earnings call and webcast.

Our earnings release, tables, and slides are in the Investor Relations section of our website at WBST.com.

I will provide highlights of the quarter and a strategic overview.

Jerry Plush will discuss business unit performance.

Glenn MacInnes will review the quarter's financial results, and then we will take your questions.

Webster delivered solid first-quarter earnings driven by strong Commercial Banking and mortgage banking results, and constrained by a couple of special charges.

Earnings per share were $0.44, up $0.02 from the year-ago period.

Results included $3.1 million of unusual or nonrecurring pretax charges amounting to $0.02 a share, with $1.6 million relating primarily to severance and outsourcing contracts that we announced during the quarter and $1.5 million resulting from a write-down of a loan in a held-for-sale account which reduced Other Income.

Core pretax pre-provision net revenue, or PPNR, rose 16% year over year.

Total revenue grew 3.5%, and expenses declined 2.2%, generating positive operating leverage of more than 5.5% year-over-year.

The efficiency ratio came in just above 62%, 347 basis points better than a year ago.

The seasonal costs we see in Q1 each year will not be a factor in subsequent quarters, and we remain committed to achieving a 60% or better efficiency ratio beginning this quarter.

The net interest margin came in about where we expected, at 323 basis points, down 4 basis points from Q4 and 13 basis points from a year ago.

Still, net interest income declined by only one-third of a percent linked quarter and rose 1.7% year-over-year due primarily to 6% loan growth, which was fully funded by core deposit growth.

Loan-to-deposit ratio is nearly flat year-over-year at 82%, a positive metric that will assure funding for expected ongoing loan growth.

Regarding asset quality, nonperforming loans increased by slightly more than $20 million compared to a year ago.

NPLs would have decreased but for $44 million in residential and consumer loans that were classified as nonaccrual under regulatory guidance for Chapter 7 bankruptcy loans that took effect late last year.

The slight uptick in nonperformers from the fourth quarter reflects a single $9 million commercial real estate loan that is under contract for resolution this quarter.

Underlying asset quality trends remain favorable.

Commercial classified loans declined 8% from year and are 33% lower than a year ago.

Delinquencies improved 46% from the fourth quarter and 33% from a year ago, to the best level since the Great Recession began.

The significant improvement in these two leading indicators is an encouraging sign for continued improvement in asset quality.

Meanwhile, the delta between the provision and net charge-offs was less than $10 million for the second straight quarter.

Return on tangible common shareholders equity was 11.3% compared to 12.04% a year ago, due to a 9% increase in tangible common equity.

These results came amid a backdrop of a New England regional economy that continues its slow expansion, according to the Fed Beige Book, with increasing strength in the housing market and stable commercial real estate fundamentals.

My take on the quarter, as I said recently in my letter to shareholders, is that we are making meaningful progress toward our goal to be a high-performing regional bank, but we have much more to do.

Today we will report on our progress and our plans to achieve that goal.

Commercial Banking continues to surge, as commercial loans grew 16% year-over-year and commercial real estate loans grew 15%.

Both portfolios held their impressive Q4 gains through Q1.

While originations were down sharply compared to the unusually strong fourth quarter, yields on originations were flat to Q4 and held above the portfolio yields.

Our compelling value proposition as a community-focused, relationship-centered here-for-you regional bank is differentiating and has helped us hold the line on pricing, enabling a 16% year-over-year increase in net interest income for the Commercial Bank.

A proofpoint for the success of our relationship focus came from Greenwich Associates as our Middle Market Banking team won regional and national excellence awards in overall client satisfaction.

Momentum remains strong, as our commercial and CRE loan pipelines are rebuilding rapidly and exceed year-ago levels.

We expect loan servicing fees, swap fees, and structured transaction fees to bounce back nicely in Q2 as well.

Webster's Commercial Banking strategy is a winner, and we expect to continue to report growth in volume and profit as the year progresses.

Mortgage banking has been another source of strength.

Residential mortgage production rose 27% from the year-ago level and 2% from Q4.

In addition to the 90%-plus checking and ACH adoption rate, 40% of mortgage banking applications are creating new referrals for relationships with other Webster business units, up from 10% two years ago.

Once again, pricing discipline came to the fore as average gain on sale revenue held at nearly 300 basis points, a decline of about 20 basis points from Q4 but quite favorable compared to peers.

Gain on sale revenue declined 17% in the quarter and rose 16% from a year ago.

The pipeline is stronger than at year-end.

We see significant growth opportunities for mortgage banking relationships.

We're steadily gaining market share in Connecticut, Massachusetts, and Rhode Island.

Yet we are still well below our potential in those markets as compared to our deposit market share.

I'll touch briefly on a couple of other relationship development activities and on our efforts to improve efficiency, and Jerry will report on progress to accelerate investment in electronic infrastructure.

These primary initiatives emanate from our commitment to invest in strategies that maximize economic profits.

Regarding our relationship development strategies, the goal is to deliver valued advice and services to customers who in turn generate economic profits.

For example, we are making significant investments in Treasury and Payment Solutions that will enable us to better serve our Commercial and Business Bank clients and expand the market opportunity.

Note the rapid revenue growth underway in this recently consolidated group.

In the Private Bank, where revenue and footings growth are accelerating, we recently opened a new office in Greenwich as part of a strategic initiative to open dual facilities in attractive, high net worth markets.

We also have immediate plans to open a dual facility in West Hartford, Connecticut.

Significant additional investment in senior talent is ongoing, including a Chief Investment Strategist, new leaders for the credit solutions and fiduciary teams, and seasoned portfolio managers.

Like the mortgage banking business, the Private Bank and the Business Bank as well share an important characteristic.

We have much less market share today than we have retail deposit market share.

Our natural share potential leaves room for significant growth in coming quarters.

HSA Bank reported its best quarter ever for new account and deposit growth.

Its focus on midsize employers has yielded larger groups per employer, as the average client size has increased from 15 to over 70 in the past four years.

The true value of HSA Bank's long-duration, low-rate transaction accounts will be more fully appreciated when rates start to rise.

Central to becoming a high-performing bank is identifying ways to be more efficient in everything we do.

Three major expense control initiatives are underway.

During the first quarter we expanded our technology partnership with our primary data processing provider, Fidelity Information Services, to include our IT infrastructure.

This agreement will enable us to swiftly deliver a number of additional services to our customers, including new electronic banking services.

We expect to lower our unit processing costs and achieve better economics as we grow.

In the second agreement, we outsourced management of our facilities to Jones Lang LaSalle, or JLL.

By partnering with a recognized leader in the field, we will gain new capabilities to identify the best locations and designs for both new and existing banking center and corporate facilities, both of which are a major focus for us, while helping us reduce energy and maintenance costs.

We've also undertaken a corporate-wide, comprehensive eForms initiative which holds promise for greatly reducing processing and storage costs across the Company over the next 18 months, while improving speed, reliability, and internal controls.

This will significantly lower costs while vastly improving customer experience by saving time and making it easier to do business with us.

Our capital levels remain well in excess of regulatory requirements, and we estimate we comply today with fully phased-in Basel III requirements including conservation buffers.

The tangible equity ratio and the Tier 1 common ratio both rose and exceed 8% and 11%, respectively.

Our solid capital position and earnings momentum enable us to consider boosting the dividend payout ratio and repurchasing additional common shares under existing authority.

The Board will take up the regular quarterly dividend later this month.

During the first quarter, Warburg Pincus exercised its two warrant tranches in a cashless transaction that has minimal impact on Webster's diluted EPS.

The exercise price on those warrants was set to rise to $13.00 from $11.50 later this year.

With the transaction, Warburg owns 9.7% of Webster's outstanding shares and remains our largest shareholder.

David Coulter remains a valued member of our Board and is standing for reelection at our Annual Meeting later this month.

As I have said often, both Webster and Warburg Pincus have benefited from Warburg's investment made nearly four years ago.

One last comment before turning it over to Jerry.

Client satisfaction is a clear differentiator for Webster in the marketplace, one that we believe can help us join the ranks of high-performing banks.

A growing reputation for exceptional customer service not only attracts clients but also draws bankers who believe in our customer-centric approach and regional bank model.

As a result, we have been able to develop, attract, and retain very high-quality bankers.

They come to Webster; they stay here; they bring their clients.

And that has been a big reason we have been able to show the growth and improving results that we have.

With that, I will turn the call over to Jerry for comments on key aspects of performance and trends in our lines of business.

Thanks, Jim, and good morning, everyone.

You'll notice a change from prior quarters in our business segments.

As of January 1 we combined our mass-market consumer lines of business into a newly created Personal Bank.

The Personal Bank brings together consumer deposits, consumer lending, Webster investment services, and also our newly created distribution division which consists of our customer care center, our branches, the ATM network, mobile, online, and social media.

In addition, our Business Banking division, which serves small businesses across our four-state footprint, is now an independent reporting unit.

This change recognizes the increasingly important role that this valued group of customers and line of business has in Webster's future.

Both the Personal Bank and the Business Bank now report to me.

Let's turn now to slide 3 to review our Personal Banking results, which had $5.6 billion in mostly residential mortgage and home equity loans and lines, and $8.4 billion in consumer deposits.

So, if you look at the chart at the top right you can see the overall loan balances have declined by about 2.4% over the past year.

That is led by a decline of 4.8% in home equity from ongoing consumer delevering and refinance activity.

Our resi mortgages are essentially flat over the past year; and that is largely driven by our strategy of selling conforming, long-term, fixed-rate loans.

The increased sale activity has contributed to substantially higher noninterest revenue over the past year, which totaled $6.7 million in Q1, $8.3 million in the very strong fourth quarter, and about $4.4 million a year ago.

Our overall personal bank portfolio yield declined by just 1 basis point in the first quarter.

A 6 basis point decline in the resi yield was almost offset by an 8 basis point increase in the consumer yield.

Keep in mind that the resi portfolio is about $700 million larger than the consumer portfolio.

You can see that our Consumer Lending originations remained strong in the first quarter.

The yield on the new originations was 3.58%, and that compares to 3.69% in Q4 and 3.65% a year ago.

The strong origination trends continue to be driven by the addition of proven talent to the sales team.

And you couple that with improving productivity in the Internet and contact center channels.

These channels represented about 22% of total originations in the first quarter, compared to 18% in Q4 and 30% a year ago.

Our originations, including loans sold with servicing retained, were $521 million in the first quarter.

That is essentially flat to the fourth quarter.

Our purchased loans represented about 23% of total production in the first quarter, and that compares to about 36% in Q4 and 18% a year ago.

Our mortgage applications for home purchases were up 40% from a year ago.

The yield on new originations declined by 11 basis points in the fourth quarter due to the continued low interest rate environment.

The gain on sale margin on originations that were sold in the first quarter was 297 basis points compared to 317 basis points in the fourth quarter and 226 basis points a year ago.

The pipeline in Personal and Consumer Lending remains very solid at $550 million at March 31 compared to $520 million at December 31.

And note, our focus remains on originating a larger percentage of jumbo mortgages.

We think that is very key to relationship building, and it is really showing in our results, as 43% of the total portfolio is now jumbo, up from 39% a year ago.

We're also very focused on growing our noninterest income.

So, in addition to the significant benefits that we have just discussed, derived from mortgage banking, credit card fee revenue that we are earn through our relationship with Elan, which got underway just about a year ago, has resulted in approximately 25,000 accounts booked, including business cards, or nearly $35 million in outstandings.

Our credit card revenue in Q1 was around $365,000 or 26% higher than a year ago, which is the last relevant period to compare to our prior agreement.

Our transaction account deposits are up about 25% in total, and that is up from 22.5% a year ago.

Our transaction deposit growth was about $131 million or 7% over the past year.

The average balance per transaction account in our personal bank is now up over $5,900, and that is up about 11% from a year ago.

We are also really pleased to record an increase in net new transaction accounts in the first quarter for the first time in the post-free checking era that ended in the fourth quarter of 2010, compared to declines in Q4 and a year ago.

Our emphasis on transaction accounts and our overall pricing discipline has resulted in lower costs of funds over the past year.

We are about 45 basis points in Q1, and that is 3 basis points lower than Q4 and 13 basis points lower than a year ago.

Also, worth noting is Webster Investment Services continues to help more of our customers optimize their investment and retirement planning.

As a result, we posted quarterly fee income of $5.1 million in the first quarter, compared to $5.3 million in Q4 and $4.7 million a year ago.

Due to our increased advisory focus we have about 34% of these revenues that are now recurring; and that is up about 30% from a year ago.

As Jim noted, we are doing a lot on the distribution side.

We continue to invest in our electronic capabilities and also in the education of our front-line bankers, to demonstrate and educate the benefits of our products and services to our customers.

Our investment in envelope-free image capture ATM shows very increased usage and routine transaction migration.

In the first quarter, more than 25% of total deposits were made at our ATMs versus 16% a year ago, a clear sign that our customers are increasingly preferring the convenience of our enhanced ATM network.

The adoption of our new mobile app continues to be strong.

We've got about 34,000 downloads of the app since its launch in mid-December.

We're going to roll out mobile deposit capture by the end of the second quarter for consumers and also for Business Banking customers, and more enhancements are underway.

Use of our online banking continues to be strong, with 60% of our checking households actively using our online services.

Our universal banker program is now operational in about 56 or one-third of our banking centers.

By empowering our bankers to be a single source of contact for our customers' product and service needs, the universal banker delivers both greater efficiency and higher customer satisfaction.

Moreover, it represents an important investment in the career of our bankers.

We will turn now to slide 4 to review our Business Banking results.

In the top chart you can see how business loans reached $1 billion for the first time, growing approximately 2% from December 31 and 12% from a year ago.

This quarter's growth in business loans reflects loan originations of $73 million, down slightly from the $89 million in Q4, but up about 3% from the first quarter a year ago.

It is also important to note that Webster was recognized as the top SBA lender in Connecticut for the fifth consecutive year.

Our portfolio yield was about 4.71% in the first quarter, down from 4.87% in Q4.

That is reflective of the lower yields in new originations as well as the runoff of higher-yielding loans.

Yield on originations in the quarter was about 4.3%, relatively comparable to the 4.3% that we reported obviously in Q4, and about 4.6% a year ago.

If you look at the bottom chart, you can see how Business Banking transaction account deposits have been consistently above 70% of total.

At a cost of funds of 9 basis points in the first quarter, same as in Q4, down about 12 basis points from a year ago, these are very, very attractive deposits for us.

The Group has seen transaction deposit growth at about $140 million or 12% compared to a year ago.

And it is really important to note, to say that just like the Personal Bank our Business Bank also saw an increase in net new transaction accounts in the first quarter for the first time in the post-free checking era.

We had net new in the quarter, compared to declines in Q4 and also a year ago.

We also saw continued significant increases in average balances in our transaction accounts.

We're up about over $23,000 in the first quarter, and that is up 13% higher than a year ago.

If you look at fee revenue, we had growth in fees from our merchant services offering, with our Q1 fees from this product up about 16%.

Our efforts to expand the number of business credit cards is showing dividends as well, as we have added almost 3,800 cards under our new arrangement with Elan in just one year.

It is worth noting that compares to only 3,200 cards added during the entire seven years of our previous credit card arrangement.

We know that Business Banking will grow by increasing new relationships and expanding existing ones by cross-selling value-added products and services, including those I mentioned already, plus payroll services and cash management to help these businesses manage their cash flow more effectively.

Let's turn now to slide 5. You can see our Commercial Banking unit recorded very strong loan growth over the past year.

Our overall loans were essentially flat point-to-point to December 31 following a very, very strong fourth quarter; and they are up about $700 million or 16% from a year ago.

On an average basis, the loans have grown by $245 million or 5% from Q4, and $732 million or 17% from a year ago, respectively.

Our total originations in the first quarter were $296 million; that is down by a significant amount from the incredibly strong fourth quarter that we had of $855 million, and it's down slightly from a year ago as well.

The Commercial Bank pipeline was really depleted at year end from all those record fourth-quarter closings, in part that borrowers were motivated to close ahead of anticipated tax changes in 2013.

It is really important to note we have rebuilt the pipeline up to $320 million as of March 31, and we expect it to continue to grow from there.

We saw linked-quarter loan growth of approximately 1%, apart from CRE loans, even taking into account $26 million of the loans originated in the fourth quarter were sold down by design in this first quarter by our sales and structuring group.

And we are really seeing increased momentum from our sales force already in the second quarter.

The 13 basis point decline in portfolio yield for the most part reflected less benefit in Q4 from deferred fee income from pre-payments, and also from past-due borrowers paying current in that period.

The yield on new fundings in the quarter was 4.15% compared to 4.14% in Q4 and 3.86% a year ago.

We also had 10 interest rate risk management transactions, primarily swaps, caps, and collars, that were booked for clients during the first quarter that generated over $640,000 in noninterest revenue.

This compares to 25 transactions and $1.7 million of revenue in the strong fourth quarter.

We expect to see improving swap activity as our pipeline grows.

If you look at the bottom chart, our total deposits were over $2.6 billion.

That's slightly down from year-end and increased by about 16.7% from a year ago.

We have achieved a favorable remixing of deposits over the past year, as transaction accounts now represent 48% of the total deposits compared to 47% at year-end and 42% a year ago.

This has contributed to the reduction in our cost of funds to 13 basis points; and that is down from 15 basis points in Q4 and 16 basis points a year ago.

Turning to our growth initiatives that you see here.

In 2013 we are pleased to say that we are establishing our eighth regional hub in Metro New York.

We believe the New York market offers tremendous opportunity for Webster to export our proven commercial middle-market model to contiguous markets, very similar to how we entered the Boston marketplace several years ago, and that our differentiated, people-driven value proposition will play very well in this market.

In fact, our commercial real estate and asset-based lending units have been in this market and very successful there for some time now.

As Jim noted, we will continue to invest in our Treasury and Payment Solutions platform.

In the first quarter, we have seen an 8% year-over-year lift in the services used by clients, and we expect revenue to grow as we bring on new people, products, and services.

I previously mentioned our sales and structuring group.

They sold down $26 million in loan commitments in the quarter and generated nearly $400,000 in revenue.

And that compared to a very strong fourth quarter where there were $78 million in commitments sold down that generated over $1 million in fees.

And as noted, we expect that this activity will continue to pick up, given the current pipeline.

We consider this to be a very, very important activity, largely used to win and retain key customer relationships while maintaining appropriate single-point loan exposures.

Let's turn now to slide 6. We will take a quick look at our results of the Private Banking unit, which we do expect will be our fastest growing business at Webster over the next five years or so.

Loan growth was $10 million or 4% from year-end and $39 million or 17% compared to a year ago.

The pipeline remains strong at $54 million at the end of the quarter.

We saw about $3 million in deposit growth from year-end after a very nice lift to $25 million in Q4; and that deposit growth compared to a year ago was over 65%.

Now we will turn to look at, on slide 7, the results of our HSA Bank unit which is the fast-growing health savings account administration business where deposits have been growing year-over-year by more than 20% for several years in a row.

With almost $1.9 billion in footings, including linked brokerage accounts, we maintain the number-two position in the industry.

So if you look at the top chart, we got $166 million of deposit growth in Q4, as most of our deposit growth normally occurs in the seasonally strong first quarter of each year.

It is worth noting that this is the quarter when the benefit plan year starts for many employers and their employees.

Deposits growth from a year ago was $249 million, or up over 21%.

You can also see in the top chart that we had a reduction in our cost of funds of about 4 basis points compared to Q4 and 14 basis points from a year ago.

We continue to tightly manage the tiered rate structure that we pay on our health savings accounts.

If you look at the bottom chart, we added over 79,000 new accounts compared to 64,000 new accounts that were added a year ago in the same quarter.

This represents growth of 22% from the prior quarter.

You can see that this business just continues to scale well as we add significant volumes.

As importantly, we have also been successful in growing our average deposit account balance over time.

The average balance now that has been with us for over seven years is over $5,200, compared to $3,900 for the market.

We think the fact that HSA's sole business or sole focus is on the business of administering, servicing, and supporting health savings accounts really underpins our better-than-market performance on this very important metric of average balance by age of account.

We will now turn to slide 8 and take a look at overall loan balances and originations.

Here you can see our overall loan balances remained a little over $12 billion, a decline of about $27 million or 0.2% linked quarter, but an increase of over $690 million or 6% year-over-year.

Glenn is going to review average loan balances in a moment, and we saw particular strength in the commercial area and in particular CRE following the very strong originations these segments had in the fourth quarter.

You can see our total originations, including residential loans originated for sale with servicing retained, $919 million in the quarter, compared to the $1.5 million in the very strong fourth quarter and about even with the year-ago quarter.

You can see that our resi mortgage originations for both portfolio and for sale performed well.

There's a combined 2.6% linked-quarter increase and a 31.3% year-over-year increase.

With that, I will turn it over to Glenn for comments on financial results, and he will also provide an outlook for the second quarter.

Thank you, Jerry, and good morning, everyone.

I'll begin on slide 9, which summarizes our quarterly trend of net income available to common shareholders; our return on average tangible common shareholders equity; and our return on average common shareholders equity.

Of note is the increase in earnings by $1 million over prior year, despite approximately $2 million of after-tax one-time expense items in Q1.

Our return on average assets was 84 basis points in Q1, and the return on average tangible common shareholders equity was 11.28%.

As noted, the decline in our tangible common equity ratio was the result of a $116 million increase in shareholders equity.

Slide 10 highlights our core earnings drivers.

This excludes noncore categories, as noted on the bottom of the slide.

Starting with average interest-earning assets.

Average earning assets grew $278 million or 1.5%, the majority of which was in our loan portfolio, which grew $232 million or 2% compared to the fourth quarter.

The key drivers of this growth were commercial and commercial real estate loans.

Average commercial loans grew from the fourth quarter by $198 million or 6.3%, in line with the guidance we provided earlier in the year.

Versus prior year, average earning assets grew by $1 billion or 6%.

Of that, 75% of the growth was the result of an increase in loan balances, with the remainder in the securities portfolio.

Net interest margin for the quarter was 323 basis points, compared to 327 basis points in the fourth quarter and 336 basis points in prior year.

The results are in line with guidance previously provided, as NIM compression remained in the 4 basis point range, consistent with much of the past year.

The compression during the quarter was driven by an 8 basis point reduction in earning asset yield and a partially offsetting reduction in funding costs of 4 basis points.

Versus prior year, NIM was down by 13 basis points as a result of a 30 basis point reduction in earning asset yield, partially offset by a reduction in funding of 18 basis points.

Net interest income decreased by $476,000 versus prior quarter, in line with our expectations.

Our growth in average earning assets in the quarter was essentially offset by the NIM decline.

The decline versus prior quarter reflects the adverse impact of 2 fewer days in Q1 versus prior quarter.

This resulted in $1.2 million in lower net interest income for the quarter.

Versus prior year, our net interest income increased by $2.4 million or 2%.

This was primarily the result of higher interest-earning assets and lower funding costs.

In the first quarter, we also had 1 less day versus prior year; and this adversely impacted net interest income by $600,000.

Core noninterest income was $48.2 million, down from $52.9 million in Q4 but up over prior year by 10%.

I'll provide more detail on core noninterest income trends on the next slide.

Core noninterest expense totaled $124 million in the quarter, up from $122.2 million in Q4 primarily due to anticipated seasonality in compensation and benefits.

On a linked-quarter basis, marketing expense increased by $1.7 million which, as we indicated on the January call, is reflective of planned expenditures in connection with repositioning of our brand and business and consumer account acquisitions.

Initiatives such as JLL and FIS will have a positive impact on our expense run rate going forward.

They did, however, contribute one-time charges of $1.5 million during the quarter.

Versus prior year, I would highlight that core noninterest expense was $2.8 million or 2.2% lower.

And our efficiency ratio of 62.16% was lower than prior year by 347 basis points.

So as you see on the bottom of the slide, our core pretax pre-provision earnings totaled $70 million, exceeding all but the fourth quarter of 2012, which represented a record for Webster.

Slide 11 provides additional detail on noninterest income.

While noninterest income was up 9.5% versus prior year as a result of strong mortgage banking and wealth revenue, we did see a drop versus prior quarter of 9%.

If mortgage banking activity remained strong in the quarter at $7 million, but was lower than the fourth quarter by $1.5 million.

During the quarter, we originated and sold $227 million in conventional fixed-rate mortgages at a gain on sale of 297 basis points.

This compares to $224 million of originations in Q4 that were sold at 317 basis points.

Deposit fees declined $829,000 versus prior quarter due to lower transaction and NSF fees.

We also saw a reduction in loan fees of approximately $1 million, primarily as a result of prepayments and accelerated loan closings in Q4 of prior year.

Lastly, we did have a one-time $1.5 million write-down on a loan previously transferred to held-for-sale.

This is included in Other Income and is reflected in the Other/BOLI category on the chart.

The $4.2 million increase in noninterest income over prior year is primarily driven by a 71% increase in mortgage sale volume, which resulted in a $2.6 million increase in revenue over prior year, and additional BOLI revenue as a result of increasing our coverage in third quarter of last year.

Turning now to slide 12, which highlights our asset quality metrics, the chart on the upper left highlights our nonperforming loan progression.

As we highlighted on our prior call, the increase in nonperforming loans in Q4 was the result of regulatory guidance requiring bankruptcy discharged borrowers to be included as nonaccruing loans.

For Webster this represents $44 million of the $199 million in nonperforming loans.

I would also note that included in the quarter's nonperforming loans was a $9 million Commercial Real Estate credit that was past due in the fourth quarter.

The credit is expected to exit during Q2.

The graph on the top right highlights the significant progress we made on loans past due.

At $40 million in Q1, past-due loans are down 46% from prior quarter.

This was driven primarily by two factors.

First, the enhancement to our customer collection process, along with some seasonality from consumer loans.

Combined, this represented a reduction of $19 million of residential and consumer loans.

Then Q1 also included the movement of the aforementioned CRE loan to nonperforming status.

Again, we expect that loan to exit in Q2.

The chart on the bottom left highlights the continuing progress we have made in commercial classified, which have consistently dropped in the 8% to 10% range on a linked-quarter basis and are now down 33% from prior year.

In summary, the significant reduction in key leading indicators such as delinquency and classified assets gives us reason to think further reductions in nonperforming loans and continuing improvement in asset quality can be expected in 2013.

Our investment portfolio is highlighted on slide 13.

The portfolio increased by $186 million from December 31 as we took advantage of a backup in rates in mid-February.

Since most purchases occurred late in the quarter, the average balance was up only modestly compared to Q4.

Yield on the total portfolio declined by 10 basis points to 333 basis points in Q1.

The securities were purchased at lower average premiums this quarter; so the total unamortized premium on the portfolio increased by only $10 million this quarter to $235 million.

This compares with a $14 million increase from Q3 to Q4.

Premium amortization on the entire portfolio declined by $100,000 to $16.3 million in the quarter.

The decrease is the result of a 1% decline in agency MBS annualized pay -- cash flow to 28%, which was anticipated.

MBS cash flow has been relatively stable and in the range of 25% to 29% since the fourth quarter of 2011.

Payments, calls, amortizations, and maturities during the quarter amounted to $423 million with a yield of 310 basis points.

During the quarter, we purchased $640 million of securities at an average yield of 212 basis points and a duration of 3.6 years.

Most of our purchases were agency MBS, although we did add another $160 million of floating-rate collateralized loan obligations.

The increase in market rates during the quarter and the addition of floating-rate AAA and AA rated CLOs enabled us to improve the yield on purchases versus last quarter, while reducing duration, which you can see on the chart in the lower left-hand.

The CLO portfolio has now grown to $249 million, helps us position better for a rising rate environment.

Total investment portfolio duration increased slightly to 2.8 years, compared to 2.7 years at December 31, mainly due to an increase in long-term market interest rates.

With a neutral rate risk profile to rising rates and some exposure to a fall in rates, we currently expect to maintain investment duration and size within a range through the reinvestment of cash flows.

Let me turn now to slide 14 for a review of our deposit trends.

The top chart highlights the 5% growth from a year ago, while we reduced expenses by 11 basis points.

Almost half the reduction in expense was the result of an increase in low-cost transaction deposit balances, which as you can see on the lower chart grew to 42% of total deposits.

On the right-hand side of the page we have provided line of business and product data.

CDs represent our highest cost of deposits, at 133 basis points.

I would note for the remainder of the year we have $1.1 billion in maturities at a rate of 106 basis points; to the extent they roll over we currently average 31 basis points on new CDs.

On slide 15 we highlight our borrowing mix and cost.

Cost of borrowings dropped 13 basis points versus prior quarter.

The reduction is primarily the result of a 28 basis point reduction in the cost of long-term debt, due to the maturity in mid-January of $102.6 million of 5 7/8% subordinated fixed-rate notes with an effective yield of 3.14%.

There are no other significant high-cost debt maturities until 2014.

Given the current rate environment, incremental funding is done primarily at short-term rates, from 10 to 20 basis points.

Our efficiency ratio is highlighted on slide 16.

As you see in the chart, our core efficiency ratio was 62.16% after being just below 60% in the fourth quarter, reflective of the guidance provided for a seasonal uptick in expenses as a result of tax and benefit resets.

Worth noting is positive operating leverage of 5.7% versus prior year, which resulted in a reduction of approximately 350 basis points in the efficiency ratio.

Slide 17 highlights our capital position.

As you can see, our key capital ratios increased from December 31, as we had an earnings-led increase of $36 million in tangible common equity during the quarter.

The ratio has also benefited from the fact that total assets declined modestly from December 31 to March 31, and that we did not repurchase any stock during the quarter.

We continue with $50 million of availability under the $100 million share repurchase authorization that was announced in December.

We intend to use this opportunistically over the time, with an eye toward maximizing (technical difficulty) profit while maintaining appropriate levels of capital (technical difficulty) risk we take.

We do this by comparing the expected returns of buybacks with other alternatives like plan asset growth and potential acquisitions.

Jim discussed the Q1 Warburg exercise of 8.6 million warrants for common stock on a net exercise basis.

The transaction resulted in the issuance of 4.6 million in common shares from Warburg late in Q1.

The majority of this is reflected in our average diluted share count of 89.7 million, and the March 31 share count of 90.2 million shares issued and outstanding.

The exercise had little impact on EPS and equity.

At quarter end, Warburg held 9.73% of our outstanding shares.

So before turning it back over to Jim, let me provide a few comments on our expectations for Q2 2013.

With respect to average earning assets, overall average earning assets will likely grow in a range of 1% to 2%.

We expect average loan growth in Q2 to be in the 1% to 2% range.

Net interest margin pressure continues, although we think we are nearing the bottom.

Given the continuing low rate environment and an MBS CPR in the mid 20s, we expect further compression in the range of 5 basis points in Q2 driven primarily by anticipated decline in the investment portfolio yields.

We would expect net interest income to be near the Q1 level.

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

Given our outlook on Q2 loan growth, we could see our Q2 provision rise modestly in Q1.

Regarding noninterest income, we expect to see a 4% to 5% increase in noninterest income in Q2.

And as we noted during the quarter we had a nonreoccurring write-down of $1.5 million reflected in Other noninterest income.

With regard to mortgage banking, although still near historical highs we expect lower mortgage banking revenue in Q2 driven by lower settlement volumes, attributable to inclement weather in Q1, and tighter pricing due to increased competition and higher GSE guarantee fees likely having a compressing effect on spreads.

Other components of noninterest income should remain relatively strong.

Regarding noninterest expense, we expect to see the benefit of lower core expenses in Q2 driven by a reduction in seasonal expenses in Q1, associated with payroll taxes and benefits, and full-quarter efficiencies especially with our outsourcing agreements with FIS and JLL, as well as the continued rationalization of our entire expense base.

As we previously communicated we expect to achieve a 60% efficiency ratio in the second quarter.

Our effective tax rate on a non-FTE basis, we would expect to be in the range of 31 basis points in Q2.

And our share count, our Q2 average fully diluted share count will include a full-quarter average of the incremental 4.6 million shares from the Warburg warrant exercise.

Based on the current market price and no additional buybacks in the quarter, we expect the second-quarter average diluted share count to be approximately 90.2 million in the second quarter.

With that, I'll turn things back over to Jim for concluding remarks.

Thanks, Glenn.

First quarter was a solid quarter with a positive outlook and strong momentum.

Our strategies in pursuit of generating economic profits are clear, as is our progress toward achieving them.

And we believe we are on path to be a high-performing regional bank.

We would now like to open it up for your questions.

(Operator Instructions) Bob Ramsey, FBR Capital Markets.

Hey, good morning, guys.

I was hoping you could just talk a little bit about loan growth.

I know the average growth in the quarter was strong at 2% and your end-of-period balances were down a touch, but it sounds as if you expect average growth in the second quarter to be pretty good, too, if it is 1% to 2%.

Just -- is that based on where the pipeline is going into the second quarter?

Just because end-of-period balances would seem to be a little bit lighter than that.

Yes, hey, Bob.

It's Jerry.

Definitely we are seeing a very nice uptick.

Throughout the comments I know that Jim made as well as myself, we tried to give a little bit of color of where it was still strong quarter-to-quarter in terms of comparison.

But clearly in Commercial and Business banking we rebuilt the pipelines, so we are back up overall in the billion-dollar-plus range.

So we were at a low point at 12/31.

So we knew that in particular there were a lot of customers that wanted to get transactions done at year end; we made those comments in the calls in Q4.

We're trying to highlight certain areas this quarter where it was.

But I think one of the things you're hearing us express is that the team really has got a lot of momentum.

There is no question there is still all the competition out there in terms of pricing in all the different markets.

But clearly the rebuilding took place during the quarter, and so we feel very comfortable going into the second quarter that we are heading into it with a much, much stronger pipeline.

Okay.

Then just taking a little bit of a step back, when we look at the Fed data we can see that the industry as a whole is down slightly in the first quarter.

Do you think that really is the trend that you talk about earlier of volume being pulled forward into the fourth quarter?

Or do you think that this quarter the customers that you talk to -- is there any slowdown in their need or desire to borrow?

It's Jim.

I'll comment that we think that most of it was the pull forward into the fourth quarter.

And we haven't seen a material shift in attitude from our clients.

Okay, great.

Thank you, guys.

Steven Alexopoulos, JPMorgan Chase.

Hey, good morning, everyone.

Wanted to start with the efficiency.

With the operating efficiency ratio down, you said, around 350 basis points year-over-year, one, is there as much focus on improving that ratio this year as there was last year?

Secondly, could we see another improvement somewhere in that similar range for this year?

Yes, Steve, it's Glenn.

We think, as we have indicated, that we will get back to 60% in Q2.

I think if you look at it and you look at our core expenses, a fair amount of what you saw the pop-up in Q1 was seasonality, about $2 million to $2.5 million in expenses.

You also heard the example of JLL and FIS.

So we continue to rationalize our expense base to further improve efficiency.

And I'll add to that, that it is a constant with us.

We talk about Pathway to 60, P260, or better.

It is a way of life.

Every day we are thinking about it, we are talking about it.

I mentioned three of the initiatives that we are undertaking where we expanded our relationship with our item processor to gain efficiencies, and we outsourced some of our facilities management.

We have got an eForms project, and we have a project management team, an operating review team that spend all of their time looking for ways to improve our efficiency, a large part of which is to continue to rationalize expenses even as we are trying to drive revenue growth.

Yes.

Steve, it's Jerry.

One other thing that we have mentioned in prior calls, but we have actually now really built up the team.

We have got a dedicated, continuous improvement unit that is staffed with Six Sigma experts.

We're actually rolling out in the second quarter a green-belt training for a number of our players in different functions across the organization.

Just to echo the comment you just heard from Glenn and Jim is -- we are going to be relentless about this.

I think we have been, and we are really, really going to work through.

At the end of the day this will squeeze out not only real dollars but also make it a lot easier to do business -- for our customers, to do business with us, and for us to actually deliver on everything to them both internally and externally.

So a lot, a lot of work going on in this area.

Okay.

Maybe to follow-up on that Jones Lang LaSalle agreement, is there any initial look as to the branches you might close or consolidate this year?

It's Jerry.

We are working hard on that.

I think we are going to have probably some more clarity on that in the second-quarter call.

Okay.

Just my final question was on the margin.

I thought you said you expect the margin down around 5 basis points in 2Q and then getting close to a bottom.

So does that imply the rest of the year you expect relatively flat from that level?

Is that what you're saying?

We think if the 10-year swap goes back up around 2%, that it will stabilize the margin.

Now the 10-year swap this morning is that 1.89%, right?

But we think then the margin will be stabilized in the second half of 2013.

But we want to be careful not to be suggesting that it would be flat in Q3.

We don't know.

But more than likely it would be attaining a trough in Q3.

So you could see further diminishment in that quarter.

Okay.

Okay.

Thanks for all the color.

Mark Fitzgibbon, Sandler O'Neill.

Good morning, gentlemen.

I wondered if you could talk a little bit about chargeoffs.

Chargeoffs have been relatively flattish for the last four quarters at around $16 million.

Do you think we will see chargeoffs beginning to taper off in coming quarters?

In that same vein, I was curious if you are still targeting a reserve-to-loan ratio of around 125%.

So I think with respect to charge-offs, we are optimistic given the leading indicators of past-due loans.

So we will need to build a little more of a history there; but if you follow it through, it should have an eventual impact on reducing our charge-offs.

With respect to the allowance, I think we are staying pretty consistent with -- we think it is in the 120%, 125% range (multiple speakers).

In your internal modeling, when do you forecast that net chargeoffs are going to cross over with provisioning, where we will see those start to even up?

I'm not going to give a specific quarter, but it is later in the year.

Okay.

And, Mark, I will add that we are optimistic about what may happen in the chargeoffs, but reticent to predict that they'd come down, because you never know when you're going to get some lumpiness.

You just can't tell.

And that is why we haven't made a projection.

Okay.

Then lastly, and I don't know if you can comment on this, but is it your understanding that Warburg intends to hold their remaining 9% position in the Company?

We don't know of any plans to reduce it; I guess I would put it that way.

That would be strictly up to them.

Thank you.

Dave Rochester, Deutsche Bank.

Hey, good morning, guys.

How much lower do you think the expense run rate can go, given you are still investing in the business and you're reducing other costs?

I know you talked about the seasonal bump unwinding as we go into it 2Q.

Are you thinking there is a good chance that expenses could actually stabilize in the second half of the year, with the other items that you mentioned?

I would say I think that we are committed to getting back to the 60% in Q2.

And as Jerry indicated, Jim as well, we continue to reinvest in the business, too.

So we are not putting out a target that we would be sub-60% or any number at this point.

You make a really good point, Dave, because when you look at our expenses and you look at us just on the expense side relative to peers, we are reasonably efficient.

The biggest issue for us has to do with the relationship of the expenses to the revenue.

So we're working very hard on driving the revenue as well as some of the initiatives that we have described that will help us to further keep the expenses in check.

Okay.

As you are heading into the back half of this year, I think you had mentioned potentially switching to neutral check ordering.

Is that still on the table?

Is that something you are thinking about?

Are there any other offsets that you can think of to that on the fee income side?

Yes, David, we believe that just given the timeline to put something like that in place, it probably would be the very tail end of the year.

You wouldn't see much of an impact in 2013.

Okay, great.

One last one on the margin.

Is your outlook assuming basically stable premium amortization at this point?

Yes.

Perfect.

All right.

Thanks, guys.

Ken Zerbe, Morgan Stanley.

Great, thanks.

Just a question on expenses.

I know you are very focused on getting back to the 60%.

But in the grander scheme of things do you guys feel that you're giving up anything in terms of growth initiatives?

Or are there other potential initiatives that you would like to pursue that you are not able to, because you are more focused on keeping the expenses low?

No, I would just echo that we continue to invest in the business.

I mean all through last year and going into this year, you saw the initiatives.

Jerry highlighted some of those -- Private Banking, Commercial buildout, Treasury, Payment Services.

All those are expenses that, as we look at the return and the economic profit and lay those out, we continue to invest in.

So really when you are looking at our expense base, we are not -- it is not referring to furniture.

We are rationalizing our expenses, and we take out capacity.

We do it through outsourcing agreements, whether it is with FIS and JLL, or just looking at how efficiently our spend is.

Once you feel good about the 60% or you're at a very stable level, the 60%, should we expect more investment in growth initiatives?

Hey, Ken.

It's Jerry.

My sense is that throughout the last several years -- I think Glenn's point was really spot on because we have been heavily investing.

In each of these calls that we have been on -- and I could talk for Joe Savage and John Guy and Dan Fitzpatrick.

Every one of these guys are adding business development officers.

What we are talking about doing is the rationalization of everything that we have today.

So we are investing in people.

We are rolling out a lot of new things from the technology side.

We talked about mobile deposit capture.

We have completely refreshed the online experience and just rolled that out for our customers.

We are going to continue to make enhancements to the ATM network.

We are adding new Banking Centers.

There is a couple that -- we will get into a lot more detail of that, again as I mentioned to one of the earlier questions, in the second quarter.

But there is a lot, though, that is here today that has got to be rationalized.

And we have got to make decisions as to whether -- can we do it effectively ourselves?

Can we partner with folks that can help us do it more effectively?

But there is a lot here that you have to justify.

Part of what we are doing -- and I think you can tell there is a very disciplined approach that we are taking -- is we are looking at every single dollar that is getting spent and what it's being spent on and are we getting a return for that dollar.

So whether it is a sponsorship, whether it is to add a person to the organization, every single dollar is being rationalized.

And it is great to be in this position of where we are spending so much time and energy on it.

I used the word relentless earlier in response to a question; but that that is the way we are right now about this.

So can I just -- I think this is a really good question to talk about -- say that we know that we are not going to be a high-performing regional bank or return in excess of our cost of capital if we run an efficiency ratio over 60%, which makes that an overarching goal.

I think, though, your point is well taken that you don't want to deny future revenue growth because of what you're doing in a particular period.

But I think there has got to be a balance here, and that is what we are keeping in mind.

I think the beauty of what we have done so far is that we have been adding revenue-producing people while becoming more efficient in terms of how we deliver the services, which has allowed us to actually have core reduction in expenses over comparable periods.

Once we get under 60% sustainably I think the answer is yes; we will be able to invest more aggressively even than we are now in adding bankers that will produce more revenue that will help to drive the positive operating leverage that we see in the future periods.

Great.

All right.

Thank you very much.

James (sic) O'Donnell, Merion Capital.

Good morning.

Jerry, if I heard you correctly, you mentioned in your prepared remarks that 25% of deposit volume is being conducted through the ATM network, up from 16% a year ago, which seems like a remarkable improvement.

Do you have a target in mind here?

Is there a minimum level that you all feel you need to maintain in order for the universal banker model to be viable?

Great question.

You know, my sense is it really is picking up because there's two things that are happening.

One is, customers who previously would never have thought to use those machines, even though they obviously had deposit-taking capabilities, more and more are getting comfortable.

And what are bankers are doing is, they're making sure that they walk our customers over and demonstrate and show.

So there is a lot more that is happening there, and we think that that upside can continue.

I would dare say that you will continue to hear us report on this on a quarterly basis, because it is priority one.

We are trying to make sure -- that is also -- you have got the remote deposit capture.

And, Jason, that is the part of why it is going to be really hard to give you a target, because I think once you roll out RDC, now you have got a customer having all that optionality.

And I think that that will take away from maybe what one would perceive would be so much of the volume that would migrate naturally just to the ATMs.

You will now have to -- it will be hard to be able to say that it would be one versus the other that is going to drive it.

But our view is that is why the universal banker model can work.

There is going to be locations where we are going to still be a heavily transacted, transaction-oriented banking center.

That is just the demographics.

But in all the areas where we possibly can do this, we obviously want to adopt that universal banker model because that gets us much more into sales and service as opposed to what tends to be much more, with the transactional nature, really a service-oriented first branch.

Okay.

That makes sense.

My follow-up was going to be on the mobile RDC.

It sounds as though from your comments that that is an integral part of the strategy, and that you all are thinking about that as being a critical component of pushing transaction volumes further out of the network.

Is that fair?

Yes, it's fair.

And one of the goals -- we are talking about from an active online customer standpoint, we have got 60% of the customers using our online services.

I want 60% of our customers as an initial target using our mobile services.

So the goal is that this is where we are out and we're going to be deploying iPads in locations and demoing for customers every single moment we can.

It is all to empower the customer.

At the end of the day this is to provide them with all the tools; and they have the option of which channel they want to do business with us.

You think about the things that we rolled out over the course of 2012 and into this year, when we rolled out our eChecking product and you followed up with rolling out of all of these image capture ATMs, and you follow it up with the mobile app, and now you are following it up with remote deposit capture, you can see where we are headed.

We want to make sure that our customers have the freedom to bank when, where, and how they want.

And the adoption rates are very, very encouraging.

Okay.

That's helpful.

Then how should we think about sticking with the universal banker model?

The impact -- is there a potentially meaningful impact here going forward on comp and benefits expense as a result of the strategy?

Or alternatively, does your cost per FTE actually increase as branch employees assume presumably greater responsibility and the skill set is more significant under the model?

How do you look at the opportunity from an absolute standpoint in terms of comp and benefits expense?

Yes, good question.

You can clearly see, between the transactions coming out of the branch to the ATM, as you couple that with the rollout of these other electronic ways that customers can do business with us, and they rollout the universal banker, just answering the specific question of -- yes, your cost per FTE will go up per universal banker versus the platform personnel that are in place.

But you are going to expect that the number of people necessary, because a lot of those transactions are migrating, to go down.

So you have got a clear offset and actually in our mind there is going to be savings to that.

And that is the payoff for why you want to have all those transactions take place on mobile devices or at the ATM machine.

Okay.

Thanks a lot.

Matthew Keating, Barclays.

Yes, thank you.

I just wanted to clarify.

I know you managed that the share -- you didn't buy back any shares in the quarter.

But in terms of the Warburg warrant transaction, the foregone shares, in lieu of them paying the exercise price on those warrants, so those didn't count at all against your $50 million remaining share buyback authorization?

Is that correct?

That's correct.

They did not.

Yes.

Okay, and then again, given your capital ratio is continuing to build, you continue to target a 30%-type payout ratio this year.

Maybe you could just comment on how you are thinking about capital return.

Thanks.

Sure, I will just say -- and we mentioned this briefly in the discussion, but that we do have the $50 million buyback authority on the one hand.

We also have signaled our intent to continue gradually raising the dividend up to around 30% or so on a payout ratio; and in fact the Board will be taking up that question next week.

Fine.

Then finally on the $1.5 million nonrecurring write-down on that loan that was recognized in Other Income, can you just explain, provide some more color on that, and maybe perhaps explain why that is one-time in nature?

Thanks.

It is one-time in nature -- it was in held-for-sale; so by accounting standards you have to -- we marked it down to the revised value.

So by accounting standards we had to account for that.

It is in Other Income.

The reduction of $1.5 million is in Other Income.

That loan should clear in this second quarter as well.

Yes.

We thought we had taken a conservative mark on it.

It turns out that the market wasn't as receptive as we would have thought; and so we went ahead and addressed it.

Thank you.

Matthew Kelley, Sterne, Agee.

Hi, guys.

I noticed that your Commercial Real Estate yield during the quarter was 4.02%.

What does the pipeline look like on the Commercial Real Estate yield front?

It's comparable to up.

Okay, got you.

Maybe you can just talk about what asset classes or geographies you are seeing better yields coming in there as we look forward?

Obviously some stabilization in the commercial loan yields helping out the margin, but where are you seeing some of those yields actually tick up?

You know, I would say that we are pretty comparable, if you think about the production that took place in the first quarter.

Really there is a concentration of probably New York into Jersey.

And again our footprint is, we have repeatedly stated, Boston to Philly.

But that is where a fair bit of the production took place.

There is a lot of competitive pressure in all the markets.

And I think true to what the head of the group and all of us believe, we are sticking with the pricing discipline that we have got in place.

Okay, got it.

Then going to your efficiency initiatives and outsourcing to JLL, I know you're going to have more commentary on that next quarter, it sounds like.

But I think during the first quarter, you had made -- you suggested that you wanted to take total square footage down from like 750,000 to 500,000.

Over what time frame do you envision executing that plan?

That's a good question, and that is what we are working on now, is to decide exactly how long and what would it take.

And rather at this point try to project what that would be, we have got some work to do, as Jerry mentioned earlier, to figure it out.

But we will be talking about that probably in the next call.

Okay.

Last question, just your tax rate.

How should we be thinking about that going forward and the changes that might be occurring there, as profitability ticks a little higher?

31% is the guidance for Q2.

Right.

But what about beyond, as we look out into 2014?

(multiple speakers) use 31% in your model.

Okay, got it.

Thank you.

Casey Haire, Jefferies & Company.

Hey, good morning, guys.

I wanted to circle back to the NIM point you made, Glenn, on post second quarter stabilizing.

I was just wondering, what are the key drivers?

Is it remixing the balance sheet?

More funding cost flexibility?

Just a little more color there if you could.

Yes, I mean it is a balance.

So it is the loan volume coming in, particularly on the commercial side.

We could do a little bit more on the funding side as well.

But I think the key is that if long-term rates start to pop up a little bit -- and again, we look at the 10-year swap and 1.89%, 1.90%, if that gets above 2% and stays there, then we think the second half of the year or toward the end of the year we should start seeing some stabilization.

Okay.

I mean assuming we stay at 1.75% here, what rate of compression should we expect?

I am not going out past the second quarter.

We are sticking with 5 in Q2 and then we will see where we are or where the factors add up.

And we will talk to you as we get through Q2.

Okay.

Fair enough.

Just a couple housekeeping items on the fee side of thing.

The guide of 4% to 5%, does that bake in the charge in the first quarter here?

Yes, it does.

And our outlook on mortgage banking and other fees.

Okay, great.

Then the gain on sale down at 2.97%, I think you said, is -- where are we today early on in the quarter versus that number?

I think we have been fairly flat to the 2.97%.

But I think you will see some of the guarantee fees coming in the second part of this quarter, and that will put some compression on the spread.

Okay.

Then just lastly, the check ordering you mentioned; I think you mentioned that that impact won't take place this year, maybe next year.

What is the all-in impact of that on a fee basis?

Between $3 million and $4 million.

Yes.

It is a several million dollar item.

Right.

$3 million to $4 million annually; and that is most likely coming in next year?

Yes.

And just remember, Casey, the thing you've got to think about is the more that is going electronic and the more that customers are doing, balance alerts and really actively managing, this is going to happen regardless in the customer base.

So you're going to see a lot more being electronic and a lot more management of the money.

So as customers -- and we're putting more and more tools out for them to be aware and effectively manage.

I would just say that I think you could see some drop-off regardless.

Got you.

Thank you.

John Pancari, Evercore.

Morning.

Can you talk a little bit about your plans around the acquisition front?

I know you have been indicating a greater interest in recent quarters.

So just get a couple thoughts on that front; thanks.

Sure.

We have indicated a greater interest, but we are focusing really 98% to 100% of our time on improving our own performance.

And to the extent that opportunities come along to do negotiated transactions under our guiding principles, we would be very interested, for sure.

But we are not out soliciting.

But we are looking at what the potential opportunities may be.

And we do believe that consolidation is going to pick up sometime over the next few quarters.

What would your ideal targets be, again?

Can you remind us in terms of the size of the bank, from a whole bank acquisition perspective?

Sure.

Ideally I'd do size and location and say the best deals that realize the most synergies are going to be the ones that are in-market.

A lot of this would be about generating those efficiencies, which could be reliable; and therefore you've got to figure that in terms of what the premium would be.

Size would be anything from around $1 billion, maybe a touch less depending upon the quality of the institution, up to significantly larger than that, even up to something that is truly strategic.

And then we would look not only within the market but contiguous to the market for opportunity.

Okay, thank you.

Then lastly on the margin, what is the average yield of the loans that you brought onto the balance sheet this quarter?

I am just trying to get an idea of how the continued loan growth that you indicated is going to help the margin in the back half of the year.

It just seems to be more dilutive at this point still, and I am just trying to reconcile that.

The average yield of everything originated in the quarter was 3.89%, weighted.

Okay.

So that combined with your expectation around the bond portfolio, with the swap rates maybe heading up, you think that is enough to provide a good floor to the margin, then?

Yes.

Okay.

All right.

Thank you.

Collyn Gilbert, Keefe, Bruyette & Woods.

Great, thanks.

Good morning, guys.

Jim, just a follow-up on the M&A question.

You said significantly larger; and I know you have always said look at partners of similar -- like-minded partners or whatever the term was that you have used.

Could you --?

There was a deal in the New York area, two smaller banks merged together of similar sizes and took out significant cost saves from the same -- from the combined institution.

Is that -- when you say a synergies focus, could you look at something of that type of magnitude, where you see two similar size comes together and really cut the pro forma?

Or really I guess exploit the synergies?

We are very open-minded about what would work.

I look at that transaction and say that is great for them, because there is two like-minded institutions for sure that came together, found a way to make that happen.

They will have a bigger presence in their market.

There's so many positives that come out of that.

And then you have seen others like the SCBT combination made and two or three others over the last several quarters or so, where people have realized that the greatest value they may be able to deliver is through consolidating with one another.

So yes, we are very open-minded to that possibility.

Okay, okay.

That's helpful.

Then just -- the Board thoughts here on the dividend; and I know you said 30% payout was the target.

Is that a target like a near-term target that we could see with the announcement this month, or is that more like a year away?

I don't want to put a time limit on it.

Let's go through the process here and the Board will have its discussion.

Then we will have more to say about that next week.

Okay, okay.

Then just --

But Collyn, I will say this, if you are looking at the sooner or later side of it, it is more likely to be sooner than later.

Okay, okay.

Then just quickly on the competitive side in pricing and structure, on the C&I side, in the market that you are seeing in the C&I loans, are you guys being forced to do more term loans on the C&I side?

Or are those structures still staying pretty short and pretty variable?

It kind of goes across the spectrum.

I wouldn't say that there is something in the market that is forcing us to do anything.

I don't think the mix has changed materially.

Most of it is short.

Okay, all right.

Great.

That was all I had.

Thanks, guys.

Michael Rosado, Credit Suisse.

Good morning, guys.

Just with the cost of deposits at around 36 basis points, do you feel that you guys can continually move that rate lower throughout the year?

Or are we starting to approach a bottom here?

Yes, we -- if there is one lever it is going to be the CD maturities that we indicated, and that we have $1.1 billion in maturities for the remainder of the year at 106 basis points.

Provided they stay and roll over, they come back in at 31 basis points.

So that is at least one lever.

With respect to the others, we continue to look at that.

So the other products, maybe less so.

Okay, great.

Then just on general loan pricing in the market, are you guys seeing any stabilization?

Or is pricing still pretty aggressive for those higher-quality credits?

I think that it is safe to say that it depends on the transaction, it depends on the line of business.

In some markets we are seeing people be very aggressive; in other markets we're seeing it being rational.

It is hard to generalize it and say across the footprint that it is comparable.

All right.

Thanks, guys.

There are no further questions at this time.

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

Rob, thank you very much, and thank you all for being with us today.

Have a good day.

Thank you.

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