Webster Financial Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Webster Financial Corporation (WBS)
by: SA Transcripts

Webster Financial (NYSE:WBS)

Q4 2012 Earnings Call

January 18, 2013 9:00 am ET

Executives

James C. Smith - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Webster Bank and Chief Executive Officer of Webster Bank

Gerald P. Plush - President, Chief Operating Officer, Director, Chairman of Enterprise Risk Management Committee, Vice Chairman of Webster Bank, President of Webster Bank and Chief Operations Officer of Webster Bank

Glenn I. MacInnes - Chief Financial Officer and Executive Vice President

Analysts

David Rochester - Deutsche Bank AG, Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

Matthew Clarke - Crédit Suisse AG, Research Division

Casey Haire - Jefferies & Company, Inc., Research Division

David Darst - Guggenheim Securities, LLC, Research Division

Russell Gunther - BofA Merrill Lynch, Research Division

Jason A. O’Donnell - Merion Capital Group

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Operator

Good morning, and welcome to Webster Financial Corporation's Fourth Quarter 2012 Earnings Results Conference Call. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, with respect to Webster's financial condition, results of operations 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 fourth quarter of 2012.

It is now my pleasure to introduce your host, Jim Smith, Chairman and CEO of Webster. Please go ahead, sir.

James C. Smith

Thank you, Dan. Good morning, everyone. Welcome to Webster's Fourth 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 of the quarter, Jerry Plush will discuss business unit performance, Glenn MacInnes will review the quarter's financial results and then we'll take your questions.

As you can see, Webster finished a strong 2012 on a decidedly positive note, and we're excited to report measurable progress against our primary strategies. Fourth quarter net income of $0.52 a share increased 21% from last year and 8% linked-quarter. We again reported record core pretax pre-provision net revenue, that's PPNR. For the full year, earnings grew 16% to $1.86 a share.

Record performance in the Commercial Bank and in Mortgage Banking, coupled with lower expenses against the linked and prior year's quarters, produced positive operating leverage of 4.6% for the linked-quarter and 4% for the year. ROE and ROA moved closer to our goals, while return on tangible common equity reached 13.4% in Q4.

Total loan originations hit multiple records, rising overall by 44% linked-quarter and 40% year-over-year. Full-year originations increased $1.5 billion or 46% to $4.6 billion, and we clearly had momentum as a lender of choice in our markets. Our net interest margin held up better than we anticipated for the quarter, declining just 1 basis point to 3.27%, primarily due to stronger-than-estimated commercial loan growth and lower deposit costs and also benefiting from higher-than-normal prepayment activity.

Total deposits grew about 1% in the quarter and 6.4% for the year. Transaction accounts grew 5% in the quarter and 18% for the year. They now account for 41% of total deposits and contributed to a continuing decline in deposit costs. The loan-to-deposit ratio stands at 83%, a positive metric given likely future loan growth.

Asset quality continues to improve, though at a decelerating rate. Commercial loan credit quality trends, in particular, remained quite positive. Glenn will explain the regulatory guidance requiring reclassification from TDRs to non-accrual status of loans related to stay and pay Chapter 7 bankruptcies.

Our improving financial performance is traceable directly to our success in executing 2 primary strategies. First, regarding investment in electronic infrastructure, we completed the installation of touchscreen image-capture ATMs throughout the franchise in Q4, complete with customer preset preferences. Deposit volume has surged at ATMs installed at least 4 months, while related branch transaction volumes are down nearly 10%.

In Q4, we rolled out a new smartphone app for iPhones, Androids and BlackBerries, and Remote Deposit Capture for consumers is right behind. Meanwhile, our Universal Banker program, recently rolled out in 10% of our branches, enables our specialty developed bankers to assist customers in more of an advisory capacity and will become the norm in the quarters ahead.

We've recently organized all of our delivery channels into a single distribution unit as we look to streamline and harmonize service delivery. Over time, our offices will be smaller, better located and electronically advanced, and the teller line will become more of a banking memory.

The second primary strategy is investing in relationship development activities where we can deliver valued advice and services to customers who, in turn, generate economic profits. Those activities include mortgage lending, Middle Market and small-business banking, cash management services and private banking and investment advisory services, all of which are delivering improving returns.

Commercial Banking turned in its best performance ever in Q4 and has great potential to grow and prosper further. Loans grew more than 6% linked-quarter, capping full-year growth of over 17%. Originations and closings were at an all-time high by a significant amount for the quarter and the year, and business loans now exceed mortgage and other consumer loans for the first time. Yields and spreads have held remarkably well, proof that we're taking share based on brand and service quality. Our regional president model helps us compete successfully at the local level, where we've gained a well-earned reputation for working with our customers in good times and bad.

Overall client satisfaction is high and rising. Both new and existing customers are signing up for our increasingly sophisticated Cash Management and Treasury Services. Swaps income was up strongly as we insulated our clients from eventually rising rates while tilting the loan portfolio to shorter durations, and Webster-led structured transactions generated over $1 million in fees in Q4.

Each of our 5 commercial business units reported economic profits in Q4, the second quarter in a row. 2012 was also an outstanding year for Consumer Finance as Mortgage Banking benefited from the low-rate environment and an improving housing market. Total originations of $2 billion for the year included $1.4 billion of first mortgage loans, up 64% from 2011. Home equity loan originations totaled about $575 million for the year, up 11%, including a 28% year-over-year jump in the fourth quarter.

Because we view mortgages as a gateway to acquire meaningful customer relationships, we've doubled our loan originator force over the last 5 quarters to nearly 80 originators facing the market, focusing first on originating purchase mortgages, which accounted for 36% of volume in Q4 versus 24% for the industry, with special emphasis on Jumbo loans.

Our value proposition promises local personalized service and includes a service guarantee. Our pricing discipline can be seen in our relatively high gain on sale numbers for the quarter and the year. As a result, Mortgage Banking revenue rose to 16% of noninterest income in Q4 as we sold 55% of production versus 50% for the year, with most arms and Jumbos going to portfolio.

89% of our new mortgage loans have an automatic payment from a new or existing Webster checking account, and our originators have made over 2,500 referrals to their business partners in 2012. This is relationship banking at its best. 2013 looks bright given that our mortgage pipeline was above $500 million at year end.

Among notable Q4 achievements was attainment of a 60% efficiency ratio. We benefited from strong gain on sale income, commercial loan growth that boosted net interest income and disciplined expense management related to our P260 program. While, as we've said before, seasonal factors will push our ratio above 60% in the first quarter of 2013, our goal remains a sustainable efficiency ratio below 60% for most of 2013 and beyond.

Pleased as we are to reach our P260 goal, more of the contribution came from revenue than we originally anticipated and less came from expense reductions. We have more opportunities on the expense side, which we will actively pursue this year, and to help us, we've recruited a dedicated team of Six Sigma experts focused on continuous improvement across the organization. Significant initiatives include a bank-wide electronic forms project designed to reduce document printing costs, storage-based needs and retrieval costs; continuing restacking of corporate facilities; and an in-depth review of all major vendor-partner contracts.

Our capital levels remain well in excess of regulatory requirements, and we estimate that we complied today with fully phased-in Basel III requirements, including conservation buffers. With a goal to optimizing our tangible capital structure, we issued $126 million of non-cumulative perpetual preferred shares in Q4 at a 6.4% coupon, the lowest coupon ever achieved for a BB-rated issue, we're proud to say.

In early December, following the board's authorization of a $100 million stock repurchase program, we purchased $50 million or about 2.5 million shares, a part of Warburg Pincus' secondary offering of 10 million common shares. Having now returned capital to their investors 3.5 years into the relationship, Warburg continues to hold a majority of its position in Webster, and David Coulter remains a valued member of our board. Our solid capital position and earnings momentum will enable us to return capital to shareholders by gradually increasing the dividend payout ratio and repurchasing additional common shares.

I want to take a moment to salute every Webster Banker for their outstanding contributions to our 2012 performance. Webster Bankers believe we can make a difference for those who rely on us. That's our common bond which underlies our progress and success. Out improving performance strengthens that bond as we pursue our goal to be a high-performing regional bank.

With that, I'll turn the call over to Jerry for comments on key aspects of performance and trends in our lines of business.

Gerald P. Plush

Thanks, Jim, and good morning, everyone. Let's start with a review of how our principal lines of business are performing. So if you turn to Slide 3, here you can see our Commercial Bank unit recorded strong loan and origination growth in the quarter and for the year. Overall loan growth was $300 million or 6.3% compared to September 30, and $748 million or 17% from 1 year ago.

As you can see in the top chart, the real success story here in Commercial Banking is the greater than 20% growth in Middle Market and CRE loans over the past year and 8% over the last quarter. We've also stabilized our equipment finance and Asset-Based Lending businesses, and both areas exceeded our expectations in Q4.

Take a look at the bottom chart. You can see loan origination fundings totaled $659 million in Q4 compared to $347 million in Q3 and $365 million 1 year ago. Our CRE business had a record quarter, with $234 million in originations and $205 million in fundings. The strong growth in commercial banking originations also included $31 million of loans that we'll be selling down in the first quarter.

As we stated in our last earnings call, the yield on new originations in the quarter rebounded to more normalized levels. Our Commercial Bank relationship managers focused on the full banking relationship with our customers. It's also worth noting there were 28 interest rate risk management transactions, primarily swaps, caps and collars, that were booked for clients during the fourth quarter that generated $1.8 million in noninterest revenue. Our demand deposits at 800 -- or excuse me, at $935 million were essentially flat to September 30, but they're up $191 million from the prior year. Our Commercial Bank team opened 585 new demand deposit accounts in the year in comparison to 503 new accounts in 2011.

It's also worth noting that our sales and structuring group completed 6 agented transactions in the quarter, selling down $78 million in loan commitments and generating $1.2 million in fees. We consider this a very important activity, largely used to win and retain key client relationships while maintaining appropriate single-point loan exposures.

The Commercial Bank pipeline declined from Q3 and Q4 from 1 year ago, driven by record Q4 closings and in part from borrowers motivated to close ahead of the anticipated tax changes in 2013. Based upon our past performance, we would expect the pipeline to grow from here.

Let's turn now to Slide 4. We'll review our Retail Banking group results. One of our key strategic initiatives has been growth of small business banking. So on the top chart, you can see how small business loans grew by $38 million or 4% from September 30 and $106 million or 12% from 1 year ago. This quarter's growth in small business loans reflects a record level of loan originations, totaling almost $89 million, and that's up 20% from the third quarter and also the fourth quarter from 1 year ago.

The small business certification program that all of our branch managers completed earlier this year contributed to the success, with branch-sourced and referred loan commitments in Q4 increasing by over 44% from 1 year ago. We're also seeing good success with our merchant services offerings, with Q4 fees from this product of 20% from 1 year ago.

Turn now to look at the bottom chart. You can see the progress that's been made in taking transaction account deposits to almost 33% of total deposits in the retail bank from 29% 1 year ago. The group has seen transaction deposit growth of $382 million or 13% over the past year, and that's led by small business, which grew $188 million or 17%.

At the same time, we've seen significant increases in average balances in our transaction accounts. Our small business transaction accounts had an average balance of almost $23,900 in Q4, which is about 15% higher than the level 1 year ago. Similarly, the consumer average balance per transaction account is now over $5,600, and that's up 9% from over 1 year ago. The emphasis on transaction accounts and our overall pricing discipline has resulted in lower costs of funds significantly over the past year. You can see in the bottom line that the 41 basis point cost of funds in Q4 was 3 basis points lower than Q3 and 14 basis points lower than 1 year ago.

The low interest rate environment in 2012 also presented us with an opportunity to reach out and help more of our customers plan and prepare for their retirement than ever before. As a result, our Webster investment services unit posted record quarterly revenues in Q4 and also for the full year. Due to our increased advisory focus, 32% of these revenues are reoccurring, and that's up from 27% in 2011.

As Jim mentioned, we continue to invest in our electronic capabilities and also in the education of our front-line bankers to demonstrate and educate the benefits of our products and services to our customers. In the fourth quarter, deposits at our recently upgraded envelope-free, image-capture ATMs increased by 43% over the same period 1 year ago. Our new eChecking product has accounted for 21% of consumer checking sales since it was introduced in April, while checking account attrition has declined and e-statement adoption has increased by 28% during the same period. We know the customers who utilize Webster's online and mobile banking options typically generate 10% more revenue per household and experience 1/2 the attrition rate of customers who rely on only fee-traditional delivery channels.

We also introduced our new mobile app. In addition, on the distribution front, Jim commented on our efforts to relocate and downsize branch locations. So in the fourth quarter, we are pleased to open our newly relocated Simsbury, Connecticut branch, which exemplifies what we mean by branch optimization. Our former branch in Simsbury was a standalone building that was far larger than the market required, and the drive-thru was some distance from the main facility. Our new branch is directly across the street. It's sized to fit the market. It's in a newly built shopping center with the drive-thru services right from inside the branch.

Next week we'll be opening in Greenwich, Connecticut, and that location will service further our Private Bank, as well as our newest retail branch. And I can say with confidence you can look forward to more updates from us in 2013 regarding our optimization efforts like combinations, renovations and moves.

We'll now turn to Slide 5 to review our Consumer Finance results. Our overall balances have declined modestly over the past year, largely driven by our strategy of selling a higher percentage of conforming long-term fixed rate loans. The increased sale activity, however, has contributed to substantially higher noninterest revenue over the course of the year, reaching over $8.5 million in the fourth quarter.

Our overall portfolio yield declined by 7 basis points in Q4, and that's largely driven by attrition. You can see how Consumer Finance originations remain very strong in Q4 with the yields on the new originations. This is being driven by the addition of proven talent to the sales team, coupled with improving productivity in the Internet and contact center channels. These channels represented a combined 23% of originations in 2012 compared to 16% in 2011, and we have plans to take this higher next year.

Our originations, including loans sold with servicing retained, were $530 million in the fourth quarter. Purchase loans represented about 36% of our total production in Q4 compared to 17% 1 year ago, and our mortgage applications for home purchases were up 79% from 1 year ago. The yield on the new originations declined by 16 basis points over the third quarter due to competitive pressures in the Jumbo and adjustable-rate markets, though the Q4 level of 3.69% is consistent with the first half of the year.

The gain on sale margin on originations that were sold in the fourth quarter was 317 basis points compared to 303 basis points in the third quarter and 224 basis points 1 year ago. The pipeline in consumer remains solid, with $520 million at December 31 compared to $649 million at September 30. The decline reflects the seasonal slowdown at year end, and we'll work diligently -- and we worked diligently during the fourth quarter to clear what was a very strong September 30 pipeline.

Our focus remains on originating a larger percentage of Jumbo mortgages as a key to relationship building, and it's showing in the results. Jumbo originations represented 70% of total originations for the portfolio in Q4 compared to 69% in Q3 and 40% 1 year ago. We're also focused on noninterest income, with significant benefit derived from mortgage banking income, and that's coupled with credit card fee revenue that were earned through our new partnership with Elan. Our new program got underway late in Q1. We now have over 20,000 accounts booked. Credit card revenue in Q4 was around $400,000 or 37% higher than in Q1, which is the last relevant period to compare it to under our prior agreement.

We'll now turn to Slide 6, and let's take a look at the results of our Private Banking unit, which is expanding its team and making progress towards its revenue goals. Loan growth was up significantly compared to 1 year ago, and the pipeline remains strong at $73 million at December 31. We've seen a nice lift in deposit balances from growth to $25 million in the quarter and $87 million from 1 year ago. Deposit growth in the fourth quarter also included some significant new clients. The growth we're seeing in the Private Bank reflects the recent addition of 3 new relationship officers, bringing the total to 9, and we plan to add 2 more during 2013. We now have coverage in all but one of our regional markets.

We'll turn now to Slide 7 to review the results of our HSA Bank unit, which delivers its services through multiple delivery channels, including health insurance companies, insurance agencies, third-party administrators, technology partners and, of course, our national direct sales team.

HSA Bank successfully increased its strategic focus on midsized employers. In the last 3 years, the size of our average employer has grown from 15 to 60 employees, and most of this business is done electronically. This shift in focus to midsized employers and opportunity in the larger employer segment, coupled with providing differentiated value-added services, is really paying off. So if you look at the top chart, you can see we had $36 million in deposit growth from the third quarter, though note that most of our deposit growth normally occurs in the first quarter of each year. This is the quarter when the benefit plan years start for many employers and their employees. And at this point, it looks like we're tracking very well as we head into the first quarter of this year, as deposits have increased by $90 million since year end and totaled $1.36 billion as of January 15.

It also looks like we will comfortably surpass the 51,000 new accounts that were added in January of 2012, and the business continues to scale well as we add significant volume. You can see also on the top chart the 14 basis point reduction in the cost of funds at HSA over the past year. We've tightly managed the tiered rate structure that we pay on health savings account deposits. The chart on the bottom provides our average balance by age of account. We think the fact that the HSA's -- Bank's sole focus is on administration service in support of health savings account underpins our better-than-average market performance on the important metric of average balance by age of account.

We'll turn now to Slide 8 to look at overall originations and balances. You can see overall balances now total over $12 billion, and that shows growth of over $300 million or 2.6% linked quarter and over $800 million or 7.2% year-over-year. Our total originations, including residential loans originated for sale with servicing released, were $1.5 billion in the quarter. And as we just reviewed, the pipelines remain strong, though some post-year-end rebuilding will occur in the first quarter.

I'll now turn it over to Glenn for comments on our financial results and to provide an outlook for the first quarter.

Glenn I. MacInnes

Thank you, Jerry, and good morning, everyone. Let me start by turning to Slide 9, which provides a quarterly trend in net income available to common shareholders and return on common equity. The chart has reflected the progress that Jim and Jerry reviewed and how those actions translate into improving financial performance. The 21% increase in earnings over the past year corresponds to a fourth quarter return on assets of just under 1% and a return on common equity of just under 10%. The $47.9 million in net income to common shareholders in the quarter represents our highest level since the third quarter of 2004, which included 5.8 million in securities gains. Absent that, the quarter represents record net income. At $0.52 per share, this quarter also represents the third consecutive quarter of growth in EPS. As you see on the chart, our return on average common equity reflects consecutive increases over the last 4 quarters to 9.74%.

Slide 10 highlights our core earnings drivers, which excludes the non-core categories, as noted on the bottom of the slide. Starting with average interest earning assets, virtually all of the $199 million or 1.1% growth in the third quarter resulted from growth in loans and loans held for sale. The key drivers of this growth were commercial and commercial real estate loans. The growth in average commercial loans from the third quarter was $98.8 million or 3.2%, and average commercial real estate loans grew $123 million or 4.8%. Net interest margin for the quarter was 327 basis points compared to 328 basis points in the third quarter. We realized an approximately 3 basis point benefit to the NIM in Q4 as a result of $1.3 million of deferred fee income from prepayments and past-due borrowers paying current in the period. Absent this, NIM compression would have been in the 4 basis point range, consistent with the last 3 quarters.

We otherwise saw the smallest decline in the securities portfolio yield over the past 6 quarters as a result of a reduction in premium amortization. Net interest income increased by $1.4 million over prior quarter. We had a net increase of 812,000 in interest and fees on loans from both strong loan growth and deferred fee recognition. In addition, we were able to reduce our funding costs by 3 basis points this quarter.

Core noninterest income was $52.9 million for the quarter, up 11% over Q3, led by strength in mortgage banking and loan fees. Mortgage banking activity was up $2 million over Q3, as $222 million in conventional fixed rate mortgages originated for sale in the quarter were sold at a gain on sale of 317 basis points.

We also saw an increase of $1.5 million in loan fees from the loan origination activity in the quarter. In addition, we had an increase of $673,000 in wealth and investment services from a record quarterly sales performance totaling $5.3 million in investment products by our Webster investment service unit. Core noninterest expense totaled $122.2 million in the quarter, which was lower than prior quarter by 1.1%.

We continue to focus on growing the business while controlling expenses, and the fourth quarter was no exception. For the quarter, we again demonstrated positive operating leverage of 4.6% and achieved the 60% efficiency target that we set in 2011, at a time when the efficiency ratio was over 65%.

To summarize, the core earnings slide provides a snapshot of the progress that has occurred at Webster as total revenue grew over the past 4 quarters despite 5 consecutive quarters of NIM decline as a result of a challenging rate environment. Just as importantly, we have controlled expenses while investing in growth initiatives to generate positive operating leverage.

Turning now to Slide 11, which highlights our asset quality metrics. Noteworthy aspects in the quarter are the continued reduction in commercial classified loans, which were down versus prior quarter by 7%, and the reclassification to non-accrual of $44.1 million of Chapter 7 loans as a result of regulatory guidance. Additionally, $5.3 million in charge-offs were recorded to bring Chapter 7 loans to collateral value.

You see the impact of the reclassification in the nonperforming loans chart in the upper left, as well as the new non-accruals in the chart on the lower right. Apart from the reclassification, nonperforming loans would have decreased $6.6 million or 4.1% from September 30. Likewise, new non-accruals were $40 million in the quarter compared to $49 million in the third quarter. Lastly, with regards to loans past due reflected in the chart on the upper right, the $7 million net increase is due to a single commercial real estate credit over $12 million.

We'll now turn to Slide 12, which highlights our allowance for loan loss. Our provision increased to $7.5 million for the quarter, primarily as a result of strong loan growth. We recognized $16.5 million in net charge-offs during the quarter, including $5.3 million related to the aforementioned discharge borrowers that was previously reserved. Our allowance for loan loss of $177 million now represents 1.47% of total loans. Lastly, you see the drop below 100% coverage on nonperforming loans, primarily as a result of the $39.5 million discharge borrower reclassification.

Our investment portfolio is highlighted on Slide 13. The portfolio has remained fairly flat since the first quarter of this year. With loans being the primary driver of earning asset growth since that time, the securities-to-asset ratio of 31% at December 31 is the lowest level since September 2011. The 5 basis point decline in yield represents the smallest decline over the past 6 quarters.

The available for sale yield declined by only 1 basis point to 268 basis points. The decline this quarter reflects the benefits from a slowdown in premium amortization due to less reinvestment in securities at premiums to par, which almost offset the negative impact of purchases at yields of 200 basis points. We did see a 13 basis point decline in the held to maturity yield to 414 basis points. Although premium amortization was unchanged this quarter, yields were driven lower by purchases at 208 basis points and by municipal bond call activity, which increased from $27 million last quarter to $39 million this quarter.

Premium amortization on the entire portfolio declined by $700,000 to $16.2 million in the quarter. The decrease is a result of a stable agency MBS annualized cash flow of 29%. As anticipated, it follows less reinvestment in securities at premiums to par. Prepayments, calls, amortizations and maturity for the quarter are now $452 million with a yield of 324 basis points. And during the quarter, we purchased $452 million of securities with core value of $422 million at an average yield of 203 basis points and a duration of 4 years.

Most of our purchases were agency MBS, although $89 million of floating rate collateralized loan obligations, primarily AAA-rated, were added as a new investment category. This was done to reduce prepayment and extension risks associated with agency MBS. The addition of these floating-rate assets enabled us to lower the average duration of purchased securities by 1.2 years versus last quarter while giving up only 9 basis points in yield. The total investment portfolio duration remained at 2.7 years. With a neutral rate risk profile to a rise in rates and some exposure to a fall in rates, we currently expect to maintain investment duration and size throughout the reinvestment -- through the reinvestment of cash flows.

Let me turn now to Slide 14 for a review of our deposit trends. The 2 charts highlight that total deposits have increased 6.4% from 1 year ago with a 12 basis point decline in the cost of deposits, while transaction accounts have increased 18%. During the quarter, we reduced our deposit cost by 2 basis points. As previously noted, total transaction accounts now stand at 41% of total deposits.

On Slide 15, we highlight our borrowing mix and cost. An increase in borrowings of about $140 million from September 30, along with the deposit growth of $118 million in the quarter, helped to fund the $301 million in loan growth. We recognize a 9 basis point reduction in the cost of borrowings compared to Q3. The reduction is a result of a 33 reduction in the cost of long-term debt generated by the full quarter benefit of the $136 million TruPS redemption that occurred in the early part of Q3. Given the current rate environment, incremental funding is done primarily at short term rates from 25 to 35 basis points. We would expect borrowings to decline in Q1 due to seasonal inflows from HSA public deposits.

Our P260 update on Slide 16 highlights the progress we've made toward improving our operating efficiency and the achievement of our target of 60% by Q4. As you see in the chart, our core operating efficiency improved in the fourth quarter and came in just below our target of 60%. The continuation of positive operating leverage has been essential to achieving this goal, and we remain committed to ongoing achievement of positive operating leverage, apart from the linked-quarter seasonality that we expect to see in Q1.

Slide 17 highlights our capital position. During the quarter, we took the following actions to better optimize our capital: we issued $126 million of Tier 1-eligible 5-year noncallable perpetual preferred stock with a fixed for life coupon at 6 40; we obtained approval to repurchase up to $100 million in common shares; and we repurchased $50 million of common shares at $19.85 per share on December 7. We have a solid balance sheet position and the ability to return more capital to shareholders over time.

Before turning it back over to Jim, let me provide a few comments on our expectations for the first quarter of 2013. Average -- with respect to average earning assets, overall, our average earning assets will likely grow in the range of 1% to 2%. We expect average loan growth in Q1 to be in the 2% to 3% as a result of full quarter benefit of commercial loans booked during December. Our net interest margins held up well in Q3 to Q4 and, as I highlighted, we did have a higher-than-normal prepayments which, all in, resulted in a benefit of approximately 3 basis points. Given the continuing low rate environment and partial loan growth offset, we expect a 3- to 5 basis point compression off of the Q4 number in Q1 on NIM, barring any unusually high prepayment activity. And we would expect net interest income to be near the Q4 level.

As we highlight absent discharge borrower adjustment during the quarter, credit continues to experience stable trends along key asset quality metrics. Assuming stable asset quality, we expect our Q1 provision to be flat to somewhat higher, commensurate with Q1 loan growth.

Regarding noninterest income, in the fourth quarter, we achieved exceptional results in our Mortgage Banking. A significant portion was driven by high volume, partly as a result of seasonality. We would expect to see somewhat lower volume in Q1, even given the robust pipeline and likely somewhat lower gain on sale rates as well, while other components of noninterest income should remain stable to strong.

With regard to noninterest expense, as we have highlighted on prior calls, there will be an increase in Q1, as in prior years, from higher payroll-related expense due to seasonality from payroll taxes, 401(k), et cetera, and marketing expense as we reposition our brand and -- for account acquisition. That being said, we expect to achieve a sustainable efficiency of 60% or less beginning Q2 of 2013. So for Q1, expect to see total expenses increase in the 2% to 3% range from Q4, and then expenses begin to decline from the initiatives mentioned earlier by Jim and Jerry, as well as higher revenues from growth. We expect to achieve our efficiency ratio back -- we expect to achieve an efficiency ratio back in the 60% range beginning Q2.

Our effective tax rate, on a non-FTE base, we would expect to be in the range of 31% in Q1.

Lastly, our average fully diluted shares will be impacted by repurchases during Q4. Based on our current market price and no further buybacks, I would assume to be about 89.4 million in shares outstanding.

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

James C. Smith

Thanks, Glenn. Our fourth quarter caps a year of steady, measurable progress toward our goal to become a high-performing regional bank. We're stronger, deeper and better able to meet our customers' needs than ever before as we adapt well to the rapidly changing banking environment.

This concludes our prepared remarks. We'll be happy to take your questions.

Question-and-Answer Session

Operator

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

David Rochester - Deutsche Bank AG, Research Division

Just quickly on the fee income side, I was wondering if you're expecting to make that switch to neutral check ordering this year, and can you update us on what that impact could potentially be?

James C. Smith

Sure. We are likely to make that switch some time in 2013. And I think the impact probably is somewhere in the $2.5 million to $3 million range annually.

David Rochester - Deutsche Bank AG, Research Division

So probably impacting the latter part of the year?

James C. Smith

Probably, yes, yes.

David Rochester - Deutsche Bank AG, Research Division

Okay. And on the capital side, with half of the repurchase plan done at this point, are you thinking you may reload that at some point later this year?

James C. Smith

We may do that later this year. For now, we're satisfied to have the 50 million and to really look at it opportunistically.

David Rochester - Deutsche Bank AG, Research Division

Great. And just lastly, given the new QM rule, do you expect any changes to your strategy at all?

James C. Smith

No, we don't think it's going to affect the strategy. Actually, we were pleased that it was as broad as it is, that it has a Safe Harbor. If we actually looked at our production for 2012, I think that it wouldn't have affected more than 3% to 5% of our total originations. So at least at this point, and there's a lot of refinement to be done here, we do not believe it will affect our strategy, including in the pursuit of purchase, mortgages and Jumbo loans.

Operator

The next question comes from Bob Ramsey of FBR.

Bob Ramsey - FBR Capital Markets & Co., Research Division

To follow up on this question about QM, it's helpful to know it's 3% to 5% of your 2012 originations. When you say you don't expect much of an impact, does that mean that you would be willing to portfolio a non-QM mortgage that otherwise met your criteria that was maybe part of that 3% to 5%? Or are you suggesting that it's just not a material amount and you would discontinue with the margin?

James C. Smith

Well, the first is that it's not a material amount, that's true, and I made a comment that there's a lot of refinement to be done here in -- also including our understanding of what the impacts are, what the exposures would be to the extent we went outside the QM. But I would say, at this point, there's a good possibility that we will not be confined only by QM, that we'll look a little more broadly than that, but it's premature to conclude at this point.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay, great, that's helpful. And then I want to talk a little bit about loan growth. You guys obviously had a very strong quarter for commercial loan growth. It seems a bit for a long time any loan growth in the industry has been predominantly about taking market share, and we're starting to see more growth from more of our companies this quarter. I'm curious if you're sensing an increased willingness on the part of your customers to borrow, or how much of this may be related to sort of year-end issues? Just kind of any bigger thoughts on growth?

James C. Smith

Sure. Some of it, we think, was related to year-end issues. It's hard to pin it down exactly, but we would say -- you could say somewhere 10% to 15% or so of volume may have been as a result of borrowers anticipating the tax changes. And I think that may have drawn down the pipeline more than we'd normally would seen it contributed to the record origination volume. We think that usage is about the same quarter-over-quarter, maybe a little tiny increase there. We do think that the borrowers keep talking about how uncertain the environment is, but they are investing in their businesses. There is very modest economic growth. But a lot of our gain has come from the increase in the size of our production force, from the quality of our brand in the market. I think some of the larger institutions are having some difficulties with the negative psychology toward them, which enhances the likelihood that we're going to win, and we have won a larger share of Middle Market loans than otherwise would be the case. So it's really is this confluence of factors coming together that favor a regional bank in this kind of an environment, and particularly, we think, favor us.

Bob Ramsey - FBR Capital Markets & Co., Research Division

All right, that's great. And then I know you all sort of said you expect an increase in loans in the first quarter of about 2% to 3%, on average, given some of the strong growth late in the fourth quarter. I'm curious if you think more, instead about end of period, how you're thinking about the first quarter, and in -- I know it's only been 2 weeks, but are you seeing continued strong demand so far in the first quarter?

James C. Smith

I think we'd say demand is not quite as strong as it was in the fourth quarter for some of the seasonal reasons that we've already discussed, but it's there. And then we're building on what we've created to this point. Our pipelines are down, but we'll start to refill them. And we noted that even though the pipeline's down on the mortgage side, it's still over $500 million going into the quarter. So it isn't just going to be the average that holds up the earning assets there in the quarter. I think there will be some true growth.

Operator

Next question comes from Mark Fitzgibbon of Sandler O'Neill.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

You've done some -- quite a bit of remixing on the loan portfolio, and commercial credits, I guess, are slightly over 50% of loans now. Is the goal to sort of have a 50-50 mix between commercial and consumer? Or are you comfortable taking that up to a 60% or 70% kind of level?

James C. Smith

The goal is to grow the portfolios that will, over time, generate the highest economic profit. It isn't simply what should be the size of the portfolio. But I am glad you brought it up. I want to let -- to say again that our commercial footings now exceed our consumer footings, and that was one of the overarching goals of the company for a long time now, so we're delighted to be at that point. We talk about our focus on relationship development. So as we move up market and into the commercial mix, there's an opportunity to build stronger, longer-term, valuable relationships for clients that also generate economic profits for us. And so a lot of our resources are being invested accordingly. At the same time, we're trying to right-size the consumer bank, investing in the electronics. But I would anticipate that the footings in the Commercial Bank will continue to increase relative to the loan portfolio.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then secondly, of the $2.5 billion of CDs that you have, what does the maturity schedule of those look like?

Glenn I. MacInnes

So I believe we have markets -- it's Glenn, about $1 billion coming off over the year and -- I'm just looking. That is at about $1.5 billion in the year at about 105, 105 basis points, and that'll come back in at about 30, 40 bps if we -- and we've been very successful in retaining, so up to 90% is rolling back into the book. So that should help us on our funding going forward.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

Great. And then the last question, I guess, is for Jim on -- it relates to acquisitions. You've done some great work internally. You haven't been focused on acquisitions for a while. Do you feel as though your house is in order sufficiently that you'd be ready to get more proactive on the acquisition front?

James C. Smith

Actually we do, Mark, and a lot of it is about making sure your house is in order, and you're performing well at what you do, particularly if you think you might be exporting that to somebody else. And I think we have made a lot of progress. There's still some to go. Our focus is riveted on improving what we do here. We're not spending a lot of time focusing on the acquisition front at this point, but we think there will be some opportunities. We have geared up internally to take advantage of them on a selective basis. Ideally, in negotiated transactions with like-minded partners that think together, we could be a bigger, stronger regional bank. So something may come off it, but it may not. It's not an active prong in our overall strategy. We're really focused on organic growth. There's so much we could do with what we have.

Operator

Our next question comes from Matthew Clarke of Crédit Suisse.

Matthew Clarke - Crédit Suisse AG, Research Division

On the coverage ratio, nonaccruals, I understand the situation this quarter, but could we assume that, that coverage will rebuild back above 100%? And just along those lines, whether or not we might see a more swift decline in the problem loans, maybe like we saw in the TDR bucket, and just curious what really drove that improvement on the -- in the TDRs.

Glenn I. MacInnes

Yes. So it's Glenn, and I think that you would expect coverage to go from the 91 basis points above 100. That's the answer to your first question. And I think that if you just look at our progression, I mean, it has slowed down, as Jim highlighted, on some of the metrics, but we continue to make progress across all lines. The TDRs, in part, were -- a part of that is prepayments or refinancing out of the banks, so hard to predict what that's going to look like. I mean, some of it's dependent on the borrower. So I couldn't give you guidance on what that number's going to look like over the next 3 quarters, but I think you would expect it to decline over the next 3 quarters.

Matthew Clarke - Crédit Suisse AG, Research Division

Okay. And then on the securities portfolio, that -- that's kind of held the line on a dollar basis. Is that the expectation, that you'll continue to kind of hold the line there and let the loan contribution continue to increase relative to earning assets?

Glenn I. MacInnes

Yes, and I highlighted that all our interest-earning asset growth was from loans, and that -- we've talked about that. It used to be almost 2/3-1/3, and now, it's the loans and it's commercial loans which have a yield of about 414 basis points, at least as far as funding in the quarter. So absolutely, that's our strategy to keep that flat to down and grow the loan book.

Matthew Clarke - Crédit Suisse AG, Research Division

Okay, great. And then I -- when you think about the margin going forward, I appreciate the guidance there, but I guess is there any lumpiness in the -- in some of the repricing on the CD book and FHLB book that we might see maybe a more meaningful drop in funding costs in any given quarter this year?

Glenn I. MacInnes

No, there's no lumpiness there. I think we do have some things that matures over Q1, but we factored this into our guidance that I provided. There's sub-debt that comes in during Q1, which is at 3.42. But there's no large items that are going to move it either way.

Operator

Next question comes from Casey Haire of Jefferies & Company.

Casey Haire - Jefferies & Company, Inc., Research Division

Just a quick question on the -- so the Mortgage Banking sounds like it's normalizing a little bit lower here. Can you just talk a little bit about what kind of expense leverage you get on lower Mortgage Banking?

Glenn I. MacInnes

Meaning, how quick we are to react to drops in volume?

Casey Haire - Jefferies & Company, Inc., Research Division

Exactly. Like what -- so Mortgage Banking down $1 million, what happens on the expense side?

Glenn I. MacInnes

Yes, I don't have the exact number, but I will tell you that a large part -- we use -- what our business use calls the accordion method. So -- and that involves temporary help to sort of hit the peaks and lows. So we can be very responsive to changes in volume. And so to the extent that drives up a large portion of processing side is on the temporary help side. But I don't have the exact number of that stats.

Casey Haire - Jefferies & Company, Inc., Research Division

Okay. And then just following up on some of the reserve coverage ratio down below 1.5 here, I think you guys talked about 1.25 is the lowest you'd want to go on a loan loss reserve ratio. Does that still hold?

Glenn I. MacInnes

Yes, it does.

Casey Haire - Jefferies & Company, Inc., Research Division

Okay. Is that something we might see this in the next couple of quarters here?

Glenn I. MacInnes

Further out, I think you'd see it. Not the next 2 quarters, but maybe in the fourth quarter. Volume, of course, commensurate, as I indicated, with loan growth and credit quality continuing to follow the path that it has.

James C. Smith

Actually, I just want to add that the 1.25 is not a hard limit, and Glenn makes the point that it's relative to the loan quality overall. And I think that in the last call, we suggested it even could be 1.20 or so, but it's in that range.

Operator

Our next question comes from David Darst of Guggenheim Securities.

David Darst - Guggenheim Securities, LLC, Research Division

Could you talk about how many more branches you think you could relocate? And then what's the savings per unit? And then maybe what's the cadence that you would look at relocating the units?

Gerald P. Plush

Dave, it's Jerry. Great question to try and get us to disclose the sequence in cadence. I would just share with you that we are looking very, very carefully at each of our markets, evaluating each location, trying to make sure that it's the best location, that it's the right size to serve the market, that we are getting the most through that particular location, both on the investment services, the small business, as well as, obviously, on the mass consumer side. So the way I would approach it is, what we did in Simsbury, you'll see us go from much, much larger, in the thousands of square feet, to just a several thousand or fewer square -- or less square foot location that's just got more foot traffic to it, that's got better visibility. As we noted with Greenwich, we're obviously still going to look at being opportunistic in certain markets, but there's a number of markets in 2013 that we've got some combinations lined up to do to try and go from a couple of facilities into one that's going to be a much better location, and we're going to continue to do that for the foreseeable future. I think this is something that you've got to be -- continuously look at. I think that, additionally, we've built them, and I mean, as an industry, they've been built and they stay. We're looking at this much more like what you would see retailers in other lines of business do. We are looking to make sure that we're best location, appropriate size. We're also taking into account what's happening in the demographics in each of those markets. We've got some markets where there's just an incredible amount of foot traffic that we expect to continue to occur, and therefore, we'll continue in those locations. There's others where we're seeing a significant shift into the electronic channel, and there's our opportunities for combinations. So I think we'll give a lot more guidance to that as we go forward. We're really not going to do that today on the call, but I think you should listen to some of the things that we'll do in investor conferences throughout the course of 2013. We'll give a lot more insight as to what's happening there. I do also want to say, just given the age of some of our facilities, you'll also hear us talking about significant renovations. We're #1 market share in a lot of markets, and we feel it's very, very important to refresh facilities. So there will actually be a little bit of spend in some of the markets as well. But what we've done here is really position ourselves between the eChecking product, between the upgrade of all the ATMs, the mobile app, and you know that we're going to do the release of RDC, and we're also going to look at further enhancements of our capabilities in the electronic space. We're positioning ourselves for the mass consumer. We think that the strong, strong preference is going to be for the electronic delivery, and therefore, that you'll continue to see that we will be very, very surgical in knowing where a new location would go, and we'll still continue to look, as you go forward, for combinations. We certainly think, and I think this is the most important thing, that physical presence is very, very important in a lot of the markets that we currently serve. But we are seeing in some that the shift to electronic is really, really ramping up, so we're keeping a close eye on it.

David Darst - Guggenheim Securities, LLC, Research Division

Okay. And then would you say that the number of FTEs per brand is changing as you roll out the Universal Banker program, or is it just the activity?

Gerald P. Plush

Yes, absolutely. Good question. Yes, because in terms of what's happening is, you're becoming much more of a -- instead of a transaction-based facility, you're becoming much more of a sales consultative-based, and that just requires a shift to be able to spend more time with the customer. They're performing most of their routine transactions electronically or at the ATM. So our view is -- we're not physically, obviously, walking up to an ATM. So our view is the Universal Banker will clearly shift staffing needs. There'll also be a big shift in terms of the education, the certification of the banker serving in those locations. So taking all of that into account, there definitely will be some shift in terms of the number of people per location.

Operator

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

Russell Gunther - BofA Merrill Lynch, Research Division

Appreciate the color on where you'd expect the reserve to trend near-term. You have had a chance to assess any potential impact of the recent FASB proposal for life of loan loss reserves and maybe -- instead of to keep reserves higher, ultimately?

Glenn I. MacInnes

No. I -- Russell, it's Glenn. We're still working through that, so that -- I would not factor that into our outlook right now.

Russell Gunther - BofA Merrill Lynch, Research Division

Okay. And then just lastly, on the loan growth front, through a good chunk of earnings this season and mixed commentary from some of your peers in terms of what the uncertainty in Washington and the impact there on loan demand, what are you guys seeing? And if we do get some resolution down there, could we see loan growth pick up beyond sort of the expectation you laid out in the first quarter?

James C. Smith

I think we would say, it isn't simply what happens in Washington. It's how strong the economy is. And our sense is that the underpinnings of the economy may be a little bit stronger than people have thought. And so we're anticipating there will continue to be modest growth, that if there's a resolution, of course, depending on what that is, that gives some certainty, along with that would go some stability, would that increase confidence and would business people be more likely to invest? Probably so. That would be a modest improvement over what our expectations are currently.

Operator

Next question comes from Jason O'Donnell of Merion Capital Group.

Jason A. O’Donnell - Merion Capital Group

Glenn, I know you made some comments about a potential seasonal pickup in borrowings in the first quarter. Can you just give us some sense of how you're seeing the funding strategy play out in 2013 and, I guess, 2014 given the stronger loan outlook and how things were funded this quarter? I mean, should we expect to see higher borrowings bounce to be part of that equation post the first quarter? Or are you more likely to manage your securities to assets ratio below that 30% threshold?

Glenn I. MacInnes

Yes. I think the latter. We -- and we've been pretty clear about that. I mean, we, on the Treasury side, they're actually doing a great job in timing where the market was, if you go back 2 quarters. So I think as we see loan growth, you'll likely see more of an offset on the securities portfolio.

Jason A. O’Donnell - Merion Capital Group

Okay, okay, that's helpful. And then I apologize if I missed it, but can you address the shift in banking activity you've been seeing toward mobile channels? I'm just curious what percentage of your customers are accessing their accounts through their mobile devices today versus, say, maybe a year ago?

Gerald P. Plush

Yes, Jas, it's Jerry. In terms of the uptick in transactions, I think we're going to be able to give you a much, much better picture of that given the downloadable app went out in the middle of the quarter and then the final enhancement for the iPhone went out later in December. So in terms of being able to give you true mobile statistics, I would prefer to hold on that. But we are seeing -- we obviously had a bookmark that folks were using. So there was definitely some traffic that we saw, but basically, that's combined in our online statistics previously.

Operator

Next question comes from Collyn Gilbert of Stifel, Nicolaus.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Just a follow-up a little bit on the funding question. Glenn, is there anything that you can do -- I mean, as we look at kind of the repos at 1.72 and the FHLB advances at 1.11, and I know the duration there maybe is a little bit longer, but is there anything that you can do on the funding side, keeping deposits off the table at the moment, to lower those? Or is this a decision that you're consciously making to try to keep that duration a little bit longer?

Glenn I. MacInnes

Yes. I think we are -- the decision is to keep the duration a little longer, so we're not contemplating any action against that.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay, okay. And then just kind of a big picture question, which I think people have kind of asked around it in terms of the reserves, but you guys have obviously made great strides in the last year or so with a lot of the new initiatives and some of the momentum you're gaining. Do you think that, that is sustainable enough or that the momentum can increase enough that -- I guess the way I'm looking at my model and looking out, given that the loan growth probably needs to stay more or less or will -- could potentially stay more or less where it is, that you're really going to need to grow the provision again? So if we -- again, my numbers look like maybe, say, $45 million sort of pickup in the provision over the next 2 years, which is a big number to try to find earnings to sort of supplement that provision growth in the wake of relatively flat net interest income, if Mortgage Banking starts to slow. I mean, is this something that's consciously on your mind, as management and the Board? Am I overstating the impact that this reserve build's going to be on the kind of the earnings trajectory? If you could just give a little color as to what your thoughts are on that.

James C. Smith

I think the reserves are something that's on everyone's minds in the industry, right? But I also think that the other missing piece here is that our charge-off level is still at the 50, 56 to 60 basis points. And so there's more -- as we clean up the quality of our balance sheet, you -- presumably, that would come down as well. That's sort of the third way, right?

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Yes.

James C. Smith

But I think -- and again, it's commensurate upon our loan growth that we would make the decision whether we're doing in it [ph] build or not, right, on an expense basis. So we have to see how that comes out over the year.

Gerald P. Plush

And we do think about it, Collyn, you're right. We think about it a lot, the way that it affects our -- but the conclusion is that the loan growth is valuable to us, and we'll provide as needed in order to support it. That's the fundamental conclusion.

Glenn I. MacInnes

And we do look at it, as I think everyone does, as what percent of earnings is release, and we were $9 million for this quarter, so it was the lowest that we've been for the last couple of quarters, so 12% versus the 20% number, and even higher in prior years. So we're very focused on it, as Jim highlighted, but we continue to work it.

Operator

Our next question comes from Damon DelMonte of KBW.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Most of my questions have been already answered, but just a couple more modeling-like questions. The -- in the fee income side, loan-related fees were up nicely over the quarter. And I may have missed what you described in your comments. Could you just go over what was driving that quarter-over-quarter growth, and is that sustainable going forward?

Glenn I. MacInnes

Yes. Loan-related fees were primarily in the commercial side, and so -- and we had a very strong fourth quarter, and we talked about the pipeline and the outlook for commercial. So I think you've got to assume that we'll continue to generate loan fees. I think that we are up, but from a modeling standpoint, I would say -- yes, I mean, the other side of it is -- so you have the loan originations, then you also have the swap income. And I don't know if we quoted the number of transactions, but that was 1.8 million for the quarter. So that is something that, as we book commercial real estate, that we're swapping out and we continue to get fees on as well. And that's been a good source of annuity income for us, so I think that will, in part, will continue through the year.

James C. Smith

And if you did miss it, Damon, we also mentioned some Webster-led agent transactions generated about $1 million in fees in the quarter. We expect that cash management fees will be on the rise. And so to the extent there's some volume decline there, there are some offsets in terms of fee income.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And then Glenn, just to clarify on the margin, you said that the 3- to 5 basis point potential compression in the first quarter, that includes this quarter's benefit of 3?

Glenn I. MacInnes

I take it off the 3.27.

Operator

Next question comes from Matthew Kelley of Sterne Agee.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

I was just wondering, what were the origination yields during the quarter on the $309 million in investor-owner occupied CRE versus the third quarter? How did those trend?

Glenn I. MacInnes

I think on the CRE, we were in the $318 million range, and the third quarter, I'm not sure I have that here. We can come back to you.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay, yes. How much of the $309 million was kind of your portion that you kept of agent-led deals that you led -- larger transactions, what slice have you kept? How much of that was in the $309 million?

Glenn I. MacInnes

Yes. I think we've got to come back to you on that too, Matt.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. And then just in that agent-led business which generated the $1 million in fees, when you sold down 78, I mean how much larger can that business kind of scale to as that team kind of build out their relationship networks?

James C. Smith

It can scale. We don't want to say what the potential is, but it's significantly greater than where we are now.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay, got you. And was there anything going on one time in the BOLI income, it looked like it popped up just a little bit, we should back out?

Glenn I. MacInnes

We increased our BOLI, so that's revenue-associated. I think if you look at the -- if you just look at the cash surrender value, you'd see the increase in the -- at quarter-end September, you actually saw the increase, the $100 million higher policy.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Got it. And then last question, deposit service fees. Any new initiatives planned for 2013 to help recapture what you've lost over the last couple of years? Anything changes in terms of the rate of fees relative to average deposits we should be thinking about?

James C. Smith

We're not thinking that's there's going to be a significant increase. We're always looking at the pricing of our products, and there could be a modest impact as a result of changes in pricing. But we think that the unit servicing fees are fairly stable at this point.

Operator

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

James C. Smith

Okay, Dan, thank you very much, and thank all of you for being with us today. Have a good day.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.

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