Webster Financial Corp (WBS) 2012 Q1 法說會逐字稿

Greetings.

Good morning, and welcome to Webster Financial Corporation's first-quarter 2012 results conference call.

This conference is being recorded.

Also, this presentation contains 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, and business and financial performance.

Webster has based these forward-looking statements on current expectations and projections about future events.

Actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the first quarter of 2012.

I'll now like to introduce your host, Mr.

Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Good morning, everyone.

Welcome to Webster's first-quarter 2012 earnings call and webcast.

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

I'll provide highlights on the quarter and comment on strategic initiatives.

President and COO Jerry Plush will discuss loan growth and asset quality, then CFO Glenn MacInnes will review the quarter's financial results, after which we'll take your questions.

I hope you had a chance to read my letter to shareholders in the 2011 annual report, since it lays out our strategies clearly, and we will be reporting on our progress toward achieving them today.

In short, we believe the regional bank model is on the rise, and our plans for adapting in a rapidly changing environment will enable us to thrive as a strong community-focused regional bank.

Few banks today, including Webster, are earning their cost to capital.

Though we're headed in the right direction, and slightly exceed the median for our peer group, our return on average shareholders' equity was only 8.3% in Q1, and 11.65% on average tangible capital.

In order to improve returns, given market and regulatory forces, we're making changes to our business model.

The new normal requires that we configure our businesses and operations to generate positive economic returns in less than ideal macroeconomic conditions, and our strategies are geared accordingly.

By doing this well, we will achieve our goal to be a high-performing regional bank.

Our first-quarter results shows that some of our strategic investments are beginning to pay off, as we reported continuing solid performance, pretty much across the board, resulting in net income of $0.42 a share, up 14% from a year ago.

Our pre-tax pre-provision earnings exceeded $60 million, up nearly 4% linked quarter, and nearly 9% from a year ago.

Net interest income and non-interest income both grew linked quarter and year-over-year, driving total revenue higher by over 2% in each case.

Expenses rose linked quarter due to seasonal factors, which are primarily compensation-driven, but declined year-over-year.

The resulting positive operating leverage pushed the efficiency ratio down nearly 2 full points year-over-year, underscoring the progress we're making in our quest to achieve a 60% ratio.

These positive trends reflect our success in growing relationships, particularly with businesses, despite modest economic growth in a competitive market.

Jerry will report later on strong originations, loan growth and robust pipelines in our key relationship businesses.

Jerry will also cover asset quality in more detail.

Suffice for now to say that we continue to experience steady improvement in credit metrics.

Our proactive efforts in the early identification and rapid resolution of problem credits have contributed to our good performance.

Turning to net interest margin, we're pleased with the only 3-basis point decline from Q4 to 3.36%, which reflects efforts to reduce deposit costs in line with declining loan yields.

Intense pricing discipline, coupled with growth in earning assets, pushed net interest income higher by $2.4 million linked quarter.

Noteworthy is that the duration of the securities portfolio is less than three years, and we remain slightly asset sensitive.

Fee income in the quarter benefited from robust mortgage banking activity.

Gain on sale income jumped four-fold from Q4 to $4.4 million, as our expanded sales force produced more loans that were sold at higher gain-on-sale premiums in the quarter.

Higher wealth management fees also contributed to improved non-interest income.

Transaction account deposits grew nearly 5% from year-end, and are up more than 16% from a year ago.

These low-cost deposits now comprise 38% of our deposit base compared to 32% a year ago.

The positive results reflect in part another strong first quarter from our HSA Bank division.

Webster's good Q1 performance comes against a backdrop of a moderately expanding economy.

The Fed's most recent Beige Book paints a picture of a regional economy where retailers, manufacturers and the service sector report higher revenues.

The housing market continues to retrench, with sales rising and inventories falling, and the fear factor around housing prices seems to be receding.

Overall, southern New England's housing situation remains more positive than the nation's.

Three of the four states in our footprint -- New York, Connecticut and Massachusetts, have regained sizable numbers of the jobs lost in the Great Recession.

The growth in productivity of the regional economy, already a national leader, is expected to continue to outpace the nation, which bodes well for higher income growth in our markets.

Turning now to slide 3, I would like to update you on our progress in executing the strategic priorities we laid out in the annual report and in earlier earnings calls.

We're actively endeavoring to alter our business model, change our product offerings, and shift our customer segmentation and marketing.

More specifically, we've been moving investment from physical to electronic infrastructure, especially in the consumer bank, and to building deeper, more profitable relationships with customers across the Company.

Key areas to watch for strategic growth are middle-market and small-business banking, commercial real estate, mortgage banking and especially jumbo mortgage lending, private banking, and Treasury services.

We've also committed to achieve a 60% efficiency ratio, and we're investing capital in looking to organize our analytical resources around improving our profitability measurement and modeling capabilities as regards product, customer and business-unit profitability.

These profitability tools will help us to make better choices that will produce better results.

Electronic infrastructure investment includes the accelerated investment we're making in our ATMs.

Thus far, we've enhanced 16% of our 253 deposit-taking ATMs with automated deposit image-capture technology, and we're also converting the ATMs to enable touch screen convenience starting this quarter.

Already we're seeing higher transaction volumes at these upgraded ATMs, a sure sign that consumers and small businesses like what we are doing.

Completion of all upgrades is expected by year-end.

Last month, we launched eChecking, a low-cost product for both customers and Webster, designed for those who prefer to conduct their banking using electronic channels.

The eChecking product rounds out our checking products line-up, which collectively offers value for balances, behaviors or cost.

Our plans are to roll out remote deposit capture for consumers, and a new mobile banking app, as well.

Consistent with these enhancements, we're implementing a new retail fee schedule, which better reflects the convenience and value we're delivering customers.

In the commercial bank, we're growing our key middle market, industry segment and commercial real estate businesses by attracting seasoned, relationship-oriented bankers, and appealing to a growing preference among consumers, customers and prospects to partner with a strong values-driven regional bank.

We've also created a new Treasury Services Group that brings together all of our cash management services, and features up-to-date automated capabilities that will enable us to best meet our customers' cash management needs.

We've recruited an industry leader to lead this function.

In Consumer Finance, we've added proven talent to the sales team, and increased our focus on jumbo mortgages as key to relationship building with higher net worth clients.

Our sales force of originators has nearly doubled to 70 since we announced the initiative last year, and about half of the first mortgages originated in Q1 were relationship jumbo mortgages.

We will soon be announcing a new loan jumbo origination relationship with one of the region's leading retail real estate brokerages.

We recently entered into an agreement with a new credit card provider that will deliver a more appealing value proposition for our customers, and better economics for Webster.

For example, Webster bankers will be able to open credit card accounts for customers on the spot, and to accept payments on their cards.

The first quarter saw the beginning of the marketing push behind our newly launched Webster Private Bank, with its expanded cadre of experienced bankers.

We've doubled our ranks of private bankers, and now have more than 50 people overall working in the Private Bank wealth management group.

In Q4, we plan to open a dual private bank retail facility in Greenwich, Connecticut, where having a physical presence will fill an important gap in our ability to attract high net worth clients in that lucrative market.

Webster Private Bank is focused on the segment of the high net worth market that is just below the threshold of the industry leaders.

Our target customer is what we call the millionaire next door.

We expect to grow this business rapidly by providing always objective advice coupled with local, full relationship banking and investment services, primarily, at least for now, to our relatively affluent customer base.

And our HSA Bank division is beginning to see the payoff in its shift in focus to mid-sized employers, and differentiating value-added services.

In Q1, HSA's deposit balances of nearly $1.2 billion were 23% higher than a year ago, and we soundly beat plan by opening 52,000 new accounts in the January enrollment period.

Additionally, HSA has over $165 million in assets under management.

I want to make a few comments about capital management.

You can see from slide 4 that our capital position is strong and increasing.

We manage our capital so as to ensure that we have sufficient capital to support our businesses consistent with our risk appetite and our risk exposure, including under stressed conditions, while remaining a source of strength to the bank.

We have at least $500 million more capital at the holding company than required to be well capitalized by any regulatory ratio.

For the all-important Tier 1 common-to-risk-weighted assets ratio, we exceed well capitalized by over $800 million.

Our capital levels also exceed our more conservative internal targets, which means we have choices to make for deploying that capital.

We believe we are already compliant with Basel III capital rules, including the conservation buffer.

In that we are not designated as systemically important financial institution, we will not be required to carry as much of a capital buffer as the largest banks in our market, which could be an important competitive benefit.

With a tangible common equity ratio over 7%, and a Tier 1 common ratio nearly 11%, we have room to grow the balance sheet, and to increase exposure to higher risk-weighted assets that contribute to economic profits, provided, of course, the economy continues to improve.

Over the intermediate term, we expect the TCE ratio could move down to 6.5%, and the spread between TCE and Tier 1 common may move in toward 3% from the 3.75% to 4% range in recent quarters.

That means we can support meaningful loan growth at 100% risk weighting, an important consideration when thinking about improving returns on shareholders' equity.

We noted in our last earnings call, and in the annual report, that we'd soon be looking to return additional capital to shareholders through dividend increases.

We said we'd look to set the earnings payout ratio in the 10% to 20% range over the near term, which could rise to 30% over time.

Based on our continuing solid and improving results, we will ask the Board to consider an increase in the quarterly cash dividend at the high end of the near-term range when it meets next week.

We've also said that while the dividend increase would come first, we'd consider strategic stock repurchases, that we had no immediate plans to do so.

And we're still on that page.

No immediate plans, but given our desired capital levels, it's only a matter of time.

And while our primary focus is on executing our internal strategies, we're also paying attention to near-certain industry consolidation.

We appreciate that synergies gained in a fairly-priced merger are quantifiable, and highly valued in today's tough earnings environment.

I also want to be clear that while we welcome the opportunity to create a formidable regional banking franchise, if a combination doesn't increase economic profits to our shareholders, our name won't be on it.

I'll now turn the call over to Jerry for comments on loan growth and credit quality.

Thanks, Jim, and good morning, everyone.

So, if you turn to slide 5, here you are going to see that our overall loan balances total $11.3 billion, and it's showing growth of about $87 million or 1% linked quarter, and $304 million or nearly 3% year-over-year.

Our total originations in the quarter were $791 million.

It's down as expected from the seasonally strong fourth quarter, but 44% higher than Q1 of last year, with every loan category showing improvement, and the pipelines for commercial and residential originations are quite strong going into the second quarter.

More detail on that in a few minutes.

So, our commercial loans, exclusive of commercial real estate, grew $29 million or 1% on a linked-quarter basis, as growth in middle market, small business and asset-backed lending offset a decelerating planned decline of $28 million in equipment finance.

Our expectations continue to be that the equipment finance portfolio will begin to stabilize with some potential for growth in the second half of the year.

Year-over-year, our middle market and small business loans, which are at the heart of our relationship-building strategy, grew a healthy 16%, and originations were 40% higher than last year.

Our commercial real estate lending is another bright spot, with investor and owner-occupied CRE balances up about $41 million, or 2% on a linked-quarter basis, and $211 million or 9.5% year-over-year, with originations more than doubling year-over-year.

So, it's important to note, again, that the pipeline looks strong across the board going into Q2, ahead of where we were, heading into Q1.

The small business pipeline is stronger, and similar signs of strength are showing in the pipeline for middle market in CRE.

Turning now to residential first mortgages, they grew $50 million or 1.6% linked quarter, and $120 million or 3.8% year-over-year.

Our originations were down slightly from Q4, but higher year-over-year.

You can also see that our loans originated for sale were over $131 million, compared to $100 million in Q4 and $75 million year-over-year.

Continuing a trend that we've been reporting the last several quarters, consumer loans declined by $33 million or 1.2% on a linked-quarter basis and by $85 million or 3% year-over-year.

Our origination volumes have been relatively consistent here for the period shown, averaging in the $120 million to $130 million range each quarter.

Similar to commercial, the good news is that the pipeline in all three categories is up heading into Q2 compared to where we were in Q1.

So, overall, a pretty decent quarter for loan growth, with expectations for continued growth in the second quarter.

Let's turn now to slide 6, and here we will focus on asset quality, and we'll review the key asset quality metrics and trends.

We are really pleased to report further progress in all of the key asset quality measures this quarter.

So on this slide, we've got five quarters of information regarding nonperforming loans, REO and repossessed property, our past due loans and our reconciliation of nonperforming loans.

We've also added this quarter the commercial classified loan trend for the five quarters, as well.

And we'll talk more on that in just a few minutes.

So, let's start with nonperformers.

They declined $9.8 million in Q1 or 5%, and the decline from a year ago is $83.6 million or 32%.

A number of the loan segments that we report on had declines from Q4, primarily commercial real estate and residential.

We did see an increase of $3.6 million from Q4 in our commercial non-mortgage segment, as one larger commercial credit that went nonaccrual was only partially offset by a number of smaller tiers and exits.

In addition, our consumer nonaccruals rose slightly, in large part due to the $1.5 million of performing home equity loans that we placed on nonaccrual in accordance with the intra-agency guidance that was issued in the first quarter regarding the allowance for loan estimation practices for loans and lines of credit secured by junior liens on one- to four-family residential properties.

So, again, where the first mortgage was 90 days or greater past due, regardless if the second was performing, we moved those $1.5 million worth of seconds to nonaccrual this quarter.

Let's turn now to talk about our nonperforming loans.

They now total 1.58% of total compared to 1.68% at year-end, and 2.38% a year ago.

The portfolio contains approximately $18.1 million of performing nonperformers, of which $10.9 million are consumer TDRs that have been modified, paying as agreed, and appropriately waiting to [season] before return to accrual status.

And then, of course, the balance are commercial loans in various stages of renegotiation to resolve.

So, the balance of the NPLs that [you look at risk] is focused on is approximately $160 million of nonpayers as of March 31.

Again, we will emphasize, we continue to push ahead to further reduce the level of NPLs, as we know this is incredibly worthwhile to get as much of this behind us to further reduce ongoing carrying costs and our workout expenses.

In Q4, we reported a large decline of nearly $14 million in REO and repossessed assets.

And in this quarter, we show a slight increase of about $1 million, to now total around $6 million.

This increase was primarily driven by equipment repossessions from our Webster Capital Finance division, for which the resale and disposition period is relatively short.

The portfolio consists of 39 properties at March 31, as 12 properties were sold and 12 came in.

These have all been marked to prices to expedite sale within the year, and nine of these properties are already under contract.

Our nonperforming assets to total loans plus REO declined to 1.63%.

That's down from 1.72% at December 31, and significantly down from 2.63% a year ago.

It really reflects the focus that we've had, and all the progress that has been made in reducing nonperforming assets.

So, as I mentioned earlier, new to this slide is a chart on commercial classified loans, which are a key factor in determining the overall level of the allowance for loan losses.

Here you can see a continued decline, and totaling just over $500 million at March 31.

So, our classifieds declined 9.5% from year-end, and nearly 35% from a year ago.

Our past due loans have been below 1% of total loans for eight quarters now, and they are down to 53 basis points at March 31, a slight decline from the 55 basis points that we reported at December 31.

We've also included the NPL reconciliation on this page.

For the quarter, our new nonaccruals were higher by $14.8 million, reflecting the large commercial non-mortgage loan that I referenced a moment ago.

Except for this credit, we otherwise saw a decline of $5.2 million in new nonaccruals compared to the fourth quarter.

Our cures and exits decreased by $12.3 million with lower commercial payoffs and note sales in the quarter of around $12 million compared to $18.3 million in Q4.

Also, we will note that as in prior periods, there is lots of additional credit and other performance data for each of our principal loan segments in the supplemental information provided in our Investor Relations section of the website.

You'll also find all of our TDR disclosures there, where you can see the balances that are accruing and non-accruing, yields before and after modification, and total loans modified greater than a year, which shows the strong performance that the loans have had since they've been modified.

In fact, almost 86% or $256 million of the $299 million in accruing TDRs were modified greater than a year ago and are paying as agreed.

Our TDRs totaled $376 million at quarter-end.

It's a decline of $21 million or 5%, from the $397 million that we reported at December 31.

We expect that there should be further decreases in coming periods, as deals continue to refinance, amortize and pay off.

So, now we will turn to slide 7, and take a quick look at the allowance for loan losses.

Note that our provision was $4 million for the quarter, and it's noticeably below net charge-offs for the seventh quarter in a row.

The modest increase from the $2.5 million that we reported in Q4 was within the range of expectation, taking into account, among other factors, loan growth by type, classified asset levels, and the charge-off level for the quarter.

Our allowance for loan losses now represents 1.86% of total loans, and our coverage ratio was 118% of our total nonperforming loans.

Our ability to record provision less than net charge-offs reflects the continued improvement in all our key asset quality indicators that we've just reviewed.

Our net charge-offs of $27.2 million are after $7.4 million in recoveries in the quarter, and recoveries in this quarter were somewhat above the level that we've seen in recent quarters -- a good sign.

So, with that, I will now turn it over to Glenn who will provide a review of our financial results, and also make some comments on the outlook that we have for the second quarter.

Thank you, Jerry.

Let me start by turning to slide 8, which provides a quarterly trend in net income and return on average equity.

I'll talk more about the drivers of our performance, but would highlight the $38.9 million in earnings this quarter is up 12.6% over prior year, and represents EPS of $0.42 per share, return on assets of 82 basis points, and return on average equity of 8.3%.

Turning now to slide 9, which highlights our core earnings drivers.

As we highlight, our average interest-earning assets increased by 2.8% over prior quarter.

The $483 million increase is driven by $153 million increase in average loan growth and a $323 million increase in average growth in our investment portfolio.

Net interest margin for the quarter was 336 basis points, which represents a 3-basis-point decline from Q4.

The 3 basis points of compression were the result of growth in our investment portfolio, as well as lower overall portfolio yields.

Loan yields also declined by 4 basis points.

We were able to partially offset this through favorable deposit pricing and mix, as well as the benefit from the subordinated debt tender offer earlier in the quarter.

Despite the reduction in NIM, as you see on the next line, our net interest income increased quarter-over-quarter by $2.4 million.

About 0.5 of the improvement came from the increase in earning assets, and the other 0.5 through lower funding costs.

Non-interest income was $44 million for the quarter, up from Q4 by $1.8 million, driven primarily on the strength of mortgage banking, and wealth and investment service fees.

Increases in these categories were more than offset by declines in deposit service fees and other income, which included a direct investment write-down of $760,000.

Core non-interest expense totaled $126.8 million in the quarter, which was up $2.1 million over prior quarter.

The increase occurred in three areas.

First, FDIC expense increased as a result of asset growth, and a true-up to fourth quarter of approximately $350,000.

Other expense increased $1.1 million, primarily driven by higher volumes in the residential lending and our HSA business.

Lastly, the first quarter includes expenses for payroll tax, unemployment tax, and our 401(k) match.

This totaled $3.3 million in Q1, and we expect this to trail off as employees reach maximum contributions.

Finally, at the bottom of the slide, you see our pre-tax, pre-provision earnings along with our reported pre-tax income.

In summary, while we are pleased with the progress, we know that plenty of work remains as we pursue our goal of a 60% efficiency ratio by the fourth quarter of this year.

Slide 10 highlights our loan mix and overall loan portfolio yield.

The loan portfolio grew $87 million from December, maintaining some of the momentum we saw in the fourth quarter.

Also note, we were up $304 million over prior year.

The yield on our portfolio decreased 4 basis points to 4.27%, as higher yielding fixed rate loans in the residential segment continued to refinance.

This led to an 11-basis-point decline in the residential portfolio yield, which you can see in the upper right-hand chart on slide 11.

Continuing on slide 11, yields in the commercial, commercial real estate, and consumer portfolios declined 2 basis points, 4 basis points, and 1 basis point, respectively.

As you can see, three of the four loan segments have grown compared to year-end and a year ago, while the decline in consumer portfolio reflects continued deleveraging by individuals.

We believe that the relative stability in the commercial, commercial real estate, and consumer portfolios demonstrate our loan pricing discipline, while the residential yield decline reflects the impact of consumer refinancing activity.

The $50 million growth in residential portfolio reflects the continued focus on jumbo mortgages.

Jumbo mortgages represent 39% of our residential mortgage portfolio, while jumbo originations in Q1 were 47% of the total residential mortgage originations.

Note that we continue to sell all our conforming fixed rate 20- and 30-year mortgage originations, and beginning in Q2 our intent is to sell our conforming 10- and 15-year mortgage originations, as well.

Turning to slide 12, I'll comment on trends in our commercial portfolio.

One of the bright spots in loan growth has been in the commercial non-mortgage loans, which consist of middle market, small business and industry segment banking.

The commercial non-mortgage segment, which represents just under $2 billion, or 68% of total commercial loans, grew by $267 million or 15.7% over the past year.

The growth has come primarily through share gain, and strong risk-rated credits, and there have been no underwriting concessions.

As highlighted in the top two portions of the chart, we have strategically executed a decline in equipment finance of $28 million in the quarter and $196 million year-over-year.

This is a result of scaling back our geographic reach similar to our early decision in asset-based lending, which has now stabilized and beginning to grow again.

In summary, we're clearly benefiting from what we see is a shift in the sentiment whereby prospects and consumers are now more likely to value banking services delivered by a local competitor.

Our investment portfolio is highlighted on slide 13.

The portfolio totaled $6.2 billion at March 31, with $3.1 billion in both available for sale and held to maturity.

The portfolio continues to represent about one-third of our total assets.

As highlighted with the yellow line in the top chart, the overall portfolio yield was down 12 basis points in the quarter, primarily as a result of growth, prepayments, and [loan] reinvestment rates.

On an average basis, the investment portfolio grew $323 million, or almost 6% from Q4.

During the first quarter, we purchased $718 million at an average yield of 2.49% and a duration of 3.9 years.

80% of the total purchases were agency MBS with a duration of 3.7 years and a yield of 234 basis points.

The majority of the remaining purchases were in corporate notes with a duration of five years and a yield of 311 basis points.

We grew the investment portfolio during the past two quarters to better manage our interest rate risk profile, which we now consider slightly asset sensitive to a rise in rates.

We don't expect the period-end size of the investment portfolio to change significantly in the next quarter unless ALM needs or the environment changes.

As indicated in the bottom chart, the total portfolio duration was 2.9 years at March 31, which is about the same as December 31.

The most significant influence on the portfolio's duration has been the rate environment.

To give you a sense of this, on the chart, the yellow line reflects the duration over the past five quarters, and the red line right below it represents the trend in the 10-year swap rate.

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

The top chart highlights that balances have remained relatively stable to a year ago.

However, as a result of our continued price discipline, we have been able to reduce the cost of deposits by 19 basis points over the past year to 47 basis points in Q1.

One of our priorities has been to increase transaction account balances.

The lower chart highlights the progress we've made in this initiative.

We define transaction accounts as demand accounts, health savings accounts at our HSA Bank division, and other interest-bearing checking accounts.

Transaction balances now provide 38% of our total deposits, which is a historic high for us, and as you can see, have increased $245 million versus prior quarter and $742 million over prior year.

In addition to the pie chart that you see here with deposits by line of business, we've included a slide in the appendix, which also shows deposit costs by line of business.

Note the deposit growth of $288 million in the quarter was primarily led by growth of $145 million at the HSA Bank, and its seasonally strong first quarter, $100 million in small business, and $62 million in retail.

On slide 15, we highlight our borrowing mix and costs.

Borrowings totaled $3.1 billion, $125 million increase over prior year.

Average short-term borrowings, which include FHLB advances, repurchase agreements, and Fed funds increased $203 million from December 31, and helped to fund the growth in loans and investments.

Given the current rate environment, we are borrowing with short terms at rates from 25 to 30 basis points.

Long-term borrowings declined $78 million.

In February, we repurchased $74.9 million of subordinated notes with an effective cost of 337 basis points resulting in a benefit of 310 basis points for the remainder of the year.

This was a relatively straightforward transaction for us, since we had repurchased about $22.5 million of this issue under a previous tender offer in March of 2009.

Total transactions costs of about $1.1 million represent the majority of the one-time expenses in the quarter.

The transaction improves net interest income by about $200,000 per month until January 2013.

On slide 16 -- the progress we have made against improving our operating efficiency.

As you can see on the chart, our core operating efficiency remained about the same in the first quarter, but declined by 190 basis points over prior year.

As we commented on our fourth-quarter call, this was expected primarily due to approximately $3 million in seasonal type increases in unemployment taxes, payroll taxes and our 401(k) match.

We nonetheless achieved positive operating leverage compared to Q4 and Q1 in 2011 due to revenue -- strong revenue strength in the quarter, and we remain committed to achieving our 60% efficiency ratio by the fourth quarter.

So, before turning it back over to Jim, let me provide a few comments on expectations as we continue into 2012.

With respect to average earning assets, we believe our average earning assets should grow about 2% in the second quarter.

Regarding net interest income, we have taken management actions to minimize the adverse impact in NIM, in line with our previous guidance.

We do anticipate further NIM reduction of about 5 basis points in Q2.

Long-term rates have been volatile.

NIM compression will continue to be driven by prepayment speeds and reinvestment opportunities.

That being said, we think our net interest income will reflect a modest increase over Q1, taking into account earning asset growth, partially offset by projected lower NIM.

As Jerry highlighted, credit continues to experience positive trends along all key asset quality metrics.

Assuming this continues, we would expect the provision in line with our current quarter, which, of course, is also dependent on loan growth and mix.

We expect non-interest income in Q2 to be consistent with Q1, though dependent on secondary market pricing and volumes for mortgage banking.

With regards to non-interest expense, we expect to see consistent reduction in our core expense as we implement those actions previously outlined as part of our P260 initiative.

Again, we remain committed to achieving our 60% efficiency ratio in Q4.

Our effective tax rate on a non-FTE basis was about 30% in Q1, and we expect this to be in around 30% to 31% over the remainder of the year.

Lastly, our average fully diluted shares based on our current market price I would assume to be about 92 million shares.

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

Thanks, Glenn.

In summary, we're making steady, measurable progress toward our goal of increasing economic profits by investing in strategies that add value, and avoiding those that don't.

With progress noted, we realize we're only part way along a critical path to reshape our basic business model, from the way we manage capital and risk, to the way we design and deliver products and services to our customers.

By adapting in the rapidly changing banking environment, we will thrive as a strong community-focused regional bank.

This concludes our prepared remarks, and we'd be happy to take your questions.

We will now be conducting a question-and-answer session.

(Operator Instructions) Our first question comes from the line of Dave Rochester of Deutsche Bank.

Please proceed with your question.

Hey, good morning, guys.

Morning, Dave.

Quick question on loan yields.

Those seemed to hold pretty well this quarter.

Can you talk about pricing for C&I and CRE today, as well as your jumbo residential product?

Sure, I'll talk first, Glenn MacInnes will talk about our total spread for the quarter which has held a pretty nice at about 339 basis points for the quarter, so it's been fairly consistent.

When we look at pricing, it is competitive but, we've managed to, as we've indicated in our remarks, be it sort of the top end of pricing.

Commercial real estate in itself, I think we have an average spread for the quarter somewhere around 270 and, again, that's held up pretty good, as well.

Great, and just real quick on the [resi] side?

An update there?

On the [resi] side, we are about 4.5.

Great.

And just one quick one on capital, you'd mentioned no immediate plans for share repurchases, you're talking about increasing the dividend soon.

But you've highlighted a lot of excess capital.

I was just wondering is there anything that's holding you back from establishing a share repurchase program at this point?

Or, if asked another way, what do you need to see before you become more interested in that?

Yes, specifically, no, nothing is holding us back.

We're just taking it one step at a time and I think we've been pretty clear about this in the last few calls that we'd start with the dividend, then increasing the dividend, then the share buyback program, so we're just phasing it.

Hey, Dave.

I think I'd add to Jim's comments, I think the key take away is we expect to see the gap narrow a little bit between the TCE ratio and the Tier 1 common.

As you think about putting on higher risk weighted assets, we're one of the organizations that enjoys right now a really wide spread between those ratios.

So we think there's capacity to narrow that.

I think the other comment that's pretty clear is the companies that you track, we're, obviously, acutely aware of managing the capital level down and leveraging that for profitability.

And the best returns, so we've got good organic growth.

We will use the capital there.

I mean there's a lot of different things that go into the decision that we're making.

But I think the way Jim has laid that out is exactly the path, we've been really consistent in saying we're being very deliberate, and I think he gave the harbinger of some potential good news in a couple of weeks here.

Yes.

Sounds good.

David, it's Jim.

I thought you -- I appreciated your comment about the pricing holding up, particularly on commercial loans, and I just want to say that is not a fluke.

Part of what we emphasized in our remarks was the discipline in our deposit and loan pricing, and I can assure you that every one of these new relationships that we are putting on is getting scrubbed in terms of what is the economic profit that we will generate from the relationship.

And if it doesn't meet that hurdle, and it's a tougher hurdle than simple [ray rock] run then we're not inclined to move forward.

And you'll find the same thing on the consumer side, particularly as regards to jumbo mortgage lending.

Great.

All right, guys.

Appreciate it, thanks.

Thank you.

Our next question comes from the line of Bob Ramsey at FBR Capital Markets.

Please proceed with your question.

I guess I wanted to ask a little bit, Jim, you had mentioned a new jumbo loan arrangement and I'm just sort of curious if you could share any thoughts on sort of goals for growth, typical product and rate through that channel, and maybe how that differs from what you all are ready doing, or does it differ?

Or is it just an opportunity for more volume?

This is just an opportunity for more volume through somebody that we know well, and in fact used to have a corresponding relationship with years ago, and provides an outlet to them for jumbo product that they may be originating.

It's not going to make a huge impact on our volumes overall, but what we like about it is consistent with the relationship building which is how we see the value of the jumbo mortgage, and so will have the opportunity to fully develop these relationships that come on as a result of these loans that we'll be taking on.

So they are one of the leading real estate brokers in our footprint.

There's lots of reasons for us to want to work closely with them and I think this will be positive for us.

Generally, jumbos get priced, as you know, a little bit higher than do regular conforming loans.

Part of it is there isn't a ready outlet for it.

It's natural that they would be priced higher.

We actually think that this represents an opportunity for portfolio lending at better spreads going forward than were available in the past.

And when you consider that there is relationship value as well it is a central part of our overall relationship development strategy, whether you're talking in the consumer bank, whether there's corresponding opportunities working with the Webster Private Bank, as well, to fully develop these relationships we see that as a lead relationship product going forward.

Okay.

And I know you all also mentioned that you would be selling more, or maybe all of the conforming 10- and 15-year fixed product going forward, too.

Will that have any material impact on mortgage banking or is it not a big piece of the overall pie?

Well, to the extent that we're selling it we're obviously going to be generating the fees from that.

We will still promote the business as we did in the past, but it's not as lucrative to put it on the books as it would be, say, to put a jumbo on the books instead of that.

And gain on sale opportunities are more lucrative than they've been in a very long time.

So we see in terms of how we manage, there are times where we may want to put those on the books and there are times like now where it's much more profitable to sell them.

So that's what's driving that decision

Okay.

And then maybe final question, as you all think about the 2% growth in earning assets next quarter, how do you think about the mix of loans versus securities in getting to that 2% number?

So, Bob, it's Glenn.

It's probably about 50-50 between loan growth and investment portfolio.

Okay.

Great, thank you, guys.

Thank you.

Our next question comes form the line of Ken Zerbe of Morgan Stanley.

Please proceed with your question.

Thank you.

Jim, it sounded like you are a little more cautious on your outlook for acquisitions this quarter versus last quarter.

Has anything changed in the environment or in terms of your conversations with other banks that would get you more cautious or are we reading to much into it?

I think that we intend to be saying the same thing.

I just felt that I had to say a little bit differently because there apparently was an impression created, including even some comments in the press about being an aggressive consolidator, and that never was our intention.

So all I tried to do with my comments today was to clarify what our interest is.

Nothing has changed in our view.

Okay.

We think there will be the opportunity to make combinations.

There are different kinds of acquisitions to make and we're not registered in trying to go compete in auction.

We think that the only time we would do that would be if something pretty much in our market.

We really believe that, we're looking for people that see the strategic advantage of being part of a strong regional banking franchise.

So we've always had a certain sense of what would be the right kind of opportunity for us whether it's in or outside of our market, and the discipline that we would bring to it is what I really wanted to underscore.

The notion that we need to get bigger and buy something to do it, that's not what would drive this.

This would be, we have an opportunity to create a stronger regional bank and to create economic profits at the same time, those are the drivers.

Okay, that does help a lot.

The other question I had, early in your comments you talked about the desire to bring down your capital levels, have you -- what kind of conversations have you had with regulators in terms of their comfort with bringing down the capital?

Obviously, you guys are well capitalized but how much are they comfortable with, yes, thanks.

Well, first we're constantly in communication with our regulator and they understand what our plans are, we've conducted stress tests to make sure that even in very stressed environments that we'll have ample capital.

So I don't think there's an issue of whether there is sufficient capital.

I think everyone would agree that is more than sufficient capital.

It's simply a matter of how we deploy it, over what period of time we deploy it, as the overall economy heals, as the likelihood for untoward surprises occurring.

I think we all just gain confidence in those excess capital levels.

And so, there is no restraint that's being applied anywhere.

This is really how we look at the world going forward and the timing of the actions that we think we would take and the ordering of those actions, as well.

So we're really the driver of how we would make these decisions.

I guess the question is really just design, is there -- do they have like a bright line test that says all right, this is X amount over X time period that they don't want you to cross, that you're operating within?

No.

No, there is not.

Okay.

All right, great, thanks.

Our next question comes from the line of Gerard Cassidy of RBC Capital Markets.

Please proceed with your question.

Hi, guys, this is actually Steve Duong in for Gerard.

We just had one question on your reserve balance.

You guys were at $186 million now, and given that you don't determine your reserve balance by your loans, where do you guys see it going?

Could it be prior to the crisis maybe $150 million or below?

I think we, it's Glenn, and I think we've sorted said in the first quarter that it would go down, probably remain above $150 million but, that is sort of, it will drift down toward that level.

Okay, perfect.

Great.

That's all we have.

Thank you.

Our next question comes from the line of Matt Schultheis of Boenning & Scattergood.

Please proceed with your question.

Good morning, gentlemen, how are you?

We're good, thank you.

Really quick question, what was your balance of restructured loans at the end of the quarter?

TDRs.

TDRs, we actually included in the index, the appendix in the back.

Hey, Matt, it's Jerry.

If you go to page 33 of the slide presentation.

Okay.

You'll have a detailed breakout by product type.

But it is $376 million, of which --

Right.

And you have the breakout there, $299 million is accrual, the other balance is nonaccrual.

80% of which is accruing.

Right.

Okay, thank you very much.

Sure thing.

Our next question comes from the line of Russell Gunther of Bank of America-Merrill Lynch.

Please proceed with your question.

Hi, good morning.

Hi, Russell.

I have a quick question, you guys hired some big bang talent within Webster Capital Finance this quarter, mid-March.

I guess my question is, could you give us a sense for whether any associated expense is already in the run rate both from a comp perspective?

And then secondly, whether there will be any technology or investment in the franchise needed to support their growth?

So anyone that we brought in is in the run rate.

I don't think, Russ, as you look at our total expense, that's going to be the key driver going forward.

As Jim highlighted, we continue to invest in the business, so, yes, there is some to technology, maybe not specific to the Webster Capital Finance.

But what I would highlight, as I did in the remarks, was that the first quarter typically has seasonality associated with federal and state taxes, and 401(k) match that employees have to -- they reach their maximum and then it sort of trails off.

And that in our first quarter was about $3.3 million.

That won't fall right off in the second quarter, it will trail off.

So if that's what you are looking at, and you're looking at our expense run rate, as I indicated in the fourth quarter call, the seasonality sort of kept our expenses flat you should start seeing that trail off.

Great, I got you.

I appreciate that.

It was more just trying to get a sense for anything associated with these new hires.

And then just sticking on the Capital Finance side, could you give us a sense for how granular these loans are, what the average loan size is, and then, perhaps, the related yields, as well?

Sure.

I think the average loan size is probably in the $200,000 to $300,000 range.

The yields, I think I'll wait for Glenn to pull that.

I also wanted to comment that what's happened is that we wanted to make sure that we resolved any issues of credit in Webster Capital Finance before we considered expanding.

So we pulled it back really hard from its national footprint.

And in the end we intended that it would be a regional business.

And what we've done with the hires that you read about was go back into markets where we had business before and recruit people, including a couple of former Webster Capital Finance employees that rejoined the Company to work with clients and others that we had had previous relationships with that had been very successful.

That's a lot of what you saw there.

And, Russell, it's Glenn.

Our coupon or yield on the Capital Finance is about $425 million to $450 million.

Okay, great.

And you pretty much answered, I think, my follow-up question which would just be that the team focusing on Illinois, Wisconsin and Indiana, this would be, it sounds like, perhaps a prior relationship or team that you've worked with in that past and not necessarily a return or shift in strategy back to a national platform?

Very well said.

Okay, thanks, guys.

Thanks for taking my questions.

Thank you.

Our next question comes from Mark Fitzgibbon of Sandler O'Neill Partners.

Please proceed with your question.

Hey, guys, good morning.

Hi, Mark.

A quick question to follow up on the expenses, for you, Glenn.

I know that you said there was roughly $3 million of seasonal expenses in the first quarter.

But to get to sort of that P260 number in the fourth quarter, it still implies some pretty significant reductions in operating costs.

Can you help us sort of think about that how that maps out during the course of the year?

Yes.

So I think the guidance I would give is that it's fairly consecutive from the first quarter, the reductions going forward.

You will see a drop pretty consecutively similar as we go quarter to quarter to quarter.

So does that sort of imply in the second quarter a non-operating expense number sort of $122.5 million to $123 million?

Would that be a good [guesstimate]?

I would say probably a little higher, just, maybe just a little higher.

Slightly higher.

And then you will start seeing it, because the other end of this is revenue as you've seen the revenue growth, as well.

Yes, Mark, it's Jerry.

That's the key point I was just going to add to Glenn's comments.

You have to take the compound effect of, if we continue to report the growth quarter-over-quarter, that's going to, obviously, be a net positive.

And then in addition to that, it is a step down quarter-by-quarter on the expense side.

And there's a number of initiatives that are going on that have got much better payoffs later in the year.

So our sense is each of these quarters would give you more and more clarity around what some of those initiatives are.

Okay.

And then on your commercial non-mortgage portfolio, obviously, you've had good growth there over the last several quarters.

Is there any particular industries that are really driving that growth?

Or any particular competitors that are sort of ceding the business to you?

No, I think when you look at the growth, the good news is, again, the teams are seeing a good opportunities, the pipe is pretty strong, there's clear indications, I think we can say, with the exception, as you saw, that we continue to retreat a little bit in consumer.

But particularly in commercial we're seeing a much stronger pipeline.

And there's not a geographic bent to this.

Definitely because of the great work that's happened with attracting high caliber people, clearly, Boston is growing, as an example, because we've got additional folks on the street there that have got good relationships and, of course, there is going to be some expansion.

But, if you were to look at some of the other regions in which we operate, they are also seeing good signs.

So I don't think you see it dominant from one versus another.

I would just want to add to that, Mark, if I could, this is Jim, to say that middle market companies are often choosing to bank with a regional bank instead of the much bigger bank.

We are seeing that over and over again.

And our expanded sales force, with the competent people that have been there over the long term and the newer people, is penetrating the market and gaining share and it's not based on rate.

So that's a very positive development.

I also say that the regional president model that we have where we put somebody in every local market, we have seven regional presidents who are the face of Webster in those markets.

That is also having a very positive impact on our ability to build a middle market book.

One last question, if you could just update us on the size of the portfolio in Boston, how big that has gotten now, the loan book or deposit mix, deposit book, rather?

Well, all in, it is close to $400 million including C&I and commercial real estate.

Thank you.

Our next question comes from the line of Damon DelMonte of KBW.

Please proceed with your question.

Hi, good morning, guys, how are you?

Morning, Damon.

I was wondering if you could provide a little bit more description on the mortgage banking operations.

You had mentioned that you'd made some hires recently, obviously, the contribution this quarter was pretty significant to the non-interest income component.

Could you just talk a little bit about, I guess, what you've done on the hiring side, and kind of what you see as a projection of activity in the upcoming quarters?

Yes.

Now the activities, of course, the projection of activities going to depend to a large degree on interest rates, but whatever is happening we will have a much bigger share of the market than we had before because of two things.

One is, we have significantly expanded the sales force, so that would be particularly in northern Connecticut, in the Providence area, to name two in particular, and that will have a positive impact.

We also have our loan origination, loan originators more facing outwardly than they had been previously.

So there's much more effort to identify centers of influence and to work directly with the real estate agents to develop a larger portion of our business from outside rather than inside, with a lot of inside business getting done in the branches who are in the call center.

So that has made a difference in our ability to tap into new business.

And so, we would say the given on top of that the focus on jumbo mortgage originations that our volume will increased significantly over its previous levels, that our market share overall will increase.

I am a little bit reluctant to predict what the originations will be, but I'll tell you that the pipeline is very strong.

And the only caution I would have, Damon, is gain on sale was very strong in the first quarter, 200-plus basis points, that is not necessarily something that we are going to see, I think, every quarter.

Right.

What are the total originations on the quarter?

About $420 million

$420 million, okay.

Okay, and then the hires in the northern Connecticut and Providence market, did you hire teams or are they individuals?

No, we hired individuals.

And in many cases, the first individual we hired was somebody who could lead a team and then gradually over this period of six months or so, we've been assembling the teams.

Okay.

That's helpful.

And then with regards to the wealth and investment services, also another line item that performed quite well this quarter.

Any projections?

Is what we saw this quarter more indicative of just the uptick in the market or is it more indicative of new business coming on under the books?

It's both.

Both?

I think we converted to a new platform in the fourth quarter and I think we're starting to get the benefits of that traction going forward.

Great.

And then just lastly, Glenn, just to circle back on the average earning asset growth for the upcoming quarter, you said you expect about 2%?

That's correct.

And you expect that to be split pretty evenly between loan growth and (inaudible)?

Yes, 50-50.

Okay.

That's all I had, thank you very much, guys.

Thank you.

Our next question comes from the line of Jason O'Donnell, CV Brokerage.

Please proceed with your question.

Good morning, guys.

Morning, Jason.

It looks like NCOs came in higher than what we were looking for this quarter due to increased C&I charge-offs, and I apologize if I missed it, but how lumpy were those charges this quarter?

And what is your outlook for NCOs going forward?

Yes, Jason, this is Jerry.

Definitely lumpy, there were a couple of commercial credits that we took some charges on and that in terms of being able to provide any color, really don't want to go further than the other than to say I don't think our expectations are that you will see that on a consistent basis.

It's the nature of being on the commercial bank side, you'll have some quarters where you'll see a couple of charges come through and other quarters where you'll see nothing.

So I wouldn't read into the NCO level for this particular quarter.

And, again, as we noted, we also had a really positive result on the recovery side, as well.

I think that it tells you a little bit about that we saw some bumps along the way that will happen as we continue to slowly see -- work our way through the recovery, but my sense is you are not going to -- I wouldn't read too, too much into the NCOs the number this quarter as a trend.

Okay, that's helpful.

And then with respect to your efforts on the expense reduction side, can you just maybe characterize how much in savings you expect to achieve from, let's say, fewer branch FTEs versus vendor management and other initiatives?

I'm not necessarily looking for specific figures but just sort of a characterization of where your focused here over the remaining few quarters of the year?

Sure.

So, last year, Jason, we closed 16 branches, and so I think we get the full year benefit of that this year in a run rate.

But the bulk of the activities this year are more of what I would characterize as middle of the back office.

Meaning looking at our infrastructure, looking at our vendors and working with our vendors in reducing costs along those lines.

That's the geography.

I'm going to add to that, too, there will be some attrition likely in the branch system, as well, as we bring all of our automated deposits image capture ATMs online, and also as we go through what we call a universal banker program which better equips the customer facing people in the branches to deal with the full range of customer needs, and that's a big program that we have underway that we think will make a significant impact over the next year or two.

Yes, I would just add I think that you'll see a lot of front to back, back to front reporting that we will do that will slowly begin to seep into the numbers.

So the idea of electronic delivery, as we've been talking about, more eStatements to reduce the paper statements, the list is pretty endless, Jason.

And I think the really good news is we're tackling a lot of things that I think will make us clearly a much more efficient organization.

I think that there's plenty that there is to do both on the front and the back of the Company right now and I think that Glenn's comments are spot on.

There's a lot that we've got planned on the vendor side, but there is also, in fairness, a bit of investing that is going on in the organization.

We've talked a lot about co-location, we're working our way through that, the team is doing an absolutely terrific job week in and week out there.

We should be completed that project, we've got a number of other initiatives that, I think, they will add some expenses but there's other things that are going to be coming out that will be taking out of those numbers.

So our idea is not to grow the expense base, it's really to optimize where were spending those dollars.

So I think there's a fair bit of retooling, a lot of continuous improvement work that needs to take place in the organization.

And as, I think Jim said this before, when we've described P260, this is a way of life, we are going to be talking about this all the time.

And it's not just, obviously, to get to the goal of 60%, it's something that it's much broader than that.

It's to become as efficient as we possibly can as an organization.

Absolutely.

And I want to say it's a real credit to the people and all the support groups at Webster that they are finding ways to achieve these efficiencies at the same time that we are investing in the revenue producing opportunities.

They have really done a great job.

Great, thanks a lot for the color, guys.

Our next question comes form the line of Steven Alexopoulus of JPMorgan Chase.

Please proceed with your question.

Hey, good morning, guys.

Hi, Steven.

I first wanted to follow up on an earlier question, given the comment on the pipeline for mortgage and share gains from new hires, do you view these mortgage banking fees at this $4.4 million level as sustainable here over the near term?

No, Steve, it's Glenn.

That's what my point, that was my comment with regards to the gain on sale rate, that it's sort of lumpy.

At 225, which is about where was for Q1, that's not -- if you look at the historical, go back to Q1 last year we were 175, so that number is going to bounce around a lot.

And that's going to influence that line.

Right.

And to your point, though, we're going to have really strong volumes --

Yes, we have volumes.

In addition to people.

So you could have a little bit of a difference of a rate volume.

Right.

Okay, but you did say you expect the fees consistent, right, from $44 million in the second quarter --?

Total.

Total fees.

There's a few things going on in there.

One is, obviously, the fees were driven by the 4.2 in mortgage, but also our investment in services, investment in wealth services, we are a strong quarter there.

Private banking is starting to contribute to this line.

And then on the other side you still continue to have the pressure on consumer pricing fees.

Right.

Whether it is NSF or rebates or things like that, so there's things moving in and out there, but basically flat quarter-over-quarter.

Got it.

Jim, I wanted to follow up on your comments regarding consolidation earlier.

Are you more focused on end market deals given all the commentary on efficiency versus market expansion, right, which wouldn't offer the same cost saves?

Actually we are quite open minded about it because, we think, on the one hand there may be in market opportunities to acquire whether our significant efficiencies, which is always very interesting to us, and in the past we grew meaningfully by making a lot of those transactions, and they were value adding transactions.

So, yes, we're very interested in that.

But we want to be open-minded and look even beyond the immediate franchise to opportunities where other people may see the world the same way we do, which is if you can measure value accretion from the synergies that you would achieve you ought to be willing to look more broadly at opportunity and even consider more meaningful opportunity than you might find immediately in a franchise.

So we're quite open-minded as to how we would look at these opportunities.

The big thing is that it creates a stronger regional franchise and it is value accretive to the shareholders.

Got you.

Maybe just one final question, looking at the path to 60% initiative, assuming you do get there by the fourth quarter, does that then become an annual target?

You touched on this a little bit earlier, do you keep driving expenses down beyond that?

How are you thinking once you get there?

We see it as a one reference point and that we would continue to drive it down, primarily most of that would be driven down to revenue increases.

As Jerry and Jim highlighted, the investments that are doing today will sort of take us into the next year.

Got you.

Thanks for taking my questions.

Sure.

Our next question comes form the line of Collyn Gilbert of Stifel Nicolaus.

Please proceed with your question.

Thanks, good morning, gentlemen.

Hi, Collyn.

Just a question on the HSA deposits, can you help us understand a little bit just the pricing dynamic of those deposits and just thinking about them in the event that we get into a rising rate environment sort of what rate sensitivity is on the group?

Yes, one of the great things about those deposits is they have long duration because people are motivated to keep those deposits because they are in tax-deferred accounts that you know will accrue to their benefit over their lifetimes.

And actually I think that HSA Bank has the highest average balances in our accounts of any of the major providers of HSA accounts.

And the way that we price them is on a tiered basis, so if you have a very small balance there's not an interest rate, if you have a higher balance there is.

And the higher your balance, then the higher the interest rate would be.

The more transactions you have in your account the more likely you would have a transaction fee.

So you can actually look at every tranche of the deposit spectrum here and measure the economic profit that is provided.

That is how we look at it.

So the question is what happens if rates rise, how elastic would it be?

We think it would be more inelastic than most of our other deposits.

And that is an attraction from HSAs as part of our transaction account base that I think maybe overlooked to some degree and I think it's real value will be seen when rates rise.

Okay, so when you say long duration is that contractually long duration or just more behavioral long duration?

Behavioral.

Okay.

Okay.

And then just one final question, and maybe this is for Glenn, what is the highest yielding asset that you guys are putting on your books today?

Highest yielding asset is probably 6%.

And what is that?

ISP.

I'm sorry, say that again?

ISP.

Industry segment.

It's part of the commercial group.

Right.

Okay.

And the duration on that, is that just a shorter, is that more of a C&I product?

Floating.

Okay.

Okay, that's all I had, thanks very much.

Thanks, Collyn.

Our next question comes from the line Casey Haire of Jefferies & Co.

Please proceed with your question.

Hey, good morning, guys.

Good morning, Casey.

Just a question on the loan growth, commercial, obviously, continues to do pretty well here, but equipment finance continues to run off.

I was just wondering have we reached a bottom in this loan bucket?

Hey, Casey, it's Jerry.

I think our sense is you will see a little bit of drift again this quarter, and you'll start to see it stabilize out in the Q3, Q4 corridor where we are thinking that there's also some opportunity for growth.

The comments that we've been making is the team there has been doing a nice job of, as I think Jim had commented earlier, bringing back a couple of the seasoned vets that are good producers, that will help to get us to that stabilizing point and also then been begin to turn the tide.

We do have a couple other opportunities to bring folks on board, as well, that they're looking into.

So I think the signs are that there is positive to come, I am not sure that you'll see it necessarily in Q2.

I think there's still a little bit of potential weakness there but our expectations are definitely in that Q3 to Q4 corridor.

Got you, thanks.

And then on the liability side, is there any more opportunity to restructure some of your liabilities?

Or are the prepayment penalties too punitive?

No.

We continue to look at that.

As you know, we did some of that in the fourth quarter.

But we're continuing to look at that.

And is that part of your P260 plan?

Is that baked in?

Obviously, it impacts our net interest income.

But we're looking at things like [troughs] where we would have to wait for regulatory event.

We also look at our sub-debt.

We have about $150 million in senior notes that we review as well -- as well as our FHLD funding.

Okay, but --

Everything is being looked at is the short answer.

Okay, but if you got bad news on that front would you still be able to make the 60% bogey by 4Q?

We would make the 60% bogey by 4Q.

Okay.

In other words, there are mitigants, these are things that we are looking at but obviously you build the plan a little more aggressive than just hitting the point.

Got you.

Thanks, guys.

Thank you.

See you.

Our next question comes the line of Matthew Kelley of Sterne Agee.

Please proceed with your question.

Hi, guys.

Getting back to just the deposit service fees.

The CSPB has been taking a closer look at just checking account processing methodologies and the reordering issue, and wonder if you could just talk on that and just more broadly speaking your view on where deposit service fees are headed from the space of, call it, $23.4 million in the first quarter?

Sure, I will comment on that.

That deposit fees are likely to stay under pressure for a while.

Part of it is there's a consumer awareness, I think a positive development, where they are paying closer attention to what their balances are.

Providing balance alerts helps people to avoid overdraft fees, you know what some of the other changes are that have been made.

And so we're actually seeing that those fees are in a modest down trend even after Durbin and the overdraft changes that were made.

We anticipate that we will be all on a order received basis for processing some time by early 2013.

We do it differently in different categories today, but that is one of the commitments that we have made.

We do a lot of things here to make sure that we're looking out for the best interests of our clients and I think that's really important.

So when somebody is out there, overdrafting more than they ought to we feel we have a responsibility to take a good hard look at that and see what we can do to improve their situation, whether it is counseling, running things through a newly established consumer protection counsel internally, working with people to build better relationships overall.

And I think long term that will be good for repetition and good for our overall performance, but it may mean that there is a trend of declining deposit service fees that could stay in force for another few months.

How much will the switch from a high to low to an order received or sequential type of processing methodology specifically impact the fee income generation?

It's hard to say, you could run Monte Carlos for what happens if you do it on random order, order received, what happens if you do low to high.

I think if you looked at our overall processing approach right now compared to what we would be doing in a few months from now the difference probably would be somewhere in the $2.5 million to $3 million range potentially on an annual basis.

Okay, got you.

I also want to say, you probably know too that all the things we're talking about that we're doing on the other side of that, the eChecking that we have, the value checking, the behavioral ability to reduce the (inaudible), we are really -- we're revamping the whole consumer deposit particularly checking account deposit set and then we are pricing it accordingly.

And one of the comments I made was with all the improvements we're making, we're also revising our retail fee schedule.

So it's not just a hit, it's how you manage the overall product suite and how you provide value for cost.

And so there will be a management response to any of the other changes that we are making or required to make.

Sure.

Got you.

And then just on the FDIC insurance assessments and premiums, what are we anticipating there as an assessment rate going forward?

As you continue to grow and start to add risk weighted assets how will that change?

Well, I think we are a more normalized number for us is probably about $5.4 million, somewhere around there, a quarter.

Okay.

It does -- it is impacted, obviously, by capital but it is also nonperforming assets or under performing assets as well as asset growth.

Got you.

Our rate has been typically around 12 basis points.

Got it.

One last reference point, what was the gain on sale margin in your mortgage banking operation in the fourth quarter?

You gave the year ago of (inaudible).

I think I said it was [225], somewhere around there.

That was Q1.

That was Q1.

What was it for 4Q?

[175] a year ago, I'm sorry.

What about 4Q?

4Q.

117?

4Q was, say, about [220].

I'm sorry, yes, about [220].

[220]?

Okay.

This is without low com or anything like that, so this is a real gain on sales.

Got it.

All right, thank you.

Sure.

Our next question comes from the line of Bernard Horn of Polaris Capital.

Please proceed with your question.

Good morning, just two quick questions.

The first, on the, obviously, the three of the four loan categories held up quite well and I'm just curious if there is any kind of delayed effect of customers potentially wanted to refinance and what might keep the margin up?

In other words, do you have prepayment penalties or other kinds of things that clearly sounds like you are originating it at 4.5% or so, if I got that right earlier?

Right.

But what, and if you kind of roll forward the kind of maturity of that -- of those other three buckets, is it likely that we are going to see further compression in those loan margins?

Well, the first thing I would highlight is we do have approximately $2.1 billion in [floors] so it's not that much.

But we have seen prepayments, particularly on the mortgage side they have slowed down a little, that being said, they are higher than their historic average or a more normal average, but they have come down a little in the first quarter.

So we are seeing a reduction both on prepayments on our MBS portfolio and on the mortgage portfolio.

Did you disclose what the prepayment penalties were over the last quarter or two?

To give us an idea of what -- how much these loans have been prepaying?

Yes, we don't disclose that.

Okay.

Is it material or is it just kind of a minor item?

It's not material to our numbers.

Okay, and then the second question I had was on the efficiency ratio.

So I know you've talked about it being positively affected by revenue growth but, assuming that we don't get any revenue growth, can you still get to a 60% efficiency ratio by the fourth quarter?

Because that would mean bringing non-interest expenses down about $10 million a quarter to like $114 million or so to get to that efficiency on the current revenue run rate?

Yes, it would be hard, Bernie.

It would be hard.

What would it likely be if you didn't have any?

Would there be any change at all without any revenue growth?

I think we'd probably, well, we'd probably be in around a 62, 63 range.

However, we've made a commitment and that stands.

The way we look at it, you look at quarter-over-quarter, net interest income is up.

We have initiatives on non-interest income, as well.

I don't think we have the benefit of a full traction on things like private banking, cash management, and some of those initiatives, as well.

So those are initiatives underway where we're going to pick up traction in the second, third and fourth quarter.

So I think we feel pretty good about it.

But I think the proper answer is to say, yes, as to 60% we have assumed that there will be revenue growth.

Right.

And I guess I'm -- and, again, a lot of the revenue growth, you noted that there was some increase in the net interest income, but on the non-interest income side a lot of that growth was largely mortgage banking activities.

And I know you can't kind of sell of a bunch of mortgages, generate fees and mortgage banking activity and make your efficiency ratio go down because that's just not sustainable, and the other more sustainable non-interest income figures, with the exception of wealth management which clearly was up, the other items were kind of trending down.

So if you get a pickup in average earning assets by about 2% and kind of maybe some stability in net interest margin, that may not be enough to kind of offset the decline in the sustainable things like deposit fees we were talking about.

So I guess it's, I guess you got your work cut out for you in the sense that if you had to get down to 60% with pure cost reductions that would be difficult is what you're saying?

Yes, we are.

Yes.

Hey, Bernie, it's Jerry.

I just want to add, I think Glenn was raising an excellent point.

There are a lot of initiatives that are rolling out and I think Jim referenced pricing changes in his comments.

I mean, there is a number of things that you will -- I think this will come a little more in focus when you start to see the Q2, Q3 results, clearly, from the standpoint of what happens in some of the other line items.

And, again, I had answered a call or made a comment a couple of callers ago regarding I think you'll start to see the expenses step down and I think that's the key trend.

So at this point there is no question that the combination of revenue growth and expense reductions in order to get there.

And there is a lot of stuff that has to be executed on and we will be pretty transparent about all of it along the way.

But just hope that helps.

Yes, you've been very good about that so I appreciate that.

That's all I have for now but thanks, thanks very much.

Thank you, Bernie.

Yes, bye.

Our next question comes from the line of Dan Werner of Morningstar.

Please proceed with your question.

Good morning.

On the investment portfolio, how much of that is going to be running off in 2012 and what kind of yield have those securities been gaining you guys?

So I think about $1.1 billion $1.2 billion would run off and probably at a yield somewhere around [3.25% to 3.50%].

Okay.

And you saw we're putting on [2.45%].

Okay.

Okay.

All right, that is all I had, thank you.

Sure.

Our next question comes from the line of John Pancari of Evercore Partners.

Please proceed with your question.

Morning, guys.

Hi, John.

On that, on the bond book, can you talk a little bit more about the extension risk that you're looking at here?

I guess, just to get an idea of how that duration of 2.9 years could change with, if we'd say 100-basis-point rise in rates?

Yes.

I think our intent on putting the start was to sort of show that it is sort of tracking to the 10-year, 10-year rate.

But, say, a 300-basis-point increase would probably push it out to five or six years.

That was 300 basis points, did you say?

Yes, 300 basis points.

So if you look back, 357, so the short answer, a 300--basis-point increase would probably extend it to five or six years.

Okay, okay, good.

That's all I had, thank you.

Thank you.

There are no further questions at this time.

I'd like to hand the floor back over to Mr.

Smith for closing comments.

Thank you, Lewis.

Thank you all for being with us today.

Have a good day.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.