Webster Financial Corporation
Q2 2008 Earnings Call Transcript

Published: 22 Jul 2008

[James C. Smith:]

Good morning, everyone. Welcome to Webster's Second Quarter 2008 Investor Call and Webcast. Joining me today are Jerry Plush, our Chief Financial Officer, who recently took on the Chief Risk Officer mantle as well—congratulations, Jerry—John Ciulla, our Chief Credit Risk Officer; and Terry Mangan, Investor Relations. I will provide some overview and context for the second quarter results, and Jerry will provide comments on our financial performance. Our remarks will last about 30 minutes, and then we will invite your questions. The cash and non-cash charges that are part in today’s earnings release reflect the challenging environment for financial institutions. Let me address, right up front, the increase since our preannouncement a couple of weeks ago in impairment charges against available for-sale securities. The higher non-cash charges reflect Webster’s determination, subsequent to the preannouncement, that market conditions for pooled capital trust securities rated triple-B are now such that we should take a charge as of the end of Q2. We have impaired all pooled capital trust securities rated triple-B, whether the pools are deferring payments or not. The charges have no impact in our tangible capital positions since we have already taken the mark against equity and our strong regulatory capital ratios position us well to absorb the charges. To the extent we can recognize potential losses in our securities portfolio in the most timely manner, we intend to do so. I encourage you to go to our website at www.wbst.com to see a granular view of our securities portfolio and the actions we have taken. You’ll see that the only held-to-maturity securities in the portfolio are high-grade munies and 15- and 30-year agencies. All other securities and AFS in quarter end have been marked to market. Broadly speaking, you can expect us to be very conservative in our judgments as we navigate through the current financial environment. We are focused on isolating the problems of today and improving performance tomorrow and we aim to provide our investors with financial reporting that is the most transparent, granular, and comprehensive that you will see from any company in our peer group. Overall, the cash and non-cash charges aggregate $0.98 in diluted EPS and consist of write-down of investments to fair value totaling $0.66 per share, goodwill impairment representing $0.16 per share, and One Webster program cost and other charges totaling $0.16 per share. Jerry will discuss these items in more detail. Unfortunately, the charges detract from solid improvement in Webster’s core operating results turned in during the second quarter. While we reported the loss of $0.56 per diluted share in Q2, core operating results were $0.42, as indicated in the EPS reconciliation and the earnings release. The $0.42—which before the $10 million or $0.12 increase in the loan-loss provision would have been $0.54—was above analysts’ estimates, as net interest income benefited from a stable margin and modest earning asset growth. Core P/E categories rebounded nicely from the first quarter and we contained expenses. Our narrow strategic focus on in market direct core franchise activities is a major positive for strategy development and resource allocations. There are no distractions from the task at hand. The solid core operating performance in the quarter supported the Boards’ decision to declare the regular $0.30 quarterly cash dividend that will be paid on August 18. This is the eighty-fourth consecutive quarterly dividend since Webster first paid the dividend in 1987. We plan to balance the desire to maintain the current dividend against Webster’s capital needs in the quarters ahead. As indicated in our July 10 preannouncement, the provision for credit losses in the continuing portfolios is $25 million in the quarter, driven by the $68 million spike in non-performing loans. Since net charge-offs in the continuing portfolio declined to $11.2 million, credit reserves in the continuing portfolio increased nine basis points from March 31 to 1.30%. We deem this increase essential given the increase level of non-accrual loans and the need to build reserves given continuing economic uncertainty. Again, as with the impairment charge against the securities portfolio and our decision to raise capital for that matter, we want to be aggressive in recognizing the current environments’ potential impact on future performance. The reason for the unusually high increase in NPAs was primarily because four residential development loans went non-accrual in the quarter, as slow sales took a toll on the performance. Most investors know that we have had an outstanding asset quality record in this business unit over the years and we remain confident that our underwriting and work out capabilities will serve as loss mitigators. I don’t want to make predictions in this environment, I have to take that the magnitude of the increase in non-performing assets was more likely an aberration than a trend. A few bolstered by the sizable Q2 reduction of $33 million in 30- to 89-day past due loans. There is no doubt we are living in extraordinary and uncertain economic times. To an increasing degree, those circumstances shape our priorities as a company while our vision, mission and values guide Webster people everyday as we find a way to help our customers achieve their financial goals. Our operating principles are the driving force behind the management process, and our primary focus of our report today. We understand that during a period when confidence in the banking system ebbs, banks must adapt their operating principles accordingly. So, we’ve spent considerable time and effort in recent months building capital and liquidity, and bolstering our credit-risk management capabilities, focusing inwardly as we prepare for the quarters ahead. Let’s start with our capital position. In early June, we raised $225 million of tangible capital through the issuance of convertible preferred stock. Its purpose

[Jim Smith:]

Thanks, Jerry. We have been hard at work over these past three highly unusual months for the banking industry, as we continue to execute our strategic plan and take aggressive and timely action to manage effectively through this economic cycle. We raised capital for the long-term benefit of our customers, our shareholders, and our employees. We announced the results of our One Webster Earnings Optimization Program, that will make Webster more efficient while also improving our ability to deliver top quality customer service. And we announced important organizational changes, as we look to our future as New England’s Bank. Outside of the non-accruing loan increase and the special charges, our operating performance is on the upswing, and I hope that it is not lost in the moment. Webster’s second quarter operating results reflect the positive results from our narrowed focus on doing well, what we do best. The One Webster initiative will have a meaningful, positive impact on our future operating results. We know that today’s challenging economic environment will one day give way to calmer times. And we remain confident that our narrowed focus on core franchise activities will lead us to success as a regional commercial bank, helping individuals, families, and businesses across New England, achieve their financial goals. Thank you for being with us today. We will now be pleased to respond to your questions.

[Operator:]

Thank you. Ladies and Gentlemen, we will now be conducting a question and answer session. (Operator instructions) Our first question is coming Andrea Jao of Lehman Brothers

[Andrea Jao:]

Hello? Jim Smith Hello Andrea.

[Andrea Jao:]

Hello. Good morning!

[Andrea Jao:]

Earlier during the call, you mentioned that you were in the process of getting updated collateral values for your liquidating portfolio. I was wondering how closely you looked at collateral values in the continuing portfolio, and if you could give us an update?

[John Ciulla:]

Sure. This is Jon Ciulla, the Chief Credit Risk Officer.

[Andrea Jao:]

Hi John.

[John Ciulla:]

Good morning! At the end of, in the fourth quarter of 2007, we did a complete evaluation on the consumer and residential portfolios, both continuing and liquidating, using Kay Shiller. We are in process of updating that across the portfolio at the present time, and expect those analytics to be back to us within the next 2 weeks, by the end of July. In the interim, however, Andrea, we have been as part of our line management process, in reducing unused line commitments, in the home equity portfolio, both in the continuing and the liquidating. Based on a risk based approach, I have looked at updating evaluations using ABM Models for those lines that we have deemed to be higher-risk lines. So, to date, in between the fourth quarter of 2007 and our current update on the whole portfolio, we updated about 2000 properties, representing what we have identified as the higher risk lines, as part of our line management and line reduction activity.

[Andrea Jao- Lehman Brothers:]

Will you be able to share some of those details with us, in a couple of weeks when you are done?

[John Ciulla:]

Yes.

[Andrea Jao- Lehman Brothers:]

Perfect! Thank you.

[John Ciulla:]

You are welcome.

[Operator:]

Thank you. Our next question is coming from Mark Fitzgibbon – Sandler O’Neill.

[Mark Fitzgibbon:]

Good morning, and thank you for taking my question.

[Jim Smith:]

Good morning, Mark.

[Mark Fitzgibbon:]

First, Jerry, just to clarify, you said, I think you expect NIM pressure in the third quarter, but you still expect it to improve?

[Jerry Plush:]

Yes.

[Mark Fitzgibbon:]

Okay.

[Jerry Plush:]

Mark, specifically, you have to take into account the fact that we issued the convertible preferred, so you would see naturally some improvement, in terms of that funding, show up through the NIM. So, the way I look at it is, we also believe that the NIM was really suppressed given the high level of nonperforming assets we added in. And, accordingly, you can see the trends that we have got, in terms of our costs to deposits, or costs to borrowings. So, given all those different factors, I think we feel comfortable saying that we think it will be stable, and actually begin to show some improvement.

[Mark Fitzgibbon:]

Okay. And then secondly, the nonperforming and delinquency trends in the liquidating portfolio look pretty good this quarter. Do you think that we have seen the high-water mark for nonperformers in that liquidating portfolio, or the two liquidating portfolios?

[John Ciulla:]

This is John Ciulla again. Obviously, we are hopeful. We do not think that necessarily a month over month or quarter over quarter in this environment makes a trend. But, we are obviously optimistic that the performance has stabilized. With respect to the continuing portfolio as well, we are seeing strong metrics. We are outperforming other industry home equity lenders. We think because of underwriting, relatively conservative underwriting programs, as well as Jim mentioned earlier, the geography where we are located. And we are hopeful that the behavioral patterns of the borrowers that we have seen, short of the early strike and weeded out some of the weaker borrowers, and we hope that the trend continues to stabilize over time.

[Mark Fitzgibbon:]

Okay, and then also John, could you put these would be the utilization rates are on the in footprint home equity portfolio? And are those rising, or falling, or stable?

[John Ciulla:]

Yeah, they are stable. They are actually stable in both. You know, our utilization rates are a little higher in the liquidating portfolio, as you would expect. But with respect to period over period timing, in both continuing liquidating, we are seeing stability in utilization rates.

[Jerry Plush:]

Thank you, and let me just comment that those utilization rates probably are a little less than 50% in those portfolios. Mark, I just want to say that sure, the stabilization is encouraging, but the way that we are viewing the current environment is, there is credit deterioration pretty much at least nationally speaking, across all asset classes. We do not want to suggest that we think that it is going to be any different here. And until we see the difference, as some kind of sustainable trend, we would not want to be projecting that that will occur. Much as we hope for it.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Ken Surp of Morgan Stanley [ph].

[Ken Surp:]

Thanks. You made a comment on your dividends, both on the call and in your press release, that you plan to balance the desire to maintain your current dividend against your capital needs. Now, given the fact that you just basically reaffirmed your dividend and you just raised capital, I was a little confused by this statement. Are you trying to indicate anything? That you may need to raise additional capital or what did you mean by that?

[Jerry Plush:]

No. We are trying to be absolutely neutral in terms of our intentions to pay the dividend without predicting that we would absolutely continue the dividend in future periods. So, we will base the desire to pay the dividend. We will balance that against the capital needs for the company. Now, we were not in any way suggesting that we had any need to raise additional capital.

[Ken Surp:]

Okay. And then the other question that I had, on the One Webster Initiative

[Jerry Plush:]

You are going to have to take into account that with the assets that we just put on, you will have a higher earning asset base with—again we are being cautious in terms of our views on the NIM, just given the uncertainty in the market and the impact, obviously that we saw this quarter, as it relates to some nonperforming assets and the impact that is had to the NIM. So, while we think that there is, the trajectory is that there would be that there is improvement, we are obviously being cautious in the commentary that we are providing today. We also believe that you see a very good trend as it relates to other fee income and you have got to take that into account when you factor in the 60%.

[Ken Surp:]

Okay. Great.

[Jerry Plush:]

All right. Thank you very much.

[Ken Surp:]

Sure.

[Operator.:]

Thank you. Our next question is coming from Collyn Gilbert of Stifel, Nicolaus.. .

[Collyn Gilbert:]

Thanks. Good morning guys. Just a couple of housekeeping items. What should we be using for the diluted share count for the third quarter?

[Jim Smith:]

Jerry is actually gone. What I am going to do is ask him to send to you and to everyone else the absolute number that we are using.

[Collyn Gilbert:]

Okay, and then, what about on the tax rate?

[Jim Smith:]

You know, I think in terms of the tax rate, we will give you some guidance on that as well. I will be consistent on the individual calls, and I know that we have got lined up to provide some commentary on that.

[Collyn Gilbert:]

Okay, all right. And then, in terms of you all thinking that the impairment on the Freddie and Frannie preferred this quarter, you said that it was a 15 million dollar impairment that you took? Or was the 15 million dollars the overall exposure that you had?

[Jim Smith:]

Collyn, we have 10 million in Frannie, I believe, and 5 million in Freddie preferred stocks. They were deals, part of the issuance that both organizations issued in the fourth quarter of 2007. The impairment was just below, I believe a million dollars, when you looked at the mark, as of June 30. We believe, just given the subsequent events, since that point and time, that there will be some other than temporary impairment, in those securities, and therefore, made the management judgment to recognize that. So, they are carried at fair value given the mark as of June 30th,. and we will continue to monitor that. Obviously, there has been a lot of volatility in the value of those particular stocks and, you know, given the uncertainty over the last couple of weeks, you would see market values up and down on those. But our view was, as of the reporting period, it was appropriate to go back and reflect those as the carrying value, meaning, or have the carrying value being reflected at fair value at that date.

[Collyn Gilbert:]

Okay,

[Jim Smith:]

Collyn, this is Jim, I just want to say, you raise a very interesting point, and I think that it is important that everybody look at their banking coverage, bank by bank, to really understand what the individual bank is doing, in terms of its accounting. It is important to note that we did take the impairment against Freddie and Frannie Preferred, and we did take the impairment against the BBB Capital Trust Securities that were pooled, as well, for all of them. Where, you may find that there are significant differences amongst filers.

[Collyn Gilbert:]

Yes, absolutely, especially on those Frannie and Freddie sides. Which is why I asked the question, because it was interesting that, because the reporting period of June 30, it wasn’t a huge event. Although, I guess it depends on the issuance, because I think there were, if you guys had a 4Q07 issue, and I think some other banks had an earlier issue where the impairment wasn’t as great. So, anyway, that is kind of why I asked the question. Jim Smith Collyn, if I could, let me come back. You know, we have for planning purposes, and I had said that we would send this out separately, but for the 3rd quarter I would use 60 million 300 thousand shares and for a tax rate we would estimate 30%.

[Collyn Gilbert:]

Okay. And then one final thing Jerry, and I apologize if you said it when you were talking about the One Webster Initiative, did you give guidance as to a normalized run rate, quarterly run rate, on the expenses?

[Jerry Plush:]

I did not.

[Collyn Gilbert:]

Can you?

[Jerry Plush:]

I think in terms of you will continue to see some improvement in the third and the fourth quarter when you sanitize our results for the charges that we have taken here. I think Collyn, candidly, the one area where we know that we are going to see some increase in expenses is the fact that we are working out a much more sizable nonperforming asset portfolio, and therefore, that—if there is an area that I would tell you why I put some caution to wanting to say that you will see improvement, is because we believe that it is really important right now to build out the balance of our credit-risk management capabilities. Really work the portfolio hard. So, I think John and I and Jim are all of the mindset that that is our top priority from a risk perspective and I would expect that to the extent that that may cost some dollars in the short term, that is money very, very well spent.

[Collyn Gilbert:]

Gotcha! Okay, that is all. Thank you.

[Operator:]

Thank you. Our next question is coming from James Abbott [ph] of FBR Capital Markets.

[James Abbott:]

Good ,morning! A couple of quick questions on the CDO Portfolios. I was wondering if you could just give us a sense of how many issues there are in the CDO Portfolios, in total?

[Jerry Plush:]

And James, I just want to ask, in terms of specifics, why that is an issue for you?

[James Abbott:]

I am just curious as to how diversified it was. I talked to several companies and some have a small number of issues within the CDO Portfolio, others have a thousand or more.

[Jerry Plush:]

No, it is fairly diverse. I don’t think we are talking in the thousands, but I’ll give you a number in a second here. Let me just dig that out.

[James Abbott:]

Okay. And on kind of a related note, is how many of those are differing and defaulted, and if you do not have them right now, maybe that is something that you could get back to us.

[Jerry Plush:]

Yeah. I want to be clear. We do not have defaults. This is a question of, if you look at the accounting, which is outlined under EITF 9920, it is pretty clear that if there is any type of expected change in the cash flows, it raises the specter of doubt around your ability to continue to uphold these or not at the carrying value, and as to whether or not you should be writing them down. So, obviously, we have elected to take the fair-value charges accordingly. You know, we have done it where we have seen specifically that there were deferrals, in the pools, and we have done it where when we have looked at cash coverage, on pools that we felt that basically anything within the BBBs that we owned, there was more likely than not, concern that gets raised.

[James Abbott:]

Okay. Which I applaud by the way.

[Jim Smith:]

James, it is Jim. I just want to say that the significant majority of the impairment was against pooled securities that have no deferral.

[James Abbott:]

Just to be clear, so all pooled, BBB Capital Securities have been impaired, whether they are deferring or not? And none of them are in default?

[Jim Smith:]

And I think what we would encourage you to do is apply the same standard to your universe, as we are applying to ourselves. And James, just to clarify, we have got several dozen issues within those CEOs. You know, specifically, there is between 10 and 12, I believe, in the BBB category.

[Jerry Plush:]

You have got several dozen issues and each issue is pooled.

[Jim Smith:]

Correct.

[James Abbott:]

Okay. Right. Okay, that was what I was curious. So, 10 to 12 total issues within

[Jim Smith:]

The BBB and essentially overall.

[James Abbott:]

Okay. And each issue has 20 or 30 issues within it?

[Jim Smith:]

It depends.

[Jerry Plush:]

Whatever…

[Jim Smith:]

Right. Each of these securities is different.

[James Abbott:]

Okay. And is the face value of the BBBs change at all from the prior quarter? It shows 87 million of BBBs in the prior quarter as amortized cost. And I assume there was no OTC on the prior quarter. And then now, it is showing 49 million.

[Jerry Plush:]

That is reflective of the write-down.

[James Abbott:]

Well, there is no purchase or sale other than that of the write-down?

[Jerry Plush:]

There has been no purchase of BBBs for several years. I think that you would have to date back into the ’02 through end of possibly, maybe early ’07 time frame for the last time that we purchased anything in the pooled BBBs.

[James Abbott:]

Okay. So, let me make sure that I understand this then. And I apologize for trying to do the analysis at the same time as the conference call, we just didn’t have a lot of time. The BBBs were impaired at about a 56% rate then. Is that right, or about a 45% haircut then, approximately? If I am doing that math right.

[Jerry Plush:]

I would say you are in the relevant range.

[James Abbott:]

Okay. And then, looking up through the other tranches [ph] the AAAs are sitting at about a 78% and the AAs are at 88%. Could you give us some color behind the disconnect on that? I am not a bond specialist, so, maybe some help on that.

[Jerry Plush:]

No. I would say that, you know, all of the securities, in terms of valuation, have been looked at. I think, to the extent that you look at the, what tranche that you are in, your coverage ratios are significantly higher, therefore, in terms of the question of whether they are somewhat in there that could potentially differ or not, doesn’t become as great a risk as it does obviously, as you move down to the various tranches, to look at the BBBs or even the capital notes. You know, one of the reference points that we have made is we also wrote down the income notes, which are the unrated securities to fair value. So, when you look at the components, we have basically taken anything BBB or anything in the income note categories and written them down to fair value. It is also important to note, that when we look at fair value, we go out for indications of value from a number of firms that are the specialists in the field specialists in the field and we take all of those into account in determining fair value.

[James Abbott:]

Okay, so the AAAs might have more exposure to some banks that are greater at risk or lower capital levels or whatever that we want to use. But the AAs may have less exposure. Is that the –

[Gerald P. Plush:]

I think you would have to look at. I think again you have to look at pool by pool. And this is much more complex I think to your point. There is not an easy way to do this. You have got to look at it by pool and each of these securities is valued again independently by three firms. We get indications of value based on their views of the market. In terms of, obviously we also get the cash flow modeling on each of these to ensure that we have got appropriate coverage.

[James Abbott:]

Okay, I appreciate – I apologize for all the –

[Gerald P. Plush:]

And obviously we will be happy to take post the earnings call.

[James Abbott:]

I did have one other quick question on the C&I loans that you mentioned, the publisher and the diversified manufacturer. Were those—you have your C&I portfolio broken out in past presentations—where did those fall? Were they small business, middle market asset based, or equipment financing?

[Gerald P. Plush:]

One was middle market and one was asset based.

[James Abbott:]

Okay. And any of those national or were they more in footprint?

[Gerald P. Plush:]

The asset based which as you know is a regional and national business for us actually has operations in our footprint. The publisher is in our footprint.

[James Abbott:]

Okay. Thank you very much for time.

[Operator:]

Thank you. Our next question is coming from Matthew Kelly of Sterne, Agee & Leach.

[Matthew Kelly:]

Yes, just a follow-up question on the investment portfolio and the CDOs and the trust preferred. For each of the buckets from AAA on down the fair values that are presented in the table here. Are those driven by the quotes from the broker dealers in each category or is it a cash flow modeling? Which factor drove the process in terms of the final value that you guys are carrying these on?

[Gerald P. Plush:]

The final value is by security or by pool view of market values or indications of value from three different firms. The cash flow modeling is to ensure is that we also have the support to believe that there are no issues with the ability to recognize value in securities; i.e., not to impair them.

[Matthew Kelly:]

So I mean when you put your AAA—your $50 million in AAA out for bid—it came back saying they would purchase those for $0.80 on the dollar.

[Gerald P. Plush:]

It came back indicating value. I want to be clear. We send this out for indications of value for each of those.

[Matthew Kelly:]

But is that where they actually trade.

[Gerald P. Plush:]

You know in terms of trading or non-trading of securities. The liquidity in the marketplace basically for all financial assets – the ability to easily trade securities at this point and time it depends on the class. If something is obviously readily quotable. You look at assets like these, they do not fall into that Level 1 category. They are much more of a Level 2, where there is more subjective factors that are brought into play.

[Matthew Kelly:]

I mean are the three dealers saying to you, this is where we think these pieces would actually trad,e or are they saying to you, this is where we think there is value from a cash flow basis—which is essentially the same type of analysis that you guys can do on your own without getting a quote.

[Gerald P. Plush:]

Of course that is what they do Matt. I think it is important to note they do their own cash flow analysis in terms of how they get to these indications of value. They have got to use that. That is part of the view that they do.

[Matthew Kelly:]

But there is still a disconnect between that cash flow analysis that you guys are doing or they are providing for you versus where these pieces are actually trading. I mean AAAs are trading lower than $0.80 on the dollar.

[Gerald P. Plush:]

Yes, we agree with you. No question.

[Matthew Kelly:]

So at what point would the auditors make that switch to force evaluation at those levels versus the cash flow? Or could that happen?

[Gerald P. Plush:]

Well, let us be clear. We are one of the institutions that remains committed to hold this stuff and available for sale. And recognize the fact that market values are depressed for these securities and therefore are taking up tangible capital. So as opposed to avoiding the fluctuations in these, we believe it is appropriate as we have classified them to hold them as available for sale and continue to deal with the fact that there is going to be some volatility in terms of people’s views on depressed values here. So our view is one way or another, whether there is truly impairment and it is recognized as other than temporary or whether there is temporary impairment due to market, we are very open. Obviously, I think you could stack up our transparency of disclosure with anyone and our view is that whether we are holding capital against these one way or another. And still even with that, the ratios that we reported today I think we are just trying to provide as much as granularity to you and to others to evaluate in terms of where we are on point of value basis.

[James C. Smith:]

Hey Matt this is Jim. Let me—I will be way out over my skis on this. But I think your question about the accountants. First they likely now more focused on the lower rate of tranches and they generally would be saying that they would go with the market quote, unless the filer can demonstrate that the cash flows are strong enough that there is no need to impair. They are more focused on the BBBs right now because the amount of the coverage is probably closer to one to one than it is on any of the higher rate tronches.

[Matthew Kelly:]

Okay. So the BBB pieces those are quotes where those would actually trade.

[Gerald P. Plush:]

No what we are saying that what we have these are indications of interest which may or may not—

[James C. Smith:]

Be where they would ultimately trade.

[Matthew Kelly:]

Okay. And the income notes that is the lowest piece of the stack here. It is just surprising to see those carried at 83% of amortized costs when the BBBs above those are now written down to 55% of amortized costs.

[Gerald P. Plush:]

Right, but you need to look behind that and see what those income notes were purchased at as to whether they were purchased at par or at a discount. So I think Terry could give you some color on that as it relates to—as we produce additional information about this, which sounds like it would be helpful. We will add a little bit of that granularity.

[Matthew Kelly:]

Okay, all right. Thank you.

[Operator:]

And our last question is coming from Andrea Jao of Lehman Brothers.

[Andrea Jao:]

Just a broader set of questions on the balance sheet. Securities increased this quarter

[Gerald P. Plush:]

Andrea it is Jerry. You should expect we will not add to the portfolio, and that you would see paydowns in the third and fourth quarters of this year. It is not our current intent to add to the portfolio.

[Andrea Jao:]

What base of cash flows out of the portfolio?

[Gerald P. Plush:]

Yes in terms of the proceeds.

[Andrea Jao:]

Okay. Average to process decreased this quarter. I recognize you are running down broker deposits, but how much more would you want to rely on borrowed funds to support good loan growth and kind of what is the impact of that on your interest rate sensitivity.

[Gerald P. Plush:]

Yes in terms of our plans for borrowings. We are also, as I had commented planning to reduce our alliance on borrowings as much as possible. Obviously, liquidity is a key concern for everyone in the industry so there are no absolutes to what I am going to say here. But we are of the mindset that, as we continue to get cash flows in from loans and investments, to emphasize paying down some of the short-term borrowings that we have got.

[Andrea Jao:]

Ok, and I assume as deposits in total ramp up you will also pay down.

[Gerald P. Plush:]

Absolutely. I think the focus, and I just want to take on Jim’s comments earlier, our focus is on direct lending, organic deposit growth. We believe the diversified sources that we have between commercial, municipal, retail, and HSA really are a key differentiator. And we just plan to continue to emphasize the transaction accounts across the broad spectrum of all the lines of business that we have. That is slow going, but we believe it is incredibly critical for us as an organization when we look and think about our cost of funds. That has been something that clearly we knew was one of the other big changes we needed to complete the commercial bank from thrift to commercial bank transition. And I think with the cash management products and services that we have we can effectively do that in commercial and municipal and our retail folks are very, very focused on building out transaction accounts.

[Andrea Jao:]

Last but not least, what is your interest-rate sensitivity at the moment?

[Gerald P. Plush:]

Neutral.

[Andrea Jao:]

Perfect. Thank you so much.

[Operator:]

There are no further questions. I would like to hand the floor back over to management for any closing comments.

[Gerald P. Plush:]

Thank you all for being with us today. Good day.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time.