Greetings. Good morning, and welcome to Webster Financial Corporation's First Quarter 2012 Results Conference Call. This conference is being recorded. Also this presentation includes forward-looking statements from 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 would 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 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'll 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 of capital. They were headed in the right direction and slightly exceed the medium 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'll achieve our goal to be a high-performing regional bank. Our first quarter results showed 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 pretax pre-provision earnings exceeded $60 million, up nearly 4% linked-quarter and nearly 9% from a year ago. Net interest income and noninterest…

Thanks, Jim. And good morning, everyone. So if you turn to Slide 5, here you're going to see that our overall loan balances totaled $11.3 billion, and 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 the 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 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 and 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…

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 will 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 half of the improvement came from the increase in earning assets and the other half from lower funding costs. Noninterest 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 noninterest expense totaled $126.8 million in the quarter, which was…

Thanks, Glenn. In summary, we're making steady, measurable progress towards our goal of increasing economic profits by investing in strategies that add value and avoiding those that don't. With progress noted, we realized we're only partly along the 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'll thrive as a strong community-focused seasonal bank. This concludes our prepared remarks, and we'd be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Dave Rochester of Deutsche Bank.

Quick question on loan yields. So those seem to hold on pretty well this quarter. Can you talk about pricing for CNI and CRE today as well as your jumbo and Reg E product?

Sure. I will talk -- I'll talk first, David. Glenn MacInnes will talk about our total spread for the quarter, which is held up 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 the remarks, be sort of as a 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 then just real quick on the Reg E side, you know what they're doing.

On the Reg E side, we are about 4.5.

Great. And just one quick one on capital. You 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 I guess 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 yes, we're just phasing it.

Dave, I think to add to Jim's comments. I think the key takeaway 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. And 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 is pretty clear is the companies each [ph] track. We're obviously acutely aware of managing the capital level down and leveraging that for profitability and in the best returns. So we've got good organic growth. We'll 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 and saying we're being very deliberate. And you know, I think, he gave the harbinger of some potential good news in a couple of weeks here so...

Yes, 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, that is not a fluke. And 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're putting on is getting scrubbed in terms of what is the economic profit that will generate from that relationship, and if it doesn't meet that hurdle. And it's a tougher hurdle than the simple ray run [ph] 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.

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

I guess I wanted to ask a little bit, Jim, you had mentioned the 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 are already doing, or does it differ or it is just an opportunity for more volume?

This is just on 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, it is consistent with the relationship building, which is how we see the value of the jumbo mortgage. And so we'll 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're one of the leading real estate brokers in our footprint. There's lot 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 it'd 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's relationship value as well, it is a central part of our overall relationship development strategy, whether you're talking in a 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 also mentioned that you would be selling more or maybe all of the conforming 10- and 15-year fixed product going forward too. Would 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'll 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 and getting to that 2% number?

Bob, its Glenn. It's probably about 50-50 between loan growth and investment portfolio.

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

Jim, it sounded like you're a little more cautious on your outlook for acquisitions this quarter versus last quarter. Has anything changed in the environments or in terms of your conversations with other banks that would get you more cautious, or are we reading too much into it?

I think that we intend to be saying the same thing. I just thought that I had to say it 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 in my comments today was to clarify what our interest is. Nothing has changed in our view. We think there will be the opportunity to make combinations. There are different kinds of acquisitions to make. And we're not interested in trying to go compete in an auction. We think that the only time we would do that would be 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. Now that does help a lot. The other question I had, earlier in your comments, you talked about the decide to bring down your capital levels. Have you -- what kind of conversation do you have with regulars in terms of their comfort with bringing down the capital? Obviously, you guys are well-capitalized. But how much are they comfortable with?

Well, first, we're constantly in communication with our regulator. They understand what our plans are. We've conducted stress test to make sure that even in very stressed environments, it will have ample capital. So I don't think there's an issue of whether there's sufficient capital. I think everyone would agree there's 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's 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. Do they have like a bright line test that says all right, this is x material over x time period that they don't want you to cross that you're operating within?

No, no, there is not.

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

This is actually Steve dialing in for Gerard. We just had one question on your reserve balance. You guys are at 186 now. And given that you don't determine your reserve balance by your loan, where do you guys see it going? Could it be prior to the crisis and maybe 150 or below?

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

Our next question is from the line of Matt Schultheis of Boenning and Scattergood.

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

TDR.

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

Matt, it's Jerry. If you go to Page 33 of the slide presentation, you have a detailed breakout by product type. But it is $376 million of which...

Right, and you had to break out there $299 million is accrual and the other balance is non-accrual.

80% of which is accruing.

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

A quick question, you guys hired some big bank account within Webster Capital Finance this quarter mid-March. I guess, my question is, could you give us a sense for whether any associated expenses 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 anything that's -- any one that we bought 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 technology maybe not specific to 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. And that won't fall right off in the second quarter, it will trail off. So if that's what you're looking at, 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.

Okay, 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 with the average loan sizes and perhaps the related yields as well?

Sure. I think the average loan is actually 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 happened is that we want to make sure that we resolve any issues of credit in Webster Capital Finance before we consider 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 have been very successful. That's a lot of what you saw there.

And Russell, it's Glenn. Our coupon or yield in the capital finance is about 425 to 450.

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 the past and not necessarily a return or shift in strategy back to a national platform?

Very well said.

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

I have a quick question to follow up on the expenses for you, Glenn. I know that you said it was roughly $3 million of seasonal expenses in the first quarter. But I guess just 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 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'll see a drop pretty consecutively similar as we go quarter to quarter to quarter.

So does that sort of imply in the second quarter, nonoperating expense number sort of 122.5 to 123, would that be a good guesstimate?

I'd say probably a little higher, just maybe just a little higher.

Slightly higher and then you'll start seeing it, because the other end of this is revenue as you've seen the revenue growth as well.

Yes, Mark, I think -- 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 will give you more and more clarity around what some of those initiatives are, so...

Okay. And then on your commercial non-mortgage portfolio, obviously you've had good growth over the last several quarters. Is there any particular industries that are really driving that growth or any particular competitors that are sort of feeding the business to you?

No. I think when you look at the growth, the good news is -- again, the teams are seeing good opportunities. The pipe's 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 happened with attracting high-caliber people. Clearly, Boston's growing as an example because we've got additional folk on the street there. They've got good relationships and of course, there's going to be some expansion. But if you were to look at some of the other regions in which we operate, they're also seeing good signs. So I don't think you'll see it dominate from one versus another.

I would just like want to add by, Mark, if I could. It's Jim -- to say that Middle Market companies are often choosing to bank with the regional bank instead of the much bigger bank. We're seeing that over and over again. And our expanded sales force with the confident 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 rates. So that's a very positive development. I'd also say that the regional president model that we have, where we put somebody in every local market -- so we have 7 regional presidents, who are the face of Webster in those markets. That is also having a very positive impact on our ability to build the Middle Market book.

One last question. If you could just update us on the size of the portfolio in Boston, how big that's gotten now and the loan book for our deposit mix -- deposit book rather?

Well, all-in, it's close to $400 million, including CNI and commercial real estate.

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

I was wondering if you could provide a little bit more description on the mortgage banking operations. You mentioned that you've made some hires recently. Obviously, the contribution this quarter was pretty significant to the noninterest income component. Could you just talk a little bit about, I guess, what you've done in the hiring side and kind of what you see as a projection of activity in the upcoming quarters?

Yes. Now the activity is -- of course, the projection of activity is going to depend to a large degree on interest rates. But whatever is happening will have a much bigger share of the market than we had before because of 2 things: One is we have significantly expanded the sales force, so that will be particularly in Northern Connecticut and the Providence area to name 2 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 the 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 that given on top of that to focus on jumbo mortgage originations that our volume will increase significantly over its previous levels, that our market share overall will increase. I'm 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 have, Damon, is gain on sale was very strong in the first quarter, 200-plus basis points. And that is not been necessarily something we're going to see I think every quarter.

Right. What are the total originations from that quarter?

About $420 million.

$420 million? 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 the team. And then gradually over this period of 6 months or so, we've been assembling the teams.

Okay, that's helpful. And then, with regard to the wealth and investment services, also another line item that outperform 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 onto the books?

It's both.

Both.

Yes. 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.

Okay, 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 between loan growth and security?

Yes, 50-50.

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

It looks like NCOs came in higher than what we were looking for this quarter due to increase in net charge-offs and I apologize if I missed it, but how lumpy were those charges this quarter, and what's your outlook for NCOs going forward?

Jason, it's 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, I really don't want to go further than that other than to say, I don't think our expectations are that you'll see that, I mean, I think 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. So I think that it tells you a little bit about -- we saw some bumps along the way will happen as we continue to slowly see, work our way through the recovery. But my sense is you're not going to -- I wouldn't read too much into the NCOs, for the number this quarter as a threat.

Okay, that's helpful. And then with respect to your efforts on the expense reduction side, could 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 you're focused here over the remaining few quarters of the year.

That's right. So last year, Jason, we closed 16 branches. And so I think we'll get to full year benefit of that this year in the run rate. But the bulk of the activities this year are more what I would characterize as middle to back-office, meaning looking at our infrastructure, looking at our vendors and working with our vendors and reducing cost 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 deposit 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 2.

Yes, and I'd just add. I think that you'll see a lot of front-to-back, back-to-front reporting that will do slowly begin to see fit in the numbers. So the idea of electronic delivery as we've talked about, e -- more e-statements to reduce the paper statements. Just the list is pretty endless. 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 it's -- there's plenty that there is to do both on the font and in 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 vendors' side, but there's also in fairness a bit of investing that's going on in the organization. I mean, 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 completing that project. We got a number of other initiatives that I think -- they'll add some expenses. But there's other things that are going to be coming out that we'll be taking out of those numbers. So our idea is not to grow the expense base, it's really to optimize where we're 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, with this P260, this is a way of life. We're going to be talking about this all the time, and it's not just obviously to get to the goal of 60%. It something that is 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 of the support groups at Webster, that they're finding ways to achieve these efficiencies at the same time that we're investing in the revenue-producing opportunities. They've really done a great job.

Our next question comes from the line of Steven Alexopoulos of JPMorgan Chase.

I first want to follow up on an earlier question. Given the comments 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 my point, that was my comment with regards to the gain on sales rate that it's sort of lumpy at 225, which is about where it was for Q1. That's not -- if you look back at the historic, I mean, go back to Q1 last year, we're at 175. So I mean that number is going to bounce around a lot, and that's going to influence that line.

Right, and to your point though right, it's -- we're going to have really strong volumes with [indiscernible] and the people, so you got to 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 fees, so what's...

So 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 services, investment wealth services, we're 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's 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 want to follow up 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're quite open-minded about it because we think on 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 what we do it, 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 a more meaningful opportunity that you might find immediately in the franchise. So we're quite open-minded as to how we would look at these opportunities. And 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? I mean, you touched on this a little bit earlier that do you keep driving expenses down beyond that? How do we think once you get there?

Yes, we do -- we see it as one reference point and that we would continue to drive -- drive it down primarily. Most of that would be driven down from revenue increases. As Jerry and Jim highlighted, the investments that we're doing today will sort of take us into the next year.

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

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 in the event that we get into a rising rate environment sort of what rate sensitivity is in that 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're in tax deferred accounts that you know will accrue to their benefit over their lifetime. And so, 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'd 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's 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 based that I think maybe overlooked to some degree. And I think its 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 this 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 CNI product?

Floating.

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

Just a question on loan growth. Your commercial obviously continues to do pretty well here, but equipment finance continues to run off. I just wondered have we reached the bottom in this loan bucket?

Case, it's Jerry. I think our sense is, you'll see a little bit of drift again this quarter, and you'll start to see it stabilize out in the Q3, Q4 corridor where were 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 bets that are good producers that will help get that -- get us to that stabilizing point and also that begin to turn the tide. We do have a couple of other opportunities to bring folks on board as well that they're looking into. So I think the signs are that there's positive come. I'm 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 the Q3, Q4 corridor.

Got you. And then on the liability side, is there any more opportunity to restructure some of your liabilities or are the pre-payment 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 or...

Obviously, it has -- it impacts our net interest income, but we're looking at things like troughs where we have to wait for a regulatory event. We also have our sub debt. We have about $150 million in senior notes that we review as well, as well as our FHLB funding, so -- but everything is being looked at is the short answer.

Okay. But like 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. So in other words, there are mitigants. These are things that we're looking at but obviously, you build the plan a little more aggressive than just hitting the point.

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

Getting back to just the deposit service fees, the CFPB has been taking a closer look at just the checking account, processing methodologies and the reordering issue. And I wondered if you can 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'll comment on that. The 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're paying closer attention to what their balances are. Providing balance alerts helps people to avoid overdraft fees with some of the other changes that have been made. And so we're actually seeing that those fees are in a modest downtrend even after Durbin and the overdraft changes that were made. We anticipate that we will be all on a order received basis for processing sometime by early 2013. We do it differently in different categories today, but that is one of the commitments that we have made. We've done -- we do a lot of things here to make sure that we're looking out for the best interest of our clients. I think that's really important. So when somebody's 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 could do to improve their situation, whether it's counseling, running things through a newly established consumer protection council internally, working with people to build better relationships overall. And I think long term, that will be good for our reputation and good for our overall performance. But it may mean that there is a trend of declining deposit service fees that could stay enforced for another few months.

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

It's hard to say that you can run Monte Carlos for what happens if you do it on a random order or order received, what happens if you do low to high. I think if you look at our overall processing approach right now compared to what we'd 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.

And I also want to say, you probably note, too, that all of the things that 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 cost, we're really -- we're revamping the whole consumer deposit particularly checking account deposit set, and then we're pricing it accordingly. And one of the comments I made was with all improvements we've made, 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're making or required to make.

Sure, got you. And then just on the FDIC Insurance assessments and premiums, what are we anticipating there, I mean, 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're -- a more normalized number for us is probably about $5.4 million, somewhere around there in the quarter. It does, it does -- it has impacted obviously by capital but it's also nonperforming assets or underperforming assets as well as asset growth, so our rate has been typically around 12 basis points.

Got you. One last reference point, what was the gain on sale margin in your mortgage banking operation in the fourth quarter that you gave a year ago, [indiscernible]?

I think I said it was 625, somewhere around there.

That was Q1.

That was Q1. What was 4Q?

175 a year ago.

What about 4Q?

4Q, let's see -- 4Q was, say, about 220. I'm sorry, yes, about 220.

220?

This is without low comp, right. This is the real gain on sale.

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

Just 2 quick questions. First on the -- obviously, the 3 to 4 loan categories held up quite well. And I'm just curious if there's any kind of delayed effect of customers potentially wanting 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're originating it at 4.5 or so, if I got that right earlier? But what -- and if you kind of roll forward the maturity of the -- of those other 3 buckets, is it likely that we're going to see further compression in those loan margins?

The first thing I would highlight is we do have approximately $2.1 billion of 4s [ph], so it's that not much. But we have seen prepayments particularly on the mortgage side, they slowed down a little. That being said, they're higher than the historic average or on a more normal average but they have come down a little in the first quarter. So we are seeing a reduction both on prepayments and our MBS portfolio and on the mortgage portfolio.

All right, could you disclose what the prepayment penalties were over the last quarter or 2 to give us an idea of what the -- how much these loans that are prepaying?

Yes, we don't disclose that.

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

Not material through 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 noninterest 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 will it likely be if you didn't have any? Would there be any change at all without any revenue growth?

I think we probably sort of -- well, we probably be around the 62, 63 range.

However, I mean, we've made a commitment and that stands. I mean, the way we look at it, you look at it quarter-over-quarter, net interest income is up. We have initiatives on noninterest income as well. I don't think we have the benefit of full traction on things like Private Banking, Cash Management and some of those initiatives as well. So I mean, those are initiatives underway where we're going to pick up traction in the second, third and fourth quarter. And so I think, we feel pretty good about it.

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

And I guess, I'm -- and again, that's a lot of the revenue growth. This you noted that there was some increase in the net interest income, but on the noninterest income side, a lot of that growth was largely mortgage banking activities. And I mean, I know you can't kind of sell off a bunch of mortgages, generate fees and mortgage banking activity and make your efficiency ratio good because it's not just sustainable and the other more sustainable, noninterest 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 and net interest margin, that may not be enough to kind of offset the decline in the sustainable things like deposit fees that we're talking about. So I guess, it's -- I guess it got to work out for you in a 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, yes.

Bernie, it's Jerry. I just want to add. I think Glenn has raised 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's a number of things that you'll -- I think, you'll still kind of a little more in focus when we start to see the Q2, Q3 results clearly from the standpoint of what happens if some of the other line items. And again, as I had answered a call or made a comment a couple of colors 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's no question. It's a combination of revenue growth and expense reductions in order to get there. And there's a lot of steps that has to be executed on, and we'll be pretty transparent about all of it along the way, but just hope that helps.

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

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 to $1.2 billion would run off and probably on a yield somewhere around 325 to 350. And you saw we're putting on 245.

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

On the bond book, can you talk a little bit more about the extension risks that you're looking at here, I guess, just to get an idea of how that duration of 2.9 years could change with, say, 100-basis-point rise in rates?

Yes, I think our plan on putting a start with sort of shows that it is sort of tracking to a 10-year rate. But the 300-basis-point increase probably push it out to 5 or 6 years.

That was 300 basis points did you say?

Yes, 300 basis points. So if you look back at 357, the short answer of 300-basis-point increase will probably extend it to 5 or 6 years.

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.