People's United Financial, Inc.
Q1 2010 Earnings Call Transcript

Published: 16 Apr 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. first quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today, Mr. Philip Sherringham, President and Chief Executive Officer of People's United Financial, Inc. Please proceed, sir.

[Philip Sherringham:]

Thank you. Good morning everyone and welcome, of course, to the first quarter 2010 earnings conference call of People's United Financial. Again, I am Philip Sherringham, President and CEO; and I will be presenting our results today with Paul Burner, our CFO. Other members of our management team are here with us and may answer questions as appropriate. I will be speaking from our quarterly slide deck, which is available under investor relations at www.peoples.com. As you all have seen in our earnings release, we're pleased to report that People's United continues to benefit from its fortress balance sheet, characterized by a strong capital position and ongoing solid asset quality. We continued to grow our commercial portfolio during the quarter while managing risk. Other highlights of the quarter include the closing and integration of Financial Federal. This integration, which is substantially complete, has so far progressed very smoothly, and the operations immediately began adding to the bottom line. Second, the successful conversion of our southern New England franchise onto a new FIF Metavante core systems platform reflecting a tremendous amount of time and effort by employees throughout the bank. This is something our investors don't see on a day-to-day basis, but it's a very important component of our growth strategy. It provides significant operating efficiencies and allows us to continue to offer the award-winning customer service for which we're known. We're looking forward to the conversion of our northern New England franchise in July, after which time our entire franchise will be on one core system. Finally, a continued active due diligence process on both open banks and FDIC opportunities. We remain convinced that the best deployment of our excess capital is in FDIC-assisted and whole bank acquisitions in attractive markets with high population density. While it's difficult to predict with certainty, we are pursuing a number of opportunities and feel confident that we will have an announcement in the near future. Before we move on to the presentation, I would like to remind you please to all be sure to read our forward-looking statement on slide one. Now, on to slide two. Operating net income for the first quarter was $29.2 million or $0.08 a share excluding $23.4 million pre-tax or $0.04 a share after tax of nonrecurring charges related to systems conversion and acquisition-related expenses. The quarter's results reflect continued growth in our core loan portfolios and deposits, despite the challenging environments. Our margin benefited from the Financial Federal acquisition, increasing to 3.47% compared to fourth quarter's 3.19%. We will speak to that in greater detail a bit later. Net loan chargeoffs for the quarter decreased to 26 basis points of average loans on an annualized basis from 38 basis points in the fourth quarter 2009, which was our second consecutive quarterly decline in net chargeoffs. On the other hand, due to continued economic weakness in our markets, our ratio of NPAs to originated loans, REO, and repossessed assets did increase to 1.74% from 1.44% in the fourth quarter. I would note again that our asset quality has held up remarkably well on both a relative and absolute basis through this most recent recession, and we continue to enjoy limited loss content in our loan portfolio and that most of the bad news is substantially behind us. We are pleased that our industry-leading tangible equity ratio remains strong at 18.6% and actually increased 40 basis points as a result of the addition of Financial Federal. With that, I hand it over to Paul to provide you with details on the quarter. Paul.

[Paul Burner:]

Thank you, Philip, and good morning everyone. As Philip mentioned, our overall net interest margin increased to 3.47%, up 28 basis points from the 3.19% in the fourth quarter. Improvement in the spread was primarily due to higher yields in the loan portfolio due to the acquisition of Financial Federal, as well as the reduction in deposit costs. Deposit costs of 78 basis points in the first quarter were down 16 basis points from the 94 basis points in the fourth quarter of 2009. For the month of March, our margin was 3.76%, which reflected the benefit of Financial Federal for the whole month; therefore we expect further improvement in the margin for the second quarter. Moving on to slide four, as unemployment remains high and the economy remains weak, we saw an additional increase in nonperforming assets in the quarter. NPAs increased to 1.74% from 1.44% of loans and REO. As you can see in the footnote, due to the acquisition of Fin Fed and the 141(r) credit mark on their portfolio, we're presenting this information as a ratio of NPAs to originated loans. However, the NPAs do include acquired repossessed assets from Fin Fed. Our experience remains much better than others, as you can see. Because of the strength of our original underwriting as well as our monitoring resolution and loss control practices, we continue to feel comfortable with our asset quality in the current environment. As we have done in the past, slide five provides a deeper dive into our commercial and equipment financing asset quality. Again, due to the credit mark, the loans acquired from Fin Fed are fully marked. However, going forward new loans originated since the acquisition will be included here in NPLs as warranted. While NPLs increased in the quarter, you can see that our losses decreased and remain very manageable at 15 basis points annualized for the quarter. The portfolio is well diversified and continues to focus on core middle market customers where we're able to provide better service than larger banks. Additionally, our equipment financing business has financed mission critical equipment that maintains value. Coupled with our workout resolution processes, we've been able to limit losses in this portfolio. On slide six, you can see a breakout of our commercial real estate credit performance. NPLs continue to decline for the second consecutive quarter to 1.21% while net chargeoffs increased to 43 basis points annualized reflecting $4.3 million of higher chargeoffs. We expect there continue to be some choppiness as we've seen in the past few quarters to this ratio given the size of commercial real estate loans. Construction loan balances continue to decline and are now about 5% of total loans. Residential loans continue to run off, and as this portfolio declines we would anticipate NPLs as a percentage to increase. However, actual loss content remains very low. This quarter, while NPLs rose to $66.7 million, or 2.7% of residential loans, net chargeoffs were only one basis point. Looking at the group of NPLs, approximately 70% have current loan to values less than 90%, which is consistent with last quarter and suggests continued low loss content in the portfolio. Generally, we had low average loan to values at origination and current FICO score is 721. I would also remind you that we stopped portfolioing residential loans at the end of 2006. Slide eight illustrates credit quality trends for home equity for the first quarter of 2010 which remains similar compared to the fourth quarter. As you can see on the left of the page, the first quarter's 35 basis points of NPLs for us compares very favorably to both the top 50 and our peer banks last quarter. Our net chargeoffs declined in the quarter and are less than 10% of the level of the top 50 and of our peer group. Utilization rates are steady at 48%. While growth in this portfolio is moderated due to customer preference over the past few quarters, we continue to feel this is an important part of our retail customer relationships. We're especially proud of the data on the next slide which reflects our chargeoff experience over the past few years. As you know, banking is about managing risk. I think this shows that we do that very well. Our loss ratio dropped to 26 basis points in the first quarter of 2010 from 38 in the fourth. This is about 10% of the top 50 banks and 13% of our peer group as of last quarter. Due to our strong underwriting, we expect to continue to see minimal loss content overall. Slide ten, we take a look at our Texas ratio. As you know, this is a measure of credit compared to capital both very important items to a bank. If you look at us relative to the industry, there continues to be no comparison. Moving on to slide 11, we want to take a brief moment to highlight our asset sensitive position. We remain one of, if not the most, asset sensitive bank in the country. This is been a burden as we live through this period of very low rates, but will be a benefit to us as rates begin to rise at some point in the future. Some have tried to discount this by arguing that our asset sensitivity derives solely from our excess capital and, once it's deployed, the benefit will evaporate. Well, half of our asset sensitivity is indeed due to the excess capital of approximately $2.5 billion. The other half is due to the structure of our balance sheet which has not changed. Any rate increase will flow to the bottom line, increasing earnings whether that capital is deployed or not. As you all look out and ponder a higher rate environment, don't forget that we will stand to win in such an environment. Now I will hand it back to Philip.

[Philip Sherringham:]

Thank you, Paul. As we look at this conclusion slide, I want to point out that while these conclusions are familiar to most of you, they do reflect our patience and discipline which remain hallmarks of how we are managing this institution. We feel that our time has come, and we will be rewarded for this patience and discipline as we progress through 2010. To conclude on slide 12, I would like to briefly highlight the continued strength of our position. We have a very strong balance sheet with an enviable 19% tangible capital ratio and no wholesale borrowings. We have exceptional asset quality with a low level of nonperforming loans and very low loss content within that portfolio. We have a low cost, stable deposit base and loyal, satisfied customers. We have excellent growth opportunities ahead of us, both organically and through our positions. To that point, we continue to focus on seeking acquisitions within geographies that have both wealth and population density. We feel these transactions could be in the form of open bank transactions as well as FDICassisted deals. In addition, as Paul just pointed out, our asset sensitivity provides significant earnings and operating leverage as interest rates begin to increase. This concludes our presentation, and now we will be happy to answer any questions you may have.

[Operator:]

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

[Ken Zerbe:]

First question, in terms of operating expenses in 2011, I think your last guidance was for this year quarterly expenses about 185 a quarter. But when we look out to 2011, how much does it cost you to run multiple systems? Essentially, what kind of benefit should you be getting when we come into 2011 on a quarterly basis down from the 185 number?

[Philip Sherringham:]

On an annual basis, I would say probably between $15 million and $20 million.

[Ken Zerbe:]

$15 million and $20 million annually? Okay. Then, the other question I had just on the commercial chargeoffs on slide 5. It looks like it was a little bit higher last quarter, obviously lower this quarter of 15 basis points. Was there any reversals or recoveries that happened in this quarter or is the 15 basis points a fairly clean chargeoff rate?

[Philip Sherringham:]

Sorry, Ken, we have trouble hearing your question. Could you please repeat it?

[Ken Zerbe:]

On slide 5, when you talk about the commercial chargeoffs, looks like it was a bit higher last quarter and obviously lower this quarter. Was there any reversals or recoveries that happened in this quarter that would lead to the lower number or is 15 basis points roughly a good, fairly clean number?

[Philip Sherringham:]

I think what I want to point out here is when it comes to commercial chargeoffs, they are typically very choppy. You could see up and down from one quarter to the next. It doesn't necessarily mean there's a significant trend there.

[Operator:]

Your next question comes from Steven Alexopoulos – JP Morgan Securities.

[Steven Alexopoulos:]

Good morning. Phil, when you talk about expanding into non-contiguous, densely populated markets, would Puerto Rico qualify as a market that would theoretically be on your radar screen?

[Philip Sherringham:]

Well, you know, we did mention and have mentioned in prior calls potentially looking at states like Florida, Texas, and California. That's all I am going to say. In terms of noncontiguous markets.

[Steven Alexopoulos:]

In terms of the dividend, why not a more meaningful boost to the dividend? Seems like maybe an opportunity to give shareholders a bit more yield right as they wait for capital to be deployed.

[Philip Sherringham:]

Our yield is pretty close to ten-year treasury yield. We got upside if interest rates actually increase. I suspect from one perspective it's high enough. We're basically paying a dividend twice our earnings rate, as you know. At this point, we're very focused on increasing earnings. We think the increase in dividend is meaningful in terms of trend and our confidence in our ability to actually do that. That's a signal, if you will.

[Steven Alexopoulos:]

I guess today is the third anniversary of the second step. I was just wondering. I guess you could theoretically sell the bank if you wanted to at this point. What are your thoughts? Is that being a goal to monetize the value of the franchise and capital, etc.?

[Philip Sherringham:]

I think you are right, by the way, today is probably the third anniversary or very close. I thought it was the 17th. Anyway, it's tomorrow. Yes. We're very focused on acquiring other banks at this point as opposed to anything else. I've said all along and our position hasn't changed that we run this company for the benefit of the shareholders. I will just leave it at that.

[Operator:]

Your next question comes from Christopher Nolan – Maxim Group.

[Christopher Nolan:]

Thank you for taking my call. Quick question. Funding cost of 78 basis points is quite low. How much further do you think that can go?

[Philip Sherringham:]

I'm sorry. We are having great trouble understanding your question.

[Christopher Nolan:]

Funding costs are 78 basis points or deposit costs. How much incremental improvement could there be for that?

[Philip Sherringham:]

Yes. Deposit costs could go a little bit lower, if that's your question. We think it's rather remarkable they've gone that low candidly. But we think they could still go a little lower.

[Christopher Nolan:]

I guess, I am not sure if you mentioned this earlier, but any update in terms of the projected expense savings when you complete the Metavante conversion for both northern New England and southern New England?

[Philip Sherringham:]

I think we may have answered that question already. In 2011, we think it was probably $20 million or so of expense saves.

[Operator:]

Your next question comes from Bob Ramsey – FBR Capital Markets.

[Bob Ramsey:]

Good morning. I guess my first question, I know last quarter you said that you had bid on two FDIC deals, has that number changed over the last three months?

[Philip Sherringham:]

I am not quite sure how to answer the question. We have bid on two. I can't really comment as to whether there's anything else at this point.

[Bob Ramsey:]

I think you've also said in the past that it's most likely that your next deal will be an unassisted deal. You started off the call today saying that you're confident that there will be some sort of announcement in the near future. Is there something specific on the horizon that gives you that confidence?

[Philip Sherringham:]

I wouldn't have made the statement otherwise. Having said this, I can't comment any further. I am sure you understand that.

[Bob Ramsey:]

Then the last question I have got for you, you said your margin in March was 376. Is that a good run rate going forward or with the deposit costs coming down a little bit more, do you think you will actually do a little better and what does that mean for the 45 basis points guidance for 2010?

[Philip Sherringham:]

We think there could be a little upside to that number.

[Bob Ramsey:]

A little upside to the 45 basis points you mean that you all guided for expansion?

[Philip Sherringham:]

That's correct. Little upside.

[Operator:]

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

[Mark Fitzgibbon:]

Good morning. I assume that net interest margin will continue to rise in the second quarter as you recognize the full impact from the Financial Federal deal. Can you help us sort of help quantify that better?

[Philip Sherringham:]

Sorry, Mark, ask us to quantify better the increase in the margin?

[Mark Fitzgibbon:]

Yes. Help us to get a better sense for the magnitude of the margin expansion in the second quarter.

[Philip Sherringham:]

I thought we just answered the question. In the month of March, margin rose to 3.76%. We think there's some potential upside to that, a little upside to that number going forward.

[Mark Fitzgibbon:]

Then secondly, do you feel comfortable enough with the credit situation to cease reserve building? You know the reserve sort of whittled down a little bit. Obviously you had the acquisition in there this quarter, but are we done with reserve building in your mind?

[Philip Sherringham:]

Obviously, we do what we have to do. We said for a while we thought going forward [inaudible] would match chargeoffs basically. I think we're still there. You got to be a little careful, as you know of course, Mark, when you look at the ratios. With the new accounting involved, some of the traditional ratios frankly are misleading. We are focusing on the ratio of reserves to originated loans and that number is still basically up a little bit, actually 122 I believe.

[Operator:]

Your next question comes from David Hochstim – Buckingham Research Group.

[David Hochstim:]

Good morning. Could you give us some color on what you have seen from commercial customers over the quarter? Was there any increase in loan demand and what kind of benefit was there after you closed on Financial Federal in terms of customer relationships in the business?

[Philip Sherringham:]

I think in terms of commercial loan demand, the overall comment would be it remains weak, much weaker than we'd like it to be frankly. That's true across the franchise, across all business lines on the commercial side. Things have picked up a little bit, maybe, but frankly it's still disappointing.

[David Hochstim:]

Have you seen improvement from an increase in demand from the December quarter or not really, still choppy?

[Philip Sherringham:]

I mean basically what I am trying to say is that compared to our projections, we're not seeing the loan demand we'd like to see at this point. Now the year is still young, and there are signs that the economy overall may be reaching a turning point. But at this point in terms of increased loan demand coming from middle market companies, it's simply not happening.

[David Hochstim:]

Related to that, could you just give us the final numbers on I guess assets from Financial Federal? So what the acquisition contributed to loan balances, loan lease balances in the quarter?

[Philip Sherringham:]

Yes. It's approximately $1.2 billion.

[Operator:]

Your next question comes from David Darst – Guggenheim Securities.

[David Darst:]

Good morning. With the acquired nonaccrual loans of $52 million, I am certain that includes the $20 million of OREO, do you expect that to be a pretty steady number given their risk profile?

[Philip Sherringham:]

Sorry, can you repeat the question?

[David Darst:]

The nonaccrual loans for Financial Federal of $52 million and OREO of $20 million, did you do anything in closing the transaction to inflate or increase those numbers or should we expect that to be a pretty steady number going forward?

[Philip Sherringham:]

Obviously, the number going forward will depend on what happens to their portfolio. The numbers that you just mentioned are indeed the numbers that we ended up booking, and they reflect our mark to market of the respective portfolios. In other words, the mark to market nonperforming loan number was about $52 million. The mark to market OREO portfolio is about, or [inaudible] asset, I should say in your case, was about $20 million.

[David Darst:]

What's your target loan mix including leases going forward? Do you expect to grow the overall lease portfolio?

[Philip Sherringham:]

Yes. We have hopes to grow the overall lease portfolio. That's why we bought the company. Having said this, it's very much a function of the overall economy. As we pointed out, it remains weak at this point.

[David Darst:]

What's the maximum exposure you would be comfortable with in leasing?

[Philip Sherringham:]

Maximum exposure in leasing, look, at this point, we're comfortable with the exposure we have. Which, few think about it is probably about, if you add PCLC plus, about $2.2 billion or something. Wait a second. [inaudible] is 10% of the overall portfolio. I guess at this point we're very comfortable with that level. If it went up a little bit, that would be fine, too.

[Operator:]

Your next question comes from Damon DelMonte – KBW.

[Damon DelMonte:]

Good morning, Philip, how are you? Could you remind us, if you were looking at an FDICassisted deal that took you outside of the northeast, outside of your targeted DC to Maine corridor, how big of a transaction would you be looking at?

[Philip Sherringham:]

Let me repeat the question and make sure I got it. You are asking if we looked at FDIC outside of our franchise, how big a deal would it be?

[Damon DelMonte:]

Yes. I think originally you had targeted something; you said it would have to move the needle maybe something in the $3 billion to $5 billion in asset range? Does that still hold?

[Philip Sherringham:]

Yes. Outside the franchise, sure.

[Damon DelMonte:]

Would you do something smaller?

[Philip Sherringham:]

Outside the franchise? Probably not. It depends, we will see.

[Damon DelMonte:]

Then just with respect to New England. I know I have asked this question in the past, the differences between northern and southern New England. But have you seen any changes in the last quarter? It seems like things continue to kind of chug along with no major deteriorations there. Are you kind of seeing the same trends?

[Philip Sherringham:]

Yes.

[Damon DelMonte:]

That's all I had, everything else was answered. Thank you.

[Operator:]

Your next question comes from Collyn Gilbert – Stifel Nicolaus.

[Collyn Gilbert:]

Thanks, good morning. First question on the Financial Federal, what was the dollar amount of expense contribution that we saw in the quarter related to that company?

[Paul Burner:]

It was about $2.5 million.

[Collyn Gilbert:]

Just for clarity, Paul, you may have touched on this and I might have missed it. But in terms of the increase in the commercial nonperforming loans during the quarter, roughly $12 million or so, what was that attributable to?

[Paul Burner:]

We really had one credit which accounted for $10 million of the increase which was the bulk of the increase.

[Collyn Gilbert:]

Can you give a little bit of color as to what that credit was and how it's collateralized and kind of expectation of recovery or resolution?

[Philip Sherringham:]

It's an evolving situation. At this point, we would rather not get into it too much. I guess one point I would like to make overall is, if you think about asset quality, we're still dealing with individual situations here or there. There's no systemic weakness anywhere. It's just one of the problems that pop up on a random basis.

[Collyn Gilbert:]

The fact that it doesn't look as if necessarily you added to the reserve on this credit, is that safe to assume you don't anticipate a loss or any kind of write down?

[Philip Sherringham:]

Not necessarily because, you know, reserve allocation can shift from one portfolio to another. That's part of that happening here.

[Collyn Gilbert:]

Was it an inmarket credit?

[Philip Sherringham:]

Yes.

[Collyn Gilbert:]

Just finally, Philip, if you could give us a bit of insight as to what you all are looking at and kind of how you are balancing and sort of prioritizing the options out there from an acquisition standpoint. Obviously you have the out-of-market FDIC, you've got straight out of market, you've got in-market. What's kind of driving your views and strategies and priorities as you are looking at your options out there?

[Philip Sherringham:]

Well, in terms of priority, all things being equal, we still favor in-market type acquisitions. But there are limited opportunities there, as you know. While that's a preference, it's not necessarily what's going to happen. We will have to wait and see. That would still be our preference.

[Collyn Gilbert:]

Then as far as FDIC out of market, let me back up. I guess in the last call you had said that maybe some of the inbound call activity had increased from some in-market potential contenders. Are you still seeing inbound call activity moving higher or how are you balancing the volume of in-market candidates versus out of market candidates?

[Philip Sherringham:]

I would say it's pretty much equal. It's somewhat random. It's a good mix.

[Collyn Gilbert:]

I think you said in the past that you guys would be comfortable doing simultaneous acquisitions, is that still the case?

[Philip Sherringham:]

Yes.

[Operator:]

Your next question comes from Matthew Kelley – Sterne Agee.

[Matthew Kelley:]

Just to confirm, are you still comfortable with the guidance of $185 million of expenses for Q2, 3, and 4 as you go through that integration?

[Philip Sherringham:]

Yes, we are.

[Matthew Kelley:]

Then what will the impact be on the Reg E changes on overdraft and NSF and maybe just talk about that a little bit, how you structured those programs and what you think the impact would be coming July 1.

[Philip Sherringham:]

Obviously we think it's going to have some impact. You can quantify based on various scenarios. We figure it will cost us about $10 million a year. That would be a couple of pennies if you think about it this way. We will see. We will try to make it up one way or another, either through other avenues or to restructure the programs. That's something we're still working on, as is the industry I guess.

[Matthew Kelley:]

How is the opt in approval process going and where do you stand on that with your customer base?

[Philip Sherringham:]

The what process?

[Matthew Kelley:]

Opting in, you know, to some of those overdraft programs.

[Philip Sherringham:]

Again, we're still working on the details and it's too soon to tell how the public is going to react, I guess. We're hoping that the majority of people will, in fact, opt in. We will wait and see.

[Matthew Kelley:]

You been running pretty consistently $30 million to $32 million of service charges on deposit accounts. How much specifically is overall overdraft, NSF?

[Philip Sherringham:]

We will have to get back to you on that.

[Matthew Kelley:]

Then last question just on acquisition strategy. Would you be willing to consider an open market deal in some of those same noncontiguous markets, you know, Texas, Florida, California? Or is it only assisted deals in those markets that far from home?

[Philip Sherringham:]

I would just say we're pretty open-minded. Leave it at that.

[Paul Burner:]

I actually did find the number. The uncollected and overdraft fees are about a third of the bank service charges.

[Operator:]

Your next question comes from Richard Weiss – Janney Montgomery Scott.

[Richard Weiss:]

Good morning. I was wondering if you could talk about some of the other elements of the noninterest income, like the insurance brokerage. What do you see happening with those line items in the next three quarters or so?

[Philip Sherringham:]

You know, we are seeing I would say some stability. Some of the components, of course, are a function of activities in the markets in general on the wealth management side. As the markets continue to recover, that should be helpful.

[Richard Weiss:]

I guess with the political discussions in Washington with regard to regulation, what's going to happen with the new bills, is there anything in there that particularly worries you?

[Philip Sherringham:]

Yes. There are lots of things that worry us – not just us, but I think most of the banking industry, frankly. One of course, and the primary one, might be, I guess there's two key issues. One is the Consumer Protection Agency, final status of that. In the current version of Dodd bill, it was sort of to be housed in Treasury, but more like a tenant. We think that's potentially very dangerous. We think that a prudential regulator should supervise the Consumer Financial Protection Agency in whatever form it ends up existing, I guess. That's worry number one. Worry number two is equal to worry number one, by the way, is the preemption issue. We think it's absolutely vital for the industry that we maintain preemption as it exists today of federal law versus state laws. Otherwise you could have a potential disaster for companies operating across state lines like ourselves. Those are two issues that come to mind immediately as being totally key.

[Richard Weiss:]

Would that influence you as you're going about your due diligence on looking at acquisitions then?

[Philip Sherringham:]

No. No. Because we're already a multistate organization, so we will have to live with whatever comes out of Washington. Hopefully what comes out of it makes sense rather than not. We think the Dodd bill, as it stands today, there are significant, significant issues.

[Operator:]

Your next question comes from Kenneth Bruce – BofA Merrill Lynch.

[Kenneth Bruce:]

Thanks, good morning. You know, it's pretty clear you've got an assetsensitive balance sheet. I guess the question that begs to be asked is has your view of interest rates changed at all as it relates to when we might begin to see some of that asset sensitivity working its way into P&L? You point out there's very weak loan demand, and it feels like there's still a lot of weakness in the overall economy. Have you had any changes in terms of when you might think that the rates begin to move higher and, if so, has there been a change in terms of how you're going to manage the balance sheet because of that?

[Philip Sherringham:]

You know, Ken, unfortunately, my crystal ball is probably as good as yours. I mean probably not very good. Frankly, we don't know. Consensus seems to be that maybe towards the end of the year the Fed will change its language at least or start raising rates. Depends a lot on the unemployment picture, of course. If we start seeing a change there, then I believe the Fed will start modifying its stance. Otherwise, who knows. I am afraid I can't really help you there. Broadly speaking, I would say within a year to year and a half, we think it could change sooner depending on what the Fed does and how it interprets economic conditions, I guess.

[Kenneth Bruce:]

And are you contemplating changing your portfolio position at all because of that in terms of either the length of your funding or any other aspect of your financial strategy?

[Philip Sherringham:]

That's a good question. The answer is no. We have paid the price already. At this point we're going to take the benefit when it happens. We think it would be very unwise at this point. It's only going to go one way, that's up. Can't tell you exactly when, but they will go up. When they go up, we will benefit tremendously.

[Kenneth Bruce:]

You spent a lot of the call talking about the M&A environment. At what juncture would you or what evidence in the market would suggest that maybe the M&A opportunity has, in fact, passed? Today there's many different options you've pointed out, both in and out of market, FDIC, or healthy bank acquisitions. These are obviously dependent on where we are in the cycle. What would you look out at in the market and say, okay, there's really not a good opportunity at this stage because of where we are in the cycle or valuation. Maybe we need to address our excess capital position differently.

[Philip Sherringham:]

Yes. Listen, at this point we simply feel that, in fact, the opportunities over the next year to two years are probably going to get better. Again, if you go back a year ago when bank stock prices were really extremely depressed, transactions were in fact impossible because multiples of tangible book were so low most banks simply weren't willing to sell. I think the recovery that we've seen recently in this sector is actually going to be helpful as we consider acquisitions because in part, most likely, now that those multiples are recovered, some banks are going to have to ask themselves a question and where does the next leg come from in terms of earnings? How are they going to grow earnings as they move forward? Wouldn't it make more sense to associate with a larger, stronger company such as ourselves? Hopefully the answer is going to be yes in a number of cases.

[Kenneth Bruce:]

Yes. A high quality problem. Thank you very much for your answers.

[Operator:]

We have no further questions at this time. I would now like to turn the call back over to Mr. Sherringham for closing remarks.

[Philip Sherringham:]

Very good. Thank you all for your interest, and we will see you next quarter. Have a good weekend.

[Operator:]

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful weekend.