Webster Financial Corp., Q1 2009 Earnings Call Transcript

Apr.21.09 | About: Webster Financial (WBS)

Webster Financial Corp. (NYSE:WBS)

Q1 2009 Earnings Call

April 21, 2009 9:00 am ET

Executives

James Smith - Chairman and CEO

Jerry Plush - SEVP and CFO/CRO

John Ciulla - EVP and CCRO

Analysts

Ken Zerbe - Morgan Stanley

Mark Fitzgibbon - Sandler O’Neill

David Darst - FTN Equity

Damon DelMonte - KBW

Amanda Larsen - Raymond James

Matthew Kelley - Sterne Agee

Collyn Gilbert - Stifel Nicolaus

James Abbott - FBR Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation’s First Quarter 2009 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded. Also this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster’s financial condition results of operations in business and financial performance.

Webster has based these forward-looking statements on current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties, and assumptions as described in Webster Financial’s public filings with the Securities and Exchange Commission, which could cause future results to differ materially from historical performance or future expectations.

I would now like to introduce your host for today’s conference, Mr. James C. Smith, Chairman and Chief Executive Officer. Thank you. Please go ahead, sir.

James Smith

Thanks Claudia, good morning, everyone. And welcome to Webster’s first quarter earnings call and webcast. Joining me, are Jerry Plush, our Chief Financial Officer; Terry Mangan, responsible for Investor Relations and other Webster officers who will participate in responding to questions. I hope you all had a chance to review our earnings release that was issued earlier this morning.

Before we begin, allow me to outline the flow of the call and to note that we are now including slides to accompany our comments in order to ensure that you can follow along. You could find the slides on the Investor Relations page of our website websteronline.com or wbst.com.

I will provide an overview on the quarter while Jerry will provide a more detailed review of the financials with special emphasis on credit metrics. Then I will offer some closing remarks and we'll reserve time for your questions at the end.

In the first quarter Webster reported a net operating loss of $11.3 million or $0.24 a share before preferred dividends. Of course we are not pleased with the loss; however, during the quarter we added significant provisions for loan loss reserves.

While, these reserves are well in excess of current period credit losses, we are looking down the road in an economy that we think is certain to undergo credit stress more severe than we have seen in prior periods and we want to be ready for whatever maybe still to come.

I will also note that in this quarter we had no additional other than temporary impairment and other comprehensive income on the securities portfolio was neutral. A notable reflection of the full marks that we put in our securities portfolio through the end of last year. Of course we will continue to actively manage and monitor this portfolio.

So in the quarter were the margin as expected and as estimated by us declined where non-interest income was seasonally low and where non-interest expenses were seasonally high we generated nearly $50 million in pre-tax, pre-provision operating earnings. And amount the exceeded charge offs by close to $20 million. And I am pleased to say that we did see improvement in our net interest margin as it ticked higher toward the end of the quarter.

All in all, especially considering that capital levels remained strong and virtually unchanged in the quarter and there was a lot less noise in special charges, these are the more solid results since the first quarter of last year.

Turning now to slide 3 in the online deck, for most of my time I want to focus on the four areas that I told you would be our focus in 2009, credit, capital, deposits and expenses. I am pleased to say that we made significant progress in all four areas in the first quarter.

Starting with credit we provided $66 million for loan losses. Our net charge offs were $30 million, taken together with our fourth quarter provision. Our provisions have exceeded net charge offs for the last two quarters by about $83 million representing a nearly dollar for dollar match against the rise in non-performing loans over that six month period.

Our reserve now stands at 2.33% of total loans and equals nearly 90% of non-performing loans. We remain intensely focused on identifying reserving against managing and resolving credit risk. The 36% increase in non-performing loans in Q1, is not surprising given the overall state of the economy. And let me point out that the rise in non-performing loans was tempered a bit by the 10% decline in loans that are 30 to 90 days pass due.

On the capital front we maintained our exceptionally strong regulatory capital ratios and reported a 5 basis point improvement in tangible capital to 7.75%, the highest level recorded since the early 1990s. The continuing strength in our capital levels has benefited from several recent actions including our decision earlier this year to reduce the regular cash dividend in our common stock from $0.30 to a penny a share to preserve capital.

In addition during the quarter, we completed tender under which we repurchased and retired $22.5 million in subordinated notes due in 2013. This repurchase was completed $0.80 and the $1 modestly boosting our capital levels and reducing our cost to funds. While we had hoped to repurchase much more than the 11% of these notes outstanding that were tendered.

We take it as a compliment that so many investors preferred to keep our notes in their portfolios.

Declining out-of-market loans and pay down borrowings meaning less wholesale leverage have also benefited capital ratios. Our plan is to continue building capital through a variety of means in the coming quarters.

Like many of you we have long admired JP Morgan for its fortress like balance sheet and Jamie Dimon has provided commendable leadership in this time of financial uncertainty.

Other banks we admire include Wells Fargo, PNC, and M&T. Given the incessant hammering about what constitutes adequate capital level. I would like to point out that Webster's tangible capital ratios and our regulatory capital ratios compare more than favorably across the board with all of these fine companies.

I draw these comparisons simply to make the point that even as we put ourselves into a much stronger reserve position our capital levels have held like a rock and we compare a favorably with some of the best names in the business.

While I am on the topic of capital I want to note that last week yet another highly respected analyst having conducted a bank stress on Webster, concluded that Webster has sufficient capital to withstand pessimistic loan loss assumptions. This is the same conclusion reached by other analysts who did the earlier analysis.

Webster is very well capitalized and able to withstand an economy that is considerably worse than the current consensus forecast. I can't leave capital without a word about TARP, given all the talk about Bank's desire to repay the funds, put us on the list of those who would like to get out from underneath the TARP.

We intend to ask the treasury for guidance on an orderly responsible payment plan for a $400 million in capital purchase program funds. The key word in that sentence is responsible. In all the talk of repaying TARP, I think it is important not to loose sight of the big picture.

The original purpose of CPP funds was to bolster the health of the financial system. With repayments of CPP, at least through 2009 conditional on Bank's ability to raise junior capital for that purpose. Unfortunately for the heath of the financial system, congress threw that repayment plan overboard in favor of punitive executive compensation limits, and now we’re facig unhealthy competition, including from big companies, which are benefited mightly from the government capital in a race for the door.

Ultimately no one knows how severe the recession is going to be. Congress and the Obama administration should revisit this issue and set clear standards for early repayment of CPP. And we should all remember that the CPP funds are designed to protect the system from worse than anticipated recession and losses and it will be a while before we can surely know that the system is not threatened.

All who were part of that system have an obligation to act responsibly in this regard. And let me assure you that we have no desire to participate in a recently announced federal capital assistance program or in the team test progress.

Even in this difficult economic environment, we continue to compete successfully for good lending opportunities. And to use the CPP funds as intended and promised. We have used these funds, both to purchase mortgage-backed securities and to make loans.

During the first quarter, we originated $762 million in new, modified or renewed loans, versus $673 million in Q4. Particularly notable were $419 million in new mortgages, recollecting heightened interest among home owners and refinancing to take advantage of lower rates. In fact, in-market originations increased by almost $200 million in Q1.

The decline in overall loan balances in the quarter reflected in large part, our earlier decision to cease out-of-market mortgage lending and a reduction of other out-of-market activities.

As part of our proactive efforts to avert home foreclosures, we have modified or are in the process of modifying first mortgages totaling about $30 million. We are proud of the fact that our initiative has helped to keep so many families in their homes as they work through their financial issues.

My third area for comment this morning is deposits. Most notably and remarkably, we grew our deposit base by $810 million to $12.7 billion in the first quarter, significantly exceeding our ambitious internal target.

We achieved this growth while at the same time reducing our total cost to deposits by 16 basis points. The growth underscores the strength of our franchise, including our increasing brand awareness and our favorable image as a local institution in our markets.

We have positioned ourselves as the market leader in the rates that we pay for deposits. Quite the opposite, we rely on service and our community presence to attract and develop our customers. Our deposit growth came from all areas, but in particular, HSA Bank, government finance and our retail branches.

I am pleased to say that this deposit growth has enabled us to reduce our loan-to-deposit ratio to 95% from 103% at the end of last year. And this puts us well on the way to our goal of a loan-to-deposit ratio of about 90% and makes us less dependent on wholesale funding.

The fourth area of focus is non-interest expenses. Seasonal factors, including payroll tax and benefits expense, as well as OREO and FDIC insurance expenses, contributed to the 7% increase from the fourth quarter. Compared to the year-ago quarter, expenses were down 6% apart from OREO and FDIC expenses.

We expect to see improvement in coming quarters as our full-time equivalent headcount is down 8% from a year-ago. We are well into the implementation of our One Webster earnings improvement ideas for reducing overheads and enhancing revenues by about $66 million, and Jerry will provide the details on One Webster.

That brings me to the current state of the Southern New England economy, the home of our core operations. Currently, the Southern New England economy is performing inline or slightly better than the nation as a whole. Unemployment continues to be below national levels, while housing prices have declined less than the national average. Meanwhile, the region still has the highest per capita income in the country.

So far, this recession is proving shallower than the early 1990's recession when New England faired much worse than the national average. Currently, key metrics in the region, like nonperforming loans and charge-offs are running at only about half of the national rate.

Looking ahead, some reputable forecaster see New England housing prices recovering more quickly than the nation as a whole in 2010, while the region lags the nation in job growth by a couple of quarters. Taken as a whole, Southern New England remains a comparatively good place to be in this recession.

With that I will turn the call over to Gerry.

Jerry Plush

Thank you, Jim. Good morning, everyone. On slide 4, we've provided a view of core earnings for the quarter. We are outlining several items to take into consideration by looking to see what the pre-tax pre-provisioning earnings of the company were in Q1.

This was a fairly straightforward quarter, and that there are only a few items to consider. We have backed out net gains, first the gain of $6 million in connection with the $22.5 million of subordinated debt related swaps that were tendered in March. We also back out $4.5 million in net gains from security sales in order to get down to true core earnings. In addition, we are excluding direct investment write-downs taking into quarter of $.1.6 million and $3.5 million in ROE write-down as well given the size in non-recurring nature of these particular charges. Our results also included a provision compared to losses of $66 million, $54 million of which relates to the continuing portfolio and $12 million related to the liquidating portfolio

So, with all of this taking into account our underlying operating performance in the quarter remains solid. It's clearly lower than in Q4 but not unexpected as Q1 has seasonally higher expenses, lower deposit fees which is clearly impacted by the Fed moves affecting the NIM for the full quarter.

Turning to page five, here is our income statement. You can see this on a summary level here with the key drivers for each line item are. First as previously mentioned the defined in net interest income reflects the full quarter impact of the Fed moves that occured in October and December of 2008 and we are going to talk about that in a more detail in a few slides.

Our non-interest income was lower as deposit service fee declined $2.1 million that's primarily from seasonality in the first quarter. Our wealth and investment services revenues declined about $730,000 primarily from the decline in value of asset under management while loan related fees declined about $665,000 primarily from reduced level prepayment fees. Our non-interest expenses declined by $7.1 million from a year ago excluding the foreclose property expanse in FDIC insurance assessment.

The increase from the last quarter primarily represent seasonally compensation and benefits and just noted the higher amounts per closed property expanse in FDIC premium assessments.

The non-core items for the quarter include the gain on early extinguishment of debt of $5.9 million. Securities gains of $4.5 million, per closed property expense and write-downs totaling up to $4.6 million, so One Webster related cost of $240,000 and write-downs in direct investments of $1.6 million. You can also see the preferred dividend impact here, what we are paying on the convertible preferred shares as well as the preferred shares issued pursuent to the CPP.

Turning next to the margin, our net interest margin was 2.99% in the first quarter compared to 3.2% in the fourth quarter, reflective again of that full quarter impact of the Fed moves during the fourth quarter. It's also reflective of interest reversals in the first quarter from higher levels in non-performing assets.

Our loan yields declined faster than deposit re-pricing as downward deposit re-pricing lags in the short-term, but this should catch up in Q2 and Q3 as several billion in CD’s mature re-price over those respective periods, also security yields improved about 2 basis points while borrowing cost declined 33 basis points in the period.

Turning now to the next slide, we will give a little more detail in an around non-interest income. Our deposits service fees declined about $2.1 million from last quarter and $474,000 from the year ago period. Both decreases are due primarily to reduced NSFB’s and customer behavior and again seasonality in the first quarter.

Our loan related fees declined primarily due to the lower pre-payment penalty income in Q1 of '09 compared to the link quarter and also to the year ago period. Wealth and investment services, again primarily have declined related to the value of assets under management. Our mortgage banking related income increased from year-end as re-financing volume increased as rates on mortgages decreased in the quarter. The net gain on securities is totaling about $4.5 million, we have got a $5.7 million gain on the sale of $393 million of mortgage backed securities and $5 million in common stock was sold at losses of $1.2 million.

Also as previously discussed we have reported a $6 million gain on early extinguishment of debt. And the write-down of direct investments totaled about $1.6 million and that’s really reflecting the fair market value adjustments on certain equity funds. Our total direct investments are just a shade over $12 million at the end of Q1.

Turning now to take a look at non-interest expense, this category declined $7.1 million or 6% from a year ago when you exclude foreclosed property expense in FDIC insurance assessments. Year-over-year, which shows the impact of One Webster initiatives, you can really see in compensation incentives that they decreased about $5.7 million, while payroll taxes help in recruiting decreased about $1.2 million.

Our occupancy expense increased primarily from ongoing repairs and maintenance and our FDIC insurance expenses are significantly increased as credits that we utilized in 2008, we no longer have any credit as of the third quarter of 2008 to offset the increased assessments. And in our foreclosed and repurchased property expenses the increase bears the result of cost and valuation write-downs associated with certain non-accruing loans and foreclosure.

Speaking of One Webster initiatives, when you turn to page in the next slide we provide a little more detail about our One Webster earnings optimization program that we started in Q1 of 2008.

Note that this is an ongoing continuous improvement program as we continue to look for savings. We originally identified about $50 million worth of run rate improvement, about 80% on the expense side, 20% on the revenue side that we expect it will be fully implemented by the middle of 2010. At that time we said about 20% by year-end 2008, 75% by year-end 2009 and a balance by 2010 in mid-year.

Since then we have added another $16.5 million as part of a 60 day review in December 2008 where we centralize all the support functions within the company and tighten expanse of control which have had a material impact on staffing levels at all levels in the company. Again this is an ongoing process where we will continue to have periodic reviews to maintain and seek additional efficiencies.

Turning now to the selected balances slide, you can see our total assets declined in the quarter as compared to year-end. As previously mentioned, securities declined from mortgage backed and equity security sales during the quarter. Loan balances declined $93 million due to decline commercial and consumer loans which were offset by increases in residential and commercial real estate.

Our deposits increased $810 million due to the increased focus on our deposits first strategy across all channels and included strong growth from our government finance unit, our retail branch network and in held savings accounts, and they now represent 105% of loans. Deposit inflows were primarily used to pay down FHLB advances which declined by $665 million and also repo’s and Fed funds declined $424 million.

We will now turn and take a look at the investment portfolio on slide 11, here the components of our $3.7 billion investment portfolio, there are really no significant changes from the prior quarter and next. Note that $50 million in unrealized gains in the HTM portfolio and the fact that the $110 million in unrealized losses in the AFS portfolio relatively the same as 12/31/08. Note that we have also elected not to early adopt FAS 157-4 in the quarter and we will do so in Q2 as required by the FASB. And as in prior quarters, note that we provided additional details on our website regarding the portfolio for your information.

Turning now to take a look at loans, total loans totaled $12.1 billion at March 31, 2009 compared to $12.2 billion at December 31. In the first quarter residential mortgage loans and commercial real estate loans increased by $121 million and $18 million respectively. While, commercial loans and consumer loans declined by $172 million and $37 million respectively. The decline in commercial loan balances is due primarily to out of market asset based loans declining by $92 million from year end and more than half of the decline in commercial loans noted above.

The discontinued liquidating portfolio of indirect home equity a national construction loans declined by $22 million from year end. We also provided a slide on our loan mixing yield. When you look at slide 13, you can see the both balance and the yields in the portfolio have declined.

As mentioned earlier, the full impact of the Fed rate reductions of the 175 basis points negatively impacted the yield on total loans this quarter. 68% of the CRE portfolio, 62% of the home equity portfolio and 61% of the commercial portfolio were adjustable. So, declines in LIBOR and prime affected each of these making it more understandable why yields declined in each of these loan segments in the quarter.

Looking now at our residential portfolio, you can see that 80% is in footprint and approximately 45% of the portfolio was in jumbo mortgages, about 54% in Conforming. We have no option ARMs and minimal Alt-A which is under $46 million. And our exposure to Fairfield County is approximately 15% of the total portfolio.

Also worthy of noting that the permanent NCLC segment within the residential declined to $50 million at 3/31/09 which is down from $59 million we've reported at 12/31/08 about $7.5 million in payouts and about $1 million in write-downs in that specific segment.

Turning to take a look on slide 15 in our commercial non-mortgage portfolio. This consists of middle market, small business, insurance premium finance and segment banking.

Contained in this category are our core-in markets small business and middle market customer relationships. Non-accruals here increased about $32 million in the period to a total $65 million. Of the $32 million increase in non-performers about, $18 million is related to three publishing credits. The remaining $14 million increase is attributable to four other middle market credits.

Looking at our equipment finance portfolio. This is the national granular portfolio consisting of five industry segments: Transportation, construction, environmental, manufacturing, and aviation. The overall portfolio declined slightly from year end.

Looking at the asset quality stats specific to this business, we have seen increases in delinquencies in non-performing loans here, which we expect given the challenging economic environment and the result that this has on small businesses. Overall we know that business lines performed relatively well in prior downturns.

Looking at asset base lending. The next slide you can see there were significant reductions in commitments and outstanding balances in both 4Q of '08 and in the first quarter of 2009.

The portfolio continues to have a strong collateral base and the team here proactively monitors collateral values and advance rates. The increase in non-performing loans in the quarters here are related to two credits, one manufacturing and one retailer and we are working toward resolution on both.

On slide 18, you can see our commercial real estate portfolio continues to perform well with modest delinquency, non-performing and charge off levels. This portfolio consists of investor CRE and owner-occupied. It's well diversified by product, geography and property type. We have got modest retail exposure and our team continues to actively monitor maturities, vacancy rates and leasing activity. This portfolio grew only $20 million in the quarter.

Our intent is to continue to be very, very selective as we evaluate any opportunities in the future periods.

On slide 19, we focused on our residential development portfolio and here this portfolio declines to $155 million as of March 31 driven by $5.6 million in pay downs during the quarter.

Note that absorption remains slow although we have seen sales activity picking up recently. And during the quarter, non-performers increased $5.5 million to $54 million due to the addition of $6.6 million relationship.

In the performing portfolio there are only three remaining residential relationships that have aggregate exposure greater than $5 million.

We will turn now to take a look at our consumer portfolio. This portfolio is about 99% home equity of which 38% is in home equity loans, 62% is home equity lines.

Our utilization is about 49% of March 31 compared to 48% at year end. About 82% of this portfolio is in footprint and 19% of the home equity portfolio is in the first lean position.

We have also included the updated weighted average FICO and CLTV and both are which are relatively unchanged from year end. In addition, our exposure to Fairfield County this particular portfolio is approximately 16%.

On slide 21, we will take a look at our discontinued liquidating portfolio which consists of about $267 million of home equity and $13 million of national construction loans. We saw a $22 million decline in first quarter of 2009 including about $8.6 million payoff activity.

About $10 million worth of charge offs was specific to home equity segment. We have our reserves at about $44.4 million of which $40.3 million is for home equity and $4.1 million is for the national construction portfolio. For total coverage of about 15.8% at March 31.

On the next slide, we provide a view of asset qualities and some key ratios over for the portfolio and a discontinued liquidating portfolio overall. So you can easily see the impact this discontinued segment has had on our totals when you take a look at this slide. I also want to give you a couple of other statistics that were also included in the press release tables.

Our total non-performing loans were about $316 million, or 2.61% of total loans in March 31st, compared to $233 million, or 1.91% of loans at December 31. This increase in non-performers was primarily attributed to increased non-accruals and commercial loan categories of about $58 million, the details of which we have just reviewed and increased non-accruals of $14 million of residential loans and $12 million in consumer loans.

Note though that our past due loans for the continuing portfolio has declined to about a $112.8 million at March 31 of '09, compared to $118.4 million at December 31. And also past due loans in the liquidating portfolio also declined to $12.2 million, compared to $20.1 million at December 31 of '08.

I will just turn now to slide 23 and take a look at deposits. And as Jim mentioned, we focused everyone in the company on having a deposits-first view as we believe our primary roles as a regional bank is to directly gather deposits for the purpose of self-funding our loan activities.

In the first quarter of 2009, we generated over $800 million in deposit growth, specifically in money market, savings NOW and demand deposit accounts, which increased $439 million, $215 million, $134 million and $37 million, respectively, while certificates of deposits decreased $39 million.

And you can see on the next slide, while growing deposits, it's important to not achieve this through aggressive pricing. Here you can see that the costs are lower across the board and especially in money market, where cost declined 59 basis points from 198 to 131 quarter-over-quarter.

Overall, we have achieved a reduction in the cost of deposit of 16 basis points. And with CD maturities in coming quarters, we have an opportunity to lower our cost to deposits further. Our core deposit ratio improved to 62%, and this is up from 59% at year-end, while our loan-to-deposit ratio also improved to 95%, compared to 103% in year-end.

Turning to slide 25, you can see that here we outlined the diverse sources of liquidity that we have. And again, during the quarter deposits grew in each channel and we provided the first quarter growth totaling up to $810 million here.

We've got very strong cash management services in our organization, and these services have been very well received in the market. We believe we can compete with any player in the market as the local entry and we continue to see progress in that regard.

Additionally, you can see here that we have availability from wholesale sources of about $4.3 billion in capacity. And from a holding company perspective, we have about six years worth of cash needs available at the holding company.

I will now turn it over to Jim to comment on capital and provide some closing remarks.

James Smith

Thanks, Jerry. I pretty well covered the capital ratios in my earlier remarks. Suffice it to say that our ratios are quite solid. In fact, our regulatory ratios run from a 144% to 200% of the requirement for well capitalized, putting us among the best capitalized Federal Reserve bank holding companies.

And as I said, tangible equity increased in the quarter to the highest levels since the early 1990s. I would like to conclude with some remarks reiterating the highlights of the quarter.

One; we continue to aggressively identify our credit issues and maintain strong loan loss coverage. We are realistic in estimating credit losses and set our provisions well in excess of the amount of net charge offs.

As the recession has deepened and credit has deteriorated, our reserves have tracked almost dollar-for-dollar against rising non-performing loans. Two, our capital position remains rock solid, both in terms of tangible and regulatory capital, even in the pessimistic scenarios run by multiple respected analysts, Webster's capital ratios remain more than sufficient to see us through the credit cycle.

Three, we are leveraging our strong customer relationships and our brand to grow deposits. In the first, our loan-to-deposit ratio dropped to 95%, reducing our need for wholesale funding.

And four, our One Webster earnings optimization efforts are on track to deliver total earnings enhancements and cost savings of $66 million all-in by the middle of next year, but only about half of those have been realized to-date.

My final point is that Webster boasts solid pre-provision earnings power that will help us emerge from this credit cycle with the strength and momentum needed to seize the opportunities that lie ahead.

Thank you for participating in our call this morning. Jerry and I'd be pleased to take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions).

Our first question is coming from Ken Zerbe with Morgan Stanley. Please state your question.

Ken Zerbe - Morgan Stanley

Thanks, good morning.

James Smith

Good morning, Ken.

Ken Zerbe - Morgan Stanley

I guess, probably my hardest question for you guys. Can you just tell us why it's been so hard to reserve correctly for your discontinued portfolio? Its been three quarters in a row of additional reserve build or provision expense here. And I think it’s one of the good things about these portfolios is you were able to isolate from the rest from the continuing portfolio and say here is the reserve but it just doesn’t seem that things are working out the way you had expected?

Jerry Plush

Hi Ken its Jerry. In response to your question I think over the past several quarters what we have noted is we did add to I believe in Q3 about $5 million, another $25 million or so in the fourth quarter and again here in this quarter. What we are looking at is a go-forward of expected charge-offs over a respective time period and we have adjusted it now to the tune of being able to look at as you can see here, we basically reported just about what we charged-off in the quarter and the reserves that we have up you could take a look over say a perspective 12 month period in terms of our expected views on the ROE rate and say that that’s about what we have got in reserves.

We closely monitor this portfolio, it’s being worked very hard and I think that we have isolated the specific segment in there and I feel pretty confident that it’s not going to be a reserved position that you can look at and say we have won and done. So, we are not treating this in the same way that we looked into permanent NCLC portfolio where we looked at the balance of the NCLC construction, it's the true construction in process that was left there.

So this one’s going to be a portfolio that we continue to add to in future quarters and what we want to try and do is make sure that people see that you can slip between what we are putting up against that particular discontinued segment versus what we are doing against the ongoing portfolios going forward.

Ken Zerbe - Morgan Stanley

Alright, so you have 12 month going forward essentially the provision that you put up in each quarter, essential reflects the loss expectations for the 5th quarter out if I am understanding that correct.

Jerry Plush

Yes. And basically that's our thinking at this point in time. Obviously that's subject to change but I will tell you that we are doing this now from three quarters in a row and I feel this will be the practice that we’ll use specifically for this segment.

Ken Zerbe - Morgan Stanley

Understood. Okay. And then I guess on the deposit growth, obviously you had a very strong deposit growth but it seems that almost every bank across the country regardless of region is also having phenomenal deposit growth. Maybe you can take a step back, if you have any comments on what is just driving system-wide core deposit growth?

James Smith

Sure. I will make a comment that people are saving more than they have in a very long time. People have gotten much more conservative. I think people also see the strength and stability and safety in their local banks and so perhaps there has been a bit of benefit from that as well. And we would like to think that we done a good job, we take your banking personally brand and getting that out into the markets with all our proactive marketing programs with the particular expertise that we have whether you are talking about in the government finance or an HSA bank or all the cash management services that we offer in commercial and small business banking and our proactive marketing programs in the retail bank. We think it’s all coming together at a time where customers are more inclined to be savings so such that we are deriving a significant benefits.

Jerry Plush

Hey Kevin, it's Jerry. What I think it's different to add to Jim's comment is that you can see that our deposit growth is spread over all five channels. And I would say that I think what you see in most banks across the country is clearly the change in consumer behavior to much more of a saver mentality, what we clearly are seeing in Webster is the push and the additions to staff and the focus both in the commercial sides, so in commercial and small business.

HAS I think this is clearly the season and you can see that quarter when you look at Q1 of 2008 versus Q1 of 2009, we have had fairly comparable growth there, so again another very solid performance. Clearly we have been making some good inroads in the government finance business and picking up good core relationships there, so we feel good that what’s different about Webster is the diversity here that you see is coming through all five channels as opposed to really being more consumer specific in terms of the higher savings rate that Jim has mentioned.

Ken Zerbe - Morgan Stanley

Alright, great. Thank you very much.

Operator

Our next question is coming from Mark Fitzgibbon with Sandler O’Neill. Please state your question.

Mark Fitzgibbon - Sandler O’Neill

Good morning.

James Smith

Good morning.

Mark Fitzgibbon - Sandler O’Neill

Guys, you gave some updated LTV’s on page 14 of your slide presentation. Are those based upon new appraisals or is there sort of a model that helps you arrive at those new average LTV’s?

James Smith

Mark, you are referring to in the residential portfolio?

Mark Fitzgibbon - Sandler O’Neill

Exactly.

James Smith

These are updated Case-Schiller indications of value, we run those at least quarterly and are very consistent with way we have recorded things and Q4 I think also in Q3, you are just getting the full update that we run the entire portfolio both for updated FICOs as well as the updated multi-values. So we feel fairly consistent quarter-over-quarter, little bit of differentiation here, very-very tight in terms of both FICO and CLTV when you look at the consumer portfolio virtually the same number quarter-over-quarter.

Mark Fitzgibbon - Sandler O’Neill

And then in the CNI portfolio, you had (inaudible) in non-performing loans. Was there any particular industry concentration or was there one large loan that accounted for that increase.

John Ciulla

Hi Mark, this is John. Jerry referenced in his comments in the CNI non-mortgage we had three publishing credits all each individually less than $10 million, an exposure that represented half in that category across all of CNI including our national businesses. We had a couple of credits in WBCC and then the remaining were smaller credits embedded in the middle market divisions across the footprint. So, it really was kind of a cross CNI generally. Good news was there weren’t any significantly high single point exposures in that group.

Mark Fitzgibbon - Sandler O’Neill

Okay, and then John within the company’s footprint are there markets that you think are doing meaningfully better or worse. I mean where would you say the hot spots are?

John Ciulla

Now if you think about our footprint and you look at our business and professional banking and core middle market performance across our geographies Massachusetts, Rhode Island obviously in Connecticut and down into Westchester there has not been, even though you can talk about unemployment in Rhode Island being sort of an outlier in the group. There is nothing in our performance metrics geographically within our footprint that would indicate that any one area is doing particularly better, particularly worse than any other.

Mark Fitzgibbon - Sandler O’Neill

Okay. And the last question I have and it's not really an easy one to answer but can you help us think about the provision over the next quarter or two.

Jerry Plush

Yes, Mark, it's Jerry. I think the view that we have certainly not just this quarter but in the next quarter or two, is we believe in this market just given the uncertainty that you are going to continue to see as worker provision that is in access of what we charge off. We believe that having a very strong allowance is critical to provide some safety net here for and also gives you a gauge of how the management team here, specifically the line of business leaders and the lenders working very closely with the credit risk folks at really assessing risk across the portfolio.

So, without really giving a number, I can just tell you that our view is, this year in particular more than ever its important to understand that we will continue to be taking a look at, what's happening across the footprint, what's happening across each of the segments continue to trying to figure it out, if there are any emerging hot spots and be very, very proactive in trying to address those.

Mark Fitzgibbon - Sandler O’Neill

Thank you.

Operator

Our next question is coming from David Darst with FTN Equity. Please state your question.

David Darst - FTN Equity

Good morning.

James Smith

Good morning, David.

David Darst - FTN Equity

Could you go over some of the activity within was the preferred portfolio, on supplemental page number 3, it's like the fair value increase significantly in sort of the amortizing cost.

James Smith

David what's happen during the quarter, if you do a comparison, well on that particular slide is there a number of downgrades that have taken place within the quarter. So it's very difficult from a comparability standpoint to take a look at last quarter versus this quarter because of the significant level of downgrades that we either saw with these securities either whether it was S&P or Moody's.

So the big thing I think that we did during the quarter and I think that we certainly looked at upgrading our modeling capability to do a lot more detailed credit works split apart from trying to understand what was credit related versus what was liquidity related and our views which by the way I just want to state very factually, we are within several million dollars of what Moody's would tell you values would come out at in and looking at our CDO portfolio. Clearly the income of those values are nearly zero, I think we have actually stated the map way on the schedule.

And we continue to see deterioration because of the downgrades that a lot of the big single issuers even had during the first quarter of the year, virtually all the good single names there where downgraded either to BBB or further to below investment grade.

So, really not a big there is a change within the components in terms of how we look at it from value there are certainly a lot of moving parts as it relates to downgrades that took place overall net net we are really pretty much in the same position, where we were fourth quarter in terms of looking at this from a market valuation standpoint versus the fourth quarter.

David Darst - FTN Equity

So, considering the downgrade you anticipate that as you change your mark-to-market accounting that there will be any material differences in the credit related?

James Smith

No, I think, the biggest issue to take into account is that these securities are consistently being reviewed there is more information coming out about all these financial institutions all the time. So, in any given security you could have a material change depending on who, how material that issuer is within the security, they can change your credit rating. I would have to say that we have certainly done an awful lot of our own credit work. We have taken very conservative views as it relates to credit and taking that certainly into account we have come up with evaluations.

I think that's why when you look at this quarter in particular and were our values came out versus the fourth quarter clearly the benefit of some of the prior action that we could take were reflected because a lot of the work that we had done previously unfortunately came about in the first quarter and the resulting downgrades that you see across a lot of these securities.

David Darst - FTN Equity

Okay and then could you give some outlook for the asset management portfolio where you have been reducing your disclosures?

James Smith

You know I'm going to give a broad comment but I’ll let John just continue to you know give you maybe a point or two from his view. But generally speaking we are not emphasizing the out-of-market portfolios at this time and our view is in particularly here the folks down at you know the work in ABL have done a very good job of managing down overall the commitments that they have outstanding in the market and working in their way through any customers that have had some issues. And clearly we have been very aggressive in working on the specific cases where we have had issues. And you know it’s really very much a planned activity that a lot of our folks are really in the assistance mode of springing overall commitments to commercial customers down where warranted and certainly affirming where we still continue to feel comfortable. So John, any thoughts to add to that.

John Ciulla

No I think that’s exactly right, a combination of just generally what’s going on in the business cycle with respect to inventories and receivables and lower outstanding. But also very aggressive proactive asset management to give you an indication over the last four quarters we have reduced single point exposures over $15 million in that business down from $42 units to 30 units and they have done a great job in a difficult environment managing the troubled or I shouldn’t say troubled but the adversely risk rated assets out of the portfolio before they have hurt us.

David Darst - FTN Equity

Yeah thanks.

James Smith

Great.

Operator

Our next question is coming from the line of Damon DelMonte with KBW. Please state your questions.

Damon DelMonte - KBW

Hi good morning guys. How are you?

James Smith

Fine Damon

Jerry Plush

Hi, Damon.

Damon DelMonte - KBW

Jerry, I think you mentioned part of the increase in non-performing commercial loans were due to out of market exposure. Could you just give us little color on what's you have for out of market commercial exposure?

Jerry Plush

Yes, Damon, I think my specific comments in the commercial non-mortgage was related to a number of publishing credits that went to NPL’s this quarter and everything else was there is another four credits for the $40 million that was attributable to market. I think John made the comment let me turn it to him to provide little more color again on those.

John Ciulla

Yes, the three publishing credits were out of market credits and resided in our old specialized lending portfolio, national syndicated portfolio. The bulk of the rest of the non-accruals we talked about were embedded in our core middle market and footprint business.

Damon DelMonte - KBW

And how big is that specialized lending there or national credit portfolio?

John Ciulla

We talked about it before the specialized portfolio that we talked about for years, We stopped originating in that business about two years ago. And we have less than $200 million in funded loans remaining and that book is largely attiring obviously with the state-of-the-capital market. It's not refinancing and (inaudible) as quickly as we had originally planned, but we are not originating and adding to that portfolio.

The rest of our sneak balance and sneak exposure in the bank is contained within middle market or within our national business and asset based lending or our segment business. But those are sneaks definitionally but their direct relationships where we have direct access to management and we cross sell products, private banking products to the bank it work to the corporation or cash management products. So there maybe a participation in the sneak transaction but they are in the context of a direct relationship.

Damon DelMonte - KBW

Okay. But you said it is about 200 where they were in direct relationship, alright?

James Smith

Correct, less then $200 million.

Damon DelMonte - KBW

Got you. Okay, great. And then Jerry with regard to the margin, could you tell us what the margin was at the end of March?

Jerry Plush

Yeah, Damon, we came up a little over 3, so what you are beginning to see is, it's going to take each month throughout the quarter to begin to see some of the benefits. So when we gave some previous guidance that we thought this quarter would be in and around 3%, we knew that was going to be difficult just given where we saw some of the non-accruals pop in, particularly in February and we started to see that level off and also see the effects of the deposits coming through in the month of March.

Clearly, what also should we taken into account when you think about our margin is, we have made the deliberate decision to minimize what we were funding overnight or funding short. So in the short-term that clearly is having some detrimental impact as it relates to the NIM.

But again, we are focusing on the strategic goal that we want to be totally funded and then some by deposits. So we think building the core relationships is clearly much more important throughout the course of this cycle than us just continuing to try and to tweak and pick up a little bit here and there from using more overnight funding.

Damon DelMonte - KBW

Okay, Great. And then just lastly, kind of sticking on the margin theme, could you tell us what the average yield is on the OTTIs that are going to be re-pricing in second and third quarters?

Jerry Plush

Suffice it to say that you know that they are going to be North of 3%, when you think of the portfolio. So I would like to leave that one fairly, generic, but you can get an idea that where several billion are coming through, and just depending on competitively where we price and also candidly where consumer preference is.

So awful lot of consumers that have much stronger preference for putting the money into savings now, in money market and the current markets, so I think if we continue to see transfers into those categories, clearly there is some benefit, the customer benefits from having obviously much more readily available accesses to their funds. So our view is that the way you can think about it is several billion over the next couple of quarters and a little over 3% when you think of the total on that portfolio.

Damon DelMonte - KBW

Okay, great. Thank you very much.

Jerry Plush

Sure

Operator

Our next question is coming from Amanda Larsen with Raymond James. Please state your question.

Amanda Larsen - Raymond James

Good morning

Jerry Plush

Good morning, Amanda.

Amanda Larsen - Raymond James

Hi. I wanted to see if it would be possible to obtain reserved ratios on a couple of the loan buckets i.e. the resi mortgage that's NCLC, also resi construction in residential. CRE construction, and also CRE for residential development?

James Smith

Yeah, Amanda, we don't provide that level of detail. And I think, we are going to continue to abide by that practice. I think we look at the portfolios clearly at that level of granularity when we set the reserves and the way we position it when we report in our public filings in a much more summary fashion and that's the level to which we are willing to disclose at this point.

Amanda Larsen - Raymond James

Okay, that's fine. But would you be able to break out what was resi constructions in residential, and what was CRE construction and CRE, because I think you do, do that in a Q usually.

James Smith

Yeah. I think as it relates to residential, clearly when you look at what was the permNCLC and you look at what is in national construction, we are probably at about a $9.4 million reserve against that remaining $50 million balance, and outstandings in the permanent national construction loan. Those are completed homes, we've got clearly we have had seen some activity in terms of pay downs and a little bit a charge-off in the quarter. And then international construction portfolio were just a shade over $4 million left on about $13.2 million in outstanding balances.

Jerry Plush

And that reserve is established on a file-by-file review. It's a small enough portfolio that it's easy to really get granular around how we establish the reserve.

Amanda Larsen - Raymond James

Okay. Are you able to breakout just the actual size of the portfolio on what is residential construction, the regular resi construction out of the residential portfolio?

Jerry Plush

Yeah.

Amanda Larsen - Raymond James

Sorry?

Jerry Plush

Are you referring to residential development contained in commercial real estate?

Amanda Larsen - Raymond James

No, I am referring to residential construction in residential.

Jerry Plush

Outside of MCO, the numbers are de minimus.

Amanda Larsen - Raymond James

Okay. And then do you have the size of the portfolio for CRE construction that is just for commercial real estate, not for resi development?

Jerry Plush

Yeah. Commercial real estate, the construction exposure is about a $141 million contained in our investment CRE portfolio.

Amanda Larsen - Raymond James

Okay.

Jerry Plush

Which is about $1.47 billion. That's the investment CRE portfolio, which is contained in the slides here in the CRE, or just over $2 billion of total CRE exposure. So $141 million would be the construction amount.

Amanda Larsen - Raymond James

Okay. That's all, thanks so much.

Operator

Our next question is coming from Matthew Kelley with Sterne Agee. Please state your question.

Matthew Kelley - Sterne Agee

Yeah, hi. Just a couple follow ups on commercial real estate. Just wondering if you can give a little bit more detail or some of your insights and what you are seeing for pricing supply, vacancy, NOI trends maybe a breakdown of the average class that you hold in A and B, and also the percentage in Fairfield County similar to what you provided for the residential and home equity?

Jerry Plush

Yes Matt why don’t I do this, we will have John give you sort of an overall comment on all of that, we are not going to necessarily be able to get into all of that level of detail. But basically when you think about our three portfolio, John, so you can get some type of views in terms of what we are seeing in breakouts of Class A and B, etcetera.

John Ciulla

In investment credit?

Matthew Kelley - Sterne Agee

Yes.

John Ciulla

I would say, obviously we have been very comforted by the performance in the portfolio. We have got a very strong management team, and it's an institutional like real estate portfolio. In fact yesterday we just completed a full file review of the 50 top exposures which represent 50% of our outstandings. We clearly see coming down the road and working with management and credit risk aligned. Pressure obviously on NOY and leasing activity, what could ultimately be valued deterioration in our market as we have seen in other markets.

But so far with respect to our portfolio, as you see in the statistics we have shown, we really have minimal delinquencies, virtually known non-accruals and the cash flows because we underwrote pretty consistently at debt service coverage is above 1.4 times and LTV is generally below 65%. We still feel even with the changing metrics while we are obviously concerned and we take all of the trending in the consideration on our reserving on our portfolio management, we still feel pretty comfortable with where we are right now in this part of the cycle.

Matthew Kelley - Sterne Agee

Okay. Give a percentage in the Fairfield?

Jerry Plush

Yes, Matt I think as you think about the residential development portfolio, we have got about $35 million that’s in Fairfield. So, that $107 million we report on the res-dev side. You can think about that and thats spread over about 20 different projects.

John Ciulla

Yes, I don’t have that number right off hand but that’s something that I can get back to broader group with.

Matthew Kelley - Sterne Agee

Okay. And then question on the FDIC deposit insurance premiums, what was the gross number last year before your credits. Could you give us a sense of where you were on a basis point level?

Jerry Plush

Yes, Matt, what I will do I will have Terry get back to you specifically on that and then provide anyone else who's guided interest. No problem we will get back to you.

Matthew Kelley - Sterne Agee

Okay. Alright, thank you very much.

John Ciulla

Thank you, Matt.

Operator

Our next question is coming from Collyn Gilbert with Stifel Nicolaus. Please state your question.

Collyn Gilbert - Stifel Nicolaus

Thanks. Good morning, guys.

John Ciulla

Good morning.

Collyn Gilbert - Stifel Nicolaus

Just a follow-up on the question on this SNC portfolio, John, you had said that just less than $200 million was funded, what's the portion is unfunded?

Jerry Plush

Hi, Collyn it is Jerry. What John said was there is what we refer to over a period of time as a specialized lending in that portfolio itself is in an around $200 million. So, John if you could give a little more color specific to that.

John Ciulla

Yes, I don’t have the exact dollar on that portfolio. I think that portfolio runs about 60% to 70% funded so you can extrapolate what the commitments would be on that remaining specialized portfolio.

Collyn Gilbert - Stifel Nicolaus

Okay, that’s helpful, thanks. And then just a few quick questions, Jerry, if we look at the expense side and we know we back out the one-time items that you posted this quarter. So, are we looking at a run-rate, should we assume a run-rate going forward of about $112 million is that still a good number?

Jerry Plush

Yes, Collyn are you including the repo expenses. Tell me a little bit about what’s that?

Collyn Gilbert - Stifel Nicolaus

I just backed out of foreclose, the REO, the direct investment and then I think you said there is like 200,000 some odd of one initiative.

Jerry Plush

Yes, what you are going to see is that number declining quarter-over-quarter. So, you will continue to see remember the phasing of One Webster, you are probably looking at a number that's closer to 113 for Q2, 112, 110. So, you will continue to see declines quarter-after-quarter as those ideas come in. so the timing of ideas is really important. So, from a perspective of, I am not going to be able to give you some, a fairly smoother contested number. You are going to continue to see those benefits working the way through the numbers.

Collyn Gilbert - Stifel Nicolaus

Okay. Alright that's fine. Let me just jump back to the SNC portfolio. And John, I think you ran through this in sort of general terms. So just wondering if you could get a little bit more specific on how much of within your total portfolio is actually sort of Fed defined as SNC and I know you separated between your direct relationship versus not, but as the Fed would define it as shared national credit, do you know what the size of that portfolio is?

John Ciulla

It's about $867 million funded, $772 million of that is across C&I with the balance being in investment commercial real estate. And again if you take the delta between just under $200 million we talked about in the specialized portfolio which is sort of the legacy of the purchased paper, the rest of it is spread across the various middle market lending groups with in market larger companies, our segment lending group, commercial real estate and nationally through Webster business credit. All under the general confines of their being direct relationship and not just buying deals off of some syndicators desk, but actually having direct calling efforts on the company before choosing to participate in a SNC.

Collyn Gilbert - Stifel Nicolaus

Got you. Okay, alright that’s helpful. And then just in terms of tax rate going forward which might tie in then to my question which I know, you unnecessarily don't give earnings guidance, but just sort of conceptually here any sense of when you all expect to return to a profit. And then may be that can help me determine what the tax rate we should use going forward would be?

Jerry Plush

Yes Collyn, for calculation purposes, we continue to stick by the 27.5%, in terms of return to profitability, it’s a function of where we are going to be as it relates to, as I mentioned earlier in the call what we are going to report quarter-by-quarter. We are going to continue to look at our pre-tax, pre-provision. We are going to record what we need to record in any given quarter based on how we assess Views. You could be thinking about a rate it goes as well as 20% in next couple quarters as well as we tweak through a few things. But we stuck with the 27.5 and I would tell that we are probably going to trend closer to 20% in the outer quarters.

Collyn Gilbert - Stifel Nicolaus

So then that would indicate profitability than, it should somehow should be achieved than in the next couple quarters right.

Jerry Plush

You are going to continue to see what we planned is that we have got some level of growth, the restoring of more normalized fee levels and continued reduction in expenses. So, I think I have given you a kind of the road map that you will see, expansion in net interest income you would see some better non-interest income, you would see some better non-interest expense. So all the right components are in place to show that we should have better pre-tax, pre-provision earnings on a go forward basis.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay that was all I had. Thank you.

Jerry Plush

Sure.

Operator

Our last question is coming from James Abbott with FBR Capital Markets. Please state your question.

James Abbott - FBR Capital Markets

Well hey, good afternoon or good morning and I feel honored to be the last question. Hey real quick on the equipment finance. I am curious to understand a little bit of your experience on collecting on the value of assets and what you have seen in the change of value there and maybe give us a little bit of detail on the underwriting standard. So we just, just to frame it a little bit what the original loan value is, I know it’s usually pretty high but maybe tell us what Webster does and then again what you are seeing as you try to liquidate collateral there?

Jerry Plush

Yeah this is Jerry and then obviously John is going to chime in and give some tidbits as well. But you know high level clearly this is a really seasoned team. They have been through a number of cycles. They certainly are seeing just as much challenge as anyone else given current market conditions.

One of the clear issues that you have got to grapple with in the equipment finance arena is that there has got to be a ready market to buy this what you have got to either repossesse in order to get yourself initially your full recovery.

Remember that in a lot of these cases virtually I think in all cases you have got personal guarantees. So ultimate recovery in the equipment finance business I think we still feel really strong and solid about, the issue is in the short-term. What we should be looking at as we take equipment back in if you were to look at the market there is certainly soft spots in some of the segments.

So you know right now we would tell you that the transportation segment looks pretty good, is performing fairly well, we are starting to see some stronger things going on in vis-à-vis construction. So it really depends I think there are certain smaller segments within the portfolios. We are depending on the specific type of equipment so little bit more troublesome to try and work your way through those but again that’s to be expected just depending on as you start to see any type of recovery or resurgence in some of these particular industry segments. It’s all about supply and demand and there is a fair bit of supply in the market.

So from our perspective as we take things in to repossessed equipment, we are certainly going to be taking probably harder looks at what we should do to take that into account as opposed to having to take any type of write downs on the other side of it.

So and I just, John, any additions to that?

John Ciulla

No, I think Jerry covered the issues with respect to liquidity in the market on the equipment. I think from an underwriting perspective it's difficult to be really specific because they do, look its not a leasing company, it's a finance company and vast majority of overwhelming majority of outstanding are funded loans and their cash flow lenders, collateral value lenders and then as Jerry said most of the transactions have credit enhancement, through personal guarantees.

So, I think the LTV ends up being a function of the level of the relationship, how seasoned it is, the type of equipment, what the strength of the guarantors are, the average life of the equipment, the tenor of the facility.

So I just think they had a long track record over 18 years of sort of executing through cycles and really being able to specifically underwrite our borrowers and the equipment at the appropriate LTV levels.

James Abbott - FBR Capital Markets

Let me maybe try a little different approach because of the and I do appreciate the color generally speaking but if you look at the charge offs of $1.9 million what was the face value of those loans that was charged off loss given the fall if you will on that this particular quarter?

John Ciulla

Yes, I don not have that number right in front of me but I will also tell you it's difficult with the way we recognizing loss and obviously. And then we still have time for ultimately recovery to go after the guarantors. The charge off numbers that are posted in this period may not reflect the ultimate loss given default on a particular credit and I can tell you specifically on what's in this quarter, we have significant identifiable recovery available against that charge-off.

James Abbott - FBR Capital Markets

So tell us how you charge, what's your methodology to charge-off fee, so you charge-off very aggressively upfront then I assume.

Jerry Plush

Yeah. James, this is Jerry. Yeah, I think that was kind of what I was alluding to is that we have been looking at recover the value of the asset in terms of recovery, coupled with the strength of the guarantees that we have for the underlying borrowers, as basically we are trying to resolve the credits simultaneously. I would say, the situation where some resolution of whatever the shortfall would be use the guarantee from the borrower,

We are now shifting our view specific in this business just giving the market changes and liquidity for the assets sales to be more on reflective of that before they get transferred into repossession as opposed to at repossession or subsequent to repossession. I will call subsequent to repossession. And I think that's a little bit of a subtle shift for us as an organization. And again, we are just being responsive to what we are seeing in the marketplace.

James Abbott - FBR Capital Markets

There is not a lot of ownership or foreclosed property and that kind of thing in our OREO balance was associated with as you are charging most of that down, upfront and then repossessing and than recollecting on the backend?

Jerry Plush

I mean the bottom line is, we fair value what we repossess. And specifically in a lot of these small and lot of these particular in a equipment finance a lot of the stuff we are talking very small dollar amount. So it's a pretty consistent practice that we will be following in 2009, in terms of how we are going to make sure that we are very consistent in fair valuing upfront reflective of current market conditions in inventory levels, because I think that’s the big difference of what you could have seen in a repossession say back in the third quarter of last year to a repossession that may be taking place in Q1 or had taken place in Q1 or taking place in Q2 of 2009.

James Abbott - FBR Capital Markets

Okay. And then real quickly to recap what you mentioned on the 30 to 90-day delinquency number there. Was it a granular amount there that caused that increase, or was it one or two specific loans?

James Smith

In CRE in particular?

James Abbott - FBR Capital Markets

Yeah. I am sorry on slide 16, so I am not sure the brand name of.

James Smith

It's granular.

James Abbott - FBR Capital Markets

It's granular?

James Smith

I mean we are seeing increases in delinquency, and this is also seasonally first quarter’s high watermark. But also obviously, what's going on cyclically is driving higher delinquencies.

James Abbott - FBR Capital Markets

Okay. All right, thanks and best of luck.

James Smith

Thank you.

Operator

There are no further questions at this time. I would like to turn the floor over to management for any closing comments.

James Smith

Thank you again for being with us today.

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