Webster Financial Corp (WBS) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Webster Financial Corporation's third quarter results 2009 conference call.

At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial conditions, results of operations, and business, and financial performance.

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

These forward-looking statements are subject to risks, uncertainties, and assumptions as described in Webster's financial public filings with the Securities Exchange Commission, which could cause future results to differ materially from historical performance or future expectations.

I would now like to introduce your host to today's conference, Mr.

James C.

Smith, Chairman and Executive -- Chief Executive Officer.

Please go ahead sir.

Thank you, Melissa.

Good morning, everyone, and welcome to Webster's third quarter earnings call and webcast.

You can find our earnings release that was issued earlier this morning and the slides that accompany this presentation on our website at websterbank.com.

As usual, I'll provide an overview for the quarter and Gerry Plush, our Chief Financial Officer, and Chief Risk Officer will provide a review of our financials.

I will then offer some closing remarks and open it up for your questions.

We will begin focusing on slide 3.

Since our July earning's call, I am pleased to say that Webster continues to make significant progress on a number of fronts, including improving pre-tax pre-provision earnings, further strengthening of our capital levels, especially tangible common equity, increases not only in deposits, but market share as well made even more impressive by lined quarter expansion and net interest margin, and stable loan delinquencies for the third straight quarter.

I will elaborate on each of these.

First, our pre-tax pre-provision earnings rose to $56.1 million in Q3, up 10% from Q2, aided in part by a 14 basis point increase in the net interest margin to 3.18%, and by previously committed improvements from our OneWebster earnings optimization initiative.

These data points speak to the fundamental strength of the Webster franchise, which is beginning to shine through in a challenging economic environment.

We expect our pre-tax pre-provision earnings to grow even stronger as the economy recovers, and as we execute on our plans for growth.

If you look at slide 4, you can see that capital was the high point of the quarter.

As we announced last week, Warburg Pincus has completed its $115 million investment in Webster common stock, non-voting preferred and warrants.

We shortly will be scheduling a special shareholders' meeting to gain approval for Warburg's preferred to convert into common.

While we talked with many of you about the Warburg Pincus investment, I want to spend a minute discussing the relationship and the rationale, and to reiterate why we're so pleased with this transaction.

Our relationship with Warburg became increasingly comfortable with one another.

We found that we share a common perspective on what will constitute a successful regional banking strategy focused on New England.

So when we decided to explore raising capital, it was only natural that Warburg Pincus would be in a considered set.

My point is that Webster and Warburg Pincus understand each other very well, share a long-term focus, and are completely aligned on the belief that successful execution of our strategy to be New England's bank will create significant shareholder value.

We're pleased to have one of the marquee names in private equity as our largest shareholder.

Warburg Pincus' track record of bank investing, which includes Mellon, Dime and others is legendary.

Their thorough due diligence which drew on the expertise of JPMorgan Chase, Promontory Financial Group, Ernst & Young, and Sullivan & Cromwell, as well as Warburg's own extensive capability, convinced them that Webster's long-term potential for shareholder value creation warranted a premium to market.

More than one investor has remarked that Warburg's investment has amounted to the financial equivalent of the good housekeeping seal of approval for Webster.

It certainly has triggered interest in Webster from investors who previously weren't holders of our shares.

Terms of the investmentship pleased our investors.

The issuance price for Warburg Pincus common shares represented a 12% premium to the 10-day trailing average for our shares, and nearly a 20% premium to the 20-day trailing average at the time it was announced.

The investment resulted in minimal dilution to tangible book value and modest dilution to normalized EPS, and was struck on terms that we believe were considerably more favorable than we could have achieved otherwise in a common equity raise.

In addition, Dave Coulter has joined our Board of Directors.

As you may know, Dave is the former Chairman and CEO of Bank of America and former Vice Chairman of JPMorgan Chase, among other notable achievements.

We know Dave well and have very high personal and professional regard for him.

And I can tell you that in addition to his valuable services as a member of the Board, he is also proven to be a valued mentor and coach.

Following our very successful exchange offer in Q2, the Warburg Pincus investment boosted our already solid regulatory capital levels well above the median for our peers and then brought our pro forma September 30 Tier 1 common to risk weighted assets ratio to 6.93%, bringing us closer to the June 30 median of the top 50 US commercial banks and up more than 125 basis points from year end 2008.

The bottom line is that while our capital levels had been well in excess of regulatory requirements all along, our Tier 1 common intangible common ratios were not.

The opportunity to boost these levels and what we deemed to be highly favorable terms and put to rest any questions about tangible common equity levels was compelling.

We can now say confidently that our capital ratios across the board positioned us well not only to weather the economic storm, but also to grow once our regional economy rebounds.

The market's reaction to our capital action speaks for itself.

Since the day before we announced the exchange offer, our shares were up 74% compared to an increase of 5% for the KRX index, which is comprised of peer banks ranked from 25th to 74th in terms of asset size.

This late July when we announced the Warburg investment, our shares have risen 32% versus 9% to the KRX, and year-to-date our shares have declined 8% compared to a 30% decline to the KRX.

To be sure, there's a lot more to be done to restore the value lost in the downturn.

But the point is that our capital actions have ignited relatively strong share price performance.

As I signaled in our previous call, Webster intends to seek approval from treasury and our primary regulators to begin an orderly repayment of treasury's capital purchase plan investment.

We have now begun that process.

Given the strength of our regulatory capital ratios and the fact that CPP is not included in the calculation of tangible common equity in Tier 1 common ratios, our initial repayment plan does not envision the need to raise additional common equity other than through the tools we already have at hand, including completing exchanges for junior capital and possible utilization of our existing discretionary stock purchase program.

The third area I'd like to highlight is deposits.

Building on our success in the prior two quarters, our deposits first growth initiative delivered a $426 million linked quarter increase in deposits, with all growth coming in core deposits.

On a year-over-year basis, deposits are up 15% after taking into account a price driven reduction of $394 million in mostly single service CDs and broker deposits.

Our strong deposit performances has had a major impact on our funding profile.

Our loans to deposit ratio is now 83% compared to 109% a year ago, and our core deposits to total deposits ratio is now 69%, up from 61% a year ago.

The growth in deposits is reflected in our market share, which is rising according to the FDIC market share report that came out last week.

In Connecticut, an 11 basis point increase in our number two deposit share narrowed the gap behind the market leader, and lengthened our lead over the number three competitor, both of which saw declines.

In the Providence MSA where the top three retail market leaders all saw share erosion, Webster picked up 58 basis points in deposit share.

While we're on the subject of Providence, I want to note that we're consolidating our regional headquarters together with a new branch in 100 Westminster in the heart of Providence's financial district.

The photos in slide 7 give you some idea what our Providence facility will look like and our progress toward opening the branch in the near future.

Together with our soon to open Boston office pictured in slide 8, we're raising our profile in these two important markets as part of our New England's bank strategy.

Like a Providence facility, our new Boston flagship is located in the heart of financial district.

Our initial focus in Boston will be concentrated on middle-market companies, government finance, and business and professional customers including lawyers, accountants and medical practices.

Before I leave this subject of deposits, it's important to note that we're growing deposits through intense focus on building core deposit relationships, not through pricing, single service CDs or broker deposits.

Our rising net interest margin is proof of our progress in this regard.

On the top of loans, which Gerry will cover in detail, I should note that loan balance has declined modestly across all categories in Q3.

This isn't surprising given the fact that in a recession borrowers, both businesses and consumers, pay off loan balances rather than renewing or increasing them, and that underwriting standards are higher.

Still, we did originate, renew, or modify $617 million in loans in Q3 and $2.3 billion year-to-date.

We are fully committed to working with borrowers to see them through these difficult times, as evidenced by our successful foreclosure avoidance programs and our proactive engagement of our business borrowers.

For example, note that 60% of the increase in residential non-accrual loans in Q3 came from loan modifications, which now in total account for 40% of residential non-performing loans.

At some point and perhaps soon, our loan balances will begin growing again given our intensified focus on small businesses, middle market companies, consumers, and select commercial real estate with the appropriately priced risk adjusted returns.

We intend to play a meaningful role in providing credit for the economic recovery in our region.

Meanwhile, we continue to shrink the footings of our national, equipment, finance, and asset-based lending businesses consistent with our off reference strategic review.

Regarding our strategy, Webster has an opportunity to fill a vacuum in what we refer to as the business and professional banking market.

As a regional bank with a local feel, we can serve this market better than our larger competitors.

Our suite of products for small businesses is as good as any in the market regardless of size.

To fill the small business banking void, we are building a value proposition that brings Webster into small business's circle of trusted advisors together with their CPA and attorney.

We will accomplish this by building on our knowledge base and understanding of small businesses and by delivering a consistent customer experience across our footprint.

To take our small business banking to the next level, we recently hired Ginger Siegel, an experienced small business banker, formally with Washington Mutual and Citibank.

Opportunities in the small business market abound, and we are intent on seizing them as New England's bank.

This market is a major growth opportunity for us and you should expect to hear more in the quarters ahead.

The final area I will touch on is credit before turning the call over to Gerry for a more detailed review.

While we're seeing some modestly encouraging signs, for example, in delinquencies, it's still too early to try to predict when problem loans and charge-offs will crest.

You can see this in our continuing high provision level and net charge-offs.

We are actively identifying and managing our underperforming credits, being vigilant in our risk ratings and reserving prudently.

During Q3, we increased our coverage for credit losses to 2.9% of loans, marking the fourth consecutive quarter in which we reserved significantly more than we've charged off in anticipation of future possible credit losses.

You can see in our credit numbers that there may be some reason for cautious optimism.

While non-performing loans rose $11 million during Q3, they were down or flat across every category except commercial real estate, restructured residential mortgages where we modified terms, and consumers.

Meanwhile, delinquencies remained stable at about $130 million for the third quarter in a row, and well below the $140 million of last year's Q4.

New non-accrual loans declined for the second quarter in a row while cures and exits climbed also for the second consecutive quarter.

With that, I'll turn the call over to Gerry.

Thank you, Jim, and good morning, everyone.

We've provided a view of core earnings for the third quarter on slide 8 and outlined several items to take into consideration when looking to see what the pre-tax, pre-provision earnings of the Company were in Q3.

We're pleased to report an increase to $56 million, primarily from higher revenue.

As you can see here, there are a number of material items that impacted the quarter and resulted in a net pre-tax loss.

Similar to prior quarters, we've excluded these certain items including $4.7 million in net losses from sales of securities, as well as $1.3 million in investment write-downs from OTTI charges related to credit deterioration in the quarter.

We've also excluded $4.2 million in severance and other costs, and $2.2 million in OREO and repossessed equipment write-downs, again, just given the nature of these particular charges.

Our results also included a provision for credit losses of $85 million, of which $56.5 million related to the continuing portfolio and $28.5 million related to the liquidating portfolio.

So, exclusive of these, you can see the momentum building in our underlying performance in the quarter as the margin improved and average earning assets increased.

Before we proceed further through the slides, I would like to provide an update on two significant accounting items we addressed this quarter.

First, regarding goodwill.

Webster is required to perform its annual goodwill impairment test in the third quarter of each fiscal year, and as in past years, we utilized external valuation experts to assist us.

The testing results confirmed that no valuation allowance was required.

Second, regarding deferred tax asset valuation allowances, we prepared a realizability analysis under ASC 740 to make a determination whether a valuation allowance would be required to be established in the third quarter.

As many of you are aware, there is significant focus required in this area when a company has reported significant losses in the current or prior years.

Based on the applicable literature, the company performed an analysis of the recoverability of its DTA, and this includes consideration of reversing temporary differences, taxes paid in prior years, tax planning strategies, and reliance on future taxable income.

Management is required to identify all this available evidence, both positive and negative, in determining the likelihood of the realization of the DTA and assessing the need for a valuation allowance.

And based on all this available evidence, it was determined that it was more likely than not that the DTA will be realized and no valuation allowance is required to be established in the quarter.

Please note that the DTA will need to be evaluated on an ongoing basis, certainly quarterly, for realizability based on current information.

It's also important to note that for regulatory and Tier 1 common purposes, we deduct the full amount of the DTA from capital.

Back to the slideshow, if you turn to the next slide on slide 10, here's a view of our income statement.

You can see here on a summary level what the key drivers for each line item are.

First, the increase in net interest income reflects a significantly improved net interest margin of 3.18% as the cost of interest bearing liabilities declined 28 basis points, while earning asset yields declined only 12 basis points.

Our non-interest income increased on higher deposit service fees and other income offsetting declines in loan fees and mortgage banking activities after a strong second quarter for those categories.

Wealth and investment services revenue increased modestly as the valuation of assets under management improved in the quarter.

Our non-interest expenses increased $2.8 million, primarily from increases in compensation related expense, marketing and other expenses.

We will cover this in greater detail in a few slides.

The non-core items for the quarter included previously mentioned losses on sales of securities, foreclosed property expense and write-downs, severance and other costs, and credit related OTTI charges as outlined when we covered the prior slide.

You can also see here the preferred dividends were about $6.9 million in Q3 compared to $10.4 million in Q2.

This is what we're paying in the remaining convertible preferred shares as well as the preferred shares issued pursuant to the CPP.

Turning to slide 11, here you can see that the margin improved, again, to 3.18% in the quarter compared to 3.04% in Q2 and 2.99% in the first quarter.

As we mentioned during the second quarter call, we had a significant number of CDs that matured in Q3, over $1.7 billion and repriced at lower rates, moved out or into other deposit products.

In addition, we continue to make disciplined pricing decisions in all other deposit categories, and as a result our total cost of deposits decreased by 29 basis points.

The decrease in the cost of borrowings reflects a reduction in the cost of long-term debt.

So overall, strong improvement in Q3, and our expectation is that there is opportunity for further improvement in the fourth quarter, given discipline around loan and deposit pricing decisions, CD maturities and FHOB advanced maturities.

Turning now to slide 12, where we cover the detail behind non-interest income, you can see the deposit service fees increased about $860,000 from last quarter.

This increase in Q3 is primarily related to seasonal customer behavior.

Loan related fees declined $793,000 from the second quarter and $1.6 million from a year ago, and that's primarily due to lower application and amendment fees in the quarter compared to prior periods.

Mortgage banking activities declined $2 million in comparison with strong second quarter where we saw greater originations.

Other income increased $2.2 million from the second quarter from higher credit card referral fees, derivatives and direct investment income, and other miscellaneous items including insurance proceeds quarter-over-quarter.

The net loss from sales of securities totaled $4.7 million, which is primarily from a loss in the sale of $4.9 million in book value of pooled trust preferred securities.

In the case of these transactions, we would have taken OTTI charges versus a loss on sale, and given our intent to reduce concentration and exposure to other financial services entities, as well as manage our DTA, we executed these trades.

We also reported a loss of $1.3 million on the write-down of certain pooled trust preferred securities and preferred stock to fair value.

This is based on credit deterioration and the underlying issuers.

We update our credit assessment on each of the underlying issuers in these pools quarterly, and determined that impairment was warranted based on our review.

Turning now to look at non-interest expenses, which when you exclude foreclosed and repossessed property expense, severance and other charges, and FDIC special assessments in the second quarter, increased about $2.8 million from the second quarter.

Comp and benefits increased primarily from one extra day of pay for our non-exempt personnel, and incentives, and it's somewhat offset by declines in group insurance and commissions, while marketing rose about $600,000 from increased campaigns for checking and for advertising around branding.

And our other expenses were up about $1.6 million, primarily from changes in the reserve for unfunded lines of credit and the buildup of some litigation reserves.

Our foreclosed and repossessed property expenses were down $660,000 on a quarter-over-quarter basis, while severance and other costs were higher by $2.9 million.

The increase in other costs includes the establishment of a $3 million reserve for fraud, which had no customer impact, and this excludes any consideration for recovery.

Given this is a pending law enforcement matter, we're really not in a position to comment further on this subject.

However, you should know that in establishing the $3 million reserve, we believe we've captured the maximum possible financial exposure before any consideration of any insurance recovery for restitution.

We'll turn it now to give an update on our One Webster program.

As you recall, this earning optimization program was initiated in the beginning of 2008, and you can see here on this slide, there is an update of our progress through September of 2009.

Our intent is to show the expectations versus progress to-date through the end of the third quarter.

Again for background, we originally identified about $50 million worth of run rate improvement, about 80% on the expense side, and 20% on the revenue side, and our original expectations were to have this fully implemented by the middle of 2010.

And in December of last year, we added another $16.5 million worth of expected benefits as part of a 60-day review where we centralized support functions and tightened spans of control.

And clearly in this chart, you can see we are making considerable progress towards these goals.

Many of the benefits from these efforts are being muted in the current period by increases in items such as FDIC insurance premium expense, reduced FAS 91 expense associated with lower loan volumes, higher pension expense and higher foreclosed property expense given the current economic environment.

Turning to the next slide, we provide a high-level view of selected balances.

You can see our total assets increased as compared to last quarter, while loans declined in all principal categories in Q3, it's primarily in commercial loans, which declined by $164 million.

We'll discuss the specific loan segments in greater detail in a few minutes.

The securities portfolio increased by $441 million and we'll cover that in greater detail on the next slide.

On the funding side, deposits increased by $426 million, and the strength and quality of this deposit growth resulted in further improvement in the ratios of loans to deposits and core deposits.

Given this strong deposit growth and inflows from loan repayments, we utilized some of that funding to offset maturing borrowings, which declined by $144 million, and utilized the balance to fund asset growth in the period.

We'll turn now and take a more detailed look at the investment portfolio on slide 16.

Here you can see the components of our $4.6 billion investment portfolio.

The growth of $441 million was from purchases of $260 million in agency hybrid ARMs, $130 million in short-term agency debentures and $97 million in short duration agency CMOs.

There is no securities in this portfolio backed by sub-prime Alt-A or low-doc.

And you can see here that there is $103 million in unrealized gains in the HTM portfolio and that's up from $33 million in June 30th.

There's $3 million in unrealized losses in the AFS portfolio, a substantial improvement over the $53 million in net unrealized losses of June 30th.

And as in prior quarters, we've posted additional details in our website regarding the investment portfolio, so the supplemental schedules are out there for you to review.

On the next slide, we cover some of the more significant actions we've took during the quarter.

Here you can see what we've purchased and there's the $615 million in agency securities and notes, most of which we covered in detail while reviewing the prior slide.

We also continue to reduce exposure of financial institutions in the quarter by selling $7 million worth of common stock and only $6 million remains in portfolio.

Also, in keeping with the strategy of reducing exposure to financial institutions and reducing the deferred tax asset, we sold $4.9 million book value with a par value of $53 million of trust preferred securities at a net loss of $4.7 million, and generated an additional tax loss of $45 million, which reduced the DTA by almost $16 million.

We also recognized OTTI charges of $1.2 million on pooled trust preferred securities.

The remaining troughs are a book value of $77.6 million and they've got a fair value of the $82.8 million.

And again, there's more detail provide in the supplemental schedules.

We'll turn now to slide 18 and cover our loan portfolio, which totaled $11.3 billion at September 30th and that's a decline of $288 million from Q2.

We'll first go to each segment of the portfolio and then an overall asset quality wrap up including a summary on non-accruals.

The $11.1 billion continuing portfolio consists generally of relationship lending to consumers, small, middle market businesses, as well as national businesses, and asset based lending and equipment finance.

CRE is done on a regional basis and any loans outside the footprint are made to sponsors we know in the region.

The specialty segments of ABO and equipment finance are direct to customer and managed centrally.

The discontinued liquidating portfolio consists predominantly of indirect home equity loans at this point, and this portfolio declined by $18.5 million in the quarter.

On slide 19, the focus is on the loan mix and yields.

You can see here that the yields in the portfolio declined about 3 basis points during the quarter.

Our residential yields continue to decline from refinancing activity and to a lesser extent from interest reversals.

The consumer yields increased slightly reflecting of pricing discipline.

The new home equity originations and commercial improved by 6 basis points also reflective of better spreads and structure on new loans, renewal, and modifications, while CRE declined by 7 basis points from periodic rate reassess.

Now, we'll give some detail on each of the loan segments.

First, we'll take a look at our residential loan portfolio.

Approximately 81% is in footprint, 46% is in jumbos, about 52% in conforming loans.

Again, no options ARMs, minimal all day exposure, which is under $37 million.

Originations were $219 million for the quarter, compared to the $302 million originated in Q2, and just about a $124 million a year ago.

The refreshed weighted average FICO on the portfolio is 723, and the refreshed portfolio weighted average LTV is 59%.

The majority of the $16.2 million increase that you see here in residential non-accrual loans is related to loans modified and placed on non-accrual status.

However, these loans are paying interest and principal per the modification terms and interest is recorded only on receipt.

We've also provided an update on Permanent NCLC segment within the residential, and that declined $41.4 million at September 30th of 2009, and that's down from $44.7 million at June from $1 million in payouts, $1 million in transfers to OREO and about a $1.3 million in write-downs.

This segment has had a disproportionate effect on NPLs and net charge-offs in the quarter relative to the entire $2.8 billion continuing portfolio.

Regarding our consumer portfolio, it's about 99% home equity.

Utilization was constant with the second quarter at about 51%.

About 83% of this portfolio is in footprint.

19% of the home equity portfolio is in a first lien position.

We've also included the updated weighted average FICO and CLTV.

As you can see, there's no change in the average FICO scores from last quarter and there's a slight positive change in CLTV from the updated Case-Shiller valuations.

Originations in consumer was $66.8 million this quarter and that's compared to $69 million in the second quarter and from a $180.9 million a year ago.

The NPLs in this portfolio total $39.8 million and that's up slightly from the $38.4 million at June 30th.

On slide 22, we'll now take a look at our discontinued liquidating portfolio, which consists of about $231 million of home equity and $6 million of national construction loans.

We saw a $19 million decline in the third quarter of '09, including about $4.3 million in net payoff activity.

About $13.1 million in charge-offs were specific to the home equity segment and $270,000 in charge-offs related to NCLC.

We have reserves for these discontinued portfolios at about $57.1 million, of which $56.1 million is for home equity and $1 million for the national construction portfolio.

The liquidating reserves for home equity are based on a forward-looking projected charge-off coverage and the reserves for NCLC are based on a credit-by-credit assessment, and both of which we update quarterly.

This quarter we provided about $28.5 million in provision expense specifically for these segments.

This represents an increase in allowance coverage for the equity portfolio based on our updated risk assessment on the remaining portfolio, and coverage now represents about 15 months worth of projected charge-offs.

Turning now to slide 23, we will take a look at our commercial non-mortgage portfolio, which consists of middle markets, small business, insurance premium finance and segment banking.

Contained in this portfolio are core in-market small business and middle market customer relationships.

The portfolio totaled $1.6 billion at September 30th, a decrease from $1.7 billion at June 30th.

Originations for the quarter for small business totaled about $18 million in comparison to the $19 million in the second quarter and about $41 million a year ago, where middle market originated $8 million in the quarter compared to $24 million in Q2 and a little under $27 million a year ago.

It's important to note that non-accruals declined about $7.3 million from the second quarter in this portfolio.

Overall, both the middle market and small business portfolios continue to be relatively stable from a credit performance perspective thus far in the cycle.

Turning now to take a look at equipment finance in the next slide, you can see this portfolio consists of five industry segments, transportation, construction, environmental, manufacturing and aviation.

The portfolio totaled $951 million in comparison to $998 million at June 30th.

Originations were $48.8 million in the quarter and that's in comparison to $73.4 million in Q2 and a $107.9 million a year ago.

When we look at the asset quality stats specific to this business, we've certainly seen some increases in non-performing loans across all segments just given the challenging economic environment and the impact this has had on small businesses.

We did see, however, a modest decline in NPLs during the period down to $31.8 million in comparison to $35.7 million at June 30th.

There were about $12.5 million in new non-accrual loans in the quarter compared to $30.7 million in the second quarter.

If we turn now to take a look at asset based lending on the next slide, there were reductions in commitments and outstanding balances in both Q1 and Q2 of 2009 that we saw a continuation of in the third quarter.

Originations for the quarter were about $14.6 million and that's in comparison with $2.8 million in Q2 and $16.4 million a year ago.

The decrease in non-performing loans in the quarter was related to pay-down activity and approximately $16 million worth of charge-offs.

Charge-offs in the quarter included the write-off of $9 million for single credit based on an updated appraisal, which reflects deterioration in value of the underlying collateral.

On the next slide, you can see our commercial real estate portfolio, which consists of investor trade, small business, owner occupied.

This portfolio is well diversified by product, by geography and property type.

There is modest retail exposure and the team continues to actively monitor maturities, vacancy trends and leasing activity.

There is no originations for the quarter in commercial real estate, in comparison to $24.9 million in Q2 and $120.7 million a year ago.

This portfolio decreased slightly in the quarter and while the CRE portfolio saw no charge-offs once again, this quarter we did see an increase of $31 million in non-performing loans based on the receipt of updated financial information and expected cash flows.

Delinquencies totaled $23.9 million in comparison to $19.1 million at June 30th and about $7.2 million at the end of 2008.

Upcoming maturities for 2010, 2011 and 2012 for this portfolio are $308 million, $217 million and $139 million respectively.

If you turn now to slide 27, you can see that the res dev portfolio declined $129 million as of September 30th, a reduction of $15 million.

That was primarily driven by $10.3 million of pay-off activity, $1 million in note sales, and $3 million in net charge-offs.

It's also offset by some loan disbursements on performing projects.

Net charge-offs in the quarter were primarily driven by non-accrual resolution and updated valuations on new non-performing loans.

There were $7.6 million of new non-accruals in the quarter compared to $1.1 million in the second quarter.

Absorption activity continues to be slow, but we have seen continued sales activity across the footprint in Q3 as we affected 44 releases on the $10.3 million worth of pay-offs from executing contracts.

About 91% or $117 million of the portfolio on September 30th was in Connecticut, Massachusetts and $32 million consisted of 16 projects in Fairfield County.

In the performing portfolios, there's only three remaining res dev relationships with an aggregate exposure greater than $5 million.

Turning to slide 28, you can see here we've provided a new schedule and a summary of the new non-accruals, which we've covered in each of the sections today, as well as cures and exits, net charge-offs, and transfers to OREO.

So you can readily see the flows in non-performing loans from quarter-to-quarter.

On the next slide and the concluding slide in the asset quality credit section, we provide a view overall of the portfolio and the discontinued liquidating portfolio overall.

And you can see here easily the impact that the discontinued segment has had on our totals.

I want to reference a couple of asset quality statistics that were included in the press release tables.

Our total non-performing loans were about $361 million or 3.19% of total loans on September 30th and that compares with $350 million or 3.02% of loans on June 30th.

The increase in non-performers was primarily attributed to increased levels of performing non-accrual resi loans as discussed earlier, and increases in commercial real estate.

And that's offset by declines in commercial, equipment finance, asset-based lending, and residential development loans.

Note that our past due loans for the continuing portfolios were up slightly to about $117.8 million in comparison to $113.4 million at June 30.

Increases in consumer of about $2.8 million and commercial real estate of $4.8 million were partially offset by declines in equipment finance and residential development.

We'll turn now to take a look at deposits, and as noted previously, everyone in our company continues to be focused on business development, and is part of that focus on having a deposits first mentality since we believe our primary role as a regional bank is to directly gather deposits for the purpose of self-funding our loan activities.

And as you can see, in the third quarter we generated over $426 million in growth, specifically in money market and savings accounts, which were offset by declines in demand, NOW, CDs, and broker deposits.

And as you can see on the next slide, while growing deposits during the quarter, we saw a 29 basis point decline in cost, again reflecting we did not achieve this growth through pricing.

You can see this very clearly on slide 31.

And with over $775 million of CD maturities in Q4, we have an opportunity to continue to lower our cost of deposits further.

And with a keen focus on growing commercial, small business, and government finance operating relationships, we continue to have the opportunity to improve on mix in the periods to come as well.

And as previously noted, you can see there was solid improvement in both our core deposit ratio and our loan to deposit ratio in Q3.

On slide 32, we'll take a quick look at borrowings.

You can see here that our borrowings consist of FHLB advances, repos and other short-term and long-term debt.

Our borrowings to total assets declined to (inaudible) on September 30th, and that's down from 13% at June 30 and 21% from a year ago.

What's important to note is that the asset side, the denominator has been relatively constant in each of these periods.

So we continue to utilize strong deposit inflows discussed in the prior slides to offset maturities, and further reduce reliance on borrowings as a funding source.

And it's important to note that borrowing cost will be favorably impacted in Q4 from the maturity of about $118.5 million in FHLB advances.

Turning now to slide 33, we've outlined the diverse sources of liquidity that we have.

While the third quarter deposit growth is very significant, again, given the CD maturities and downward repricing of deposit products in each line of business.

We got strong cash management services that continue to be well received in the market, continue to see progress and growth in relationships in commercial and government finance.

Additionally, you can see here we have availability from wholesale sources of about $5.1 billion in capacity and over $400 million overnight at the FED.

And from a holding company perspective, we have over 10 years worth of cash needs available at the holding company.

I'll now turn it back to Jim and he'll provide some closing remarks.

Thank you, Gerry.

I just want to say after listening to your comments that we pride ourselves on full disclosure and transparency, and I think what you just heard from Gerry and with all the slides you have there is a very good example of that.

I want to conclude with some takeaway highlights for the quarter.

We posted improved pre-tax, pre-provision earnings of $56 million, up $5 million from Q2.

Our capital levels are solid across the board, and regulatory capital ratio has significantly exceeded regulatory requirements against peer group ratios such that we are seeking regulatory approval to begin to repay CPP capital.

Our deposit growth initiative has helped us increase our market share, and our net interest margin grew 14 basis points to 318 in the quarter with the trend in NIM remaining positive.

And finally, we continue to be cautious on credit, increasing our reserve coverage significantly for the fourth consecutive quarter.

New non-accrual loans are trending slightly downward, while cures and exits continue to rise.

Non-performing loans are down in most categories, and delinquencies remain stable.

We continue to reserve well in excess of charge-offs.

Thank you for participating in our call today.

Now Gerry and I would be pleased to take your questions.

Thank you.

We will now be conducting a question and answer session.

(Operator Instructions) Our first question is from the line of Mark Fitzgibbon, Sandler O'Neill.

Please go ahead with your question.

What's really driving that is the rate that you are paying radically better than peers or is there something else going on?

Hey Mark it's Gerry.

I apologize we did not hear the opening of your question.

The question was about money market accounts, Gerry.

I was wondering what's really driving that growth, is it rate, is it a new product, is it something else?

Mark, candidly it's the fact that we're able to drive deposit growth through all five channels.

A lot of the growth that you saw in Q3 came in government finance where we seek the primary operating relationship, and we continue to build some volume in the money market accounts as well, but it's not rate driven.

Okay.

And then secondly, you guys talked about the early stage delinquency stabilizing, and we've heard that from a lot of companies this quarter.

We also heard it last quarter.

I guess I'm wondering, the last couple of quarters if everybody's early stage delinquencies are going down or stabilizing, and yet the greater than 90-day stuff is continuing to increase, is it really a good leading indicator in your mind?

We are not going to put it out there as a leading indicator just as a fact pattern that that's what's occurring.

Clearly even though delinquencies are stable there is good portion that's flowing into delinquency and then from delinquency into non-accrual.

So you've got to trace the entire migration, but we just put it out there as what it is right now.

And you noticed that we were careful not to suggest at this point that we could call a turn.

The last question I have for you is I wondered if you could just perhaps share some thoughts with us in terms of the margin for the fourth quarter and the provision for the fourth quarter?

Yes Mark, this is Gerry.

Regarding the margin, as I indicated, we've got a couple of levers of positives that will be coming forth, one around at FHLB advances maturing.

In addition, some continuation of the CD downward re-pricing, as well as the discipline you can really have seen this quarter in and around on the loan side, particularly in consumer as well as very strong performance in commercial.

So our expectation is that you'll continue to see some improvement.

I would just say from in terms of range, say above 320 into the low 320 range, 320, 323 range type like that.

Regarding provision, I think that we continue to want to stay in the range of and I think it's consistent with the comments we made last time that we narrowed the gap between what we provide and what we charge.

I think you will continue to see that charge offs will continue to clear through items as expeditiously as we possibly can.

So, I would expect you'd continue to see that at an absolute minimum we'll provide for what we charge off and we'll just continue to asses risk in the portfolio based on what we know from information that we gather over the quarter.

So I'm not going to pin down to a specific number, but clearly I think our belief is we're taking all the right steps around how we're assessing risk content on a quarterly basis just given updated information and trends and adjusting accordingly.

Great.

Thank you.

Thank you.

Our next question is from the line of Mr.

Damon DelMonte of KBW.

Please proceed with your question.

Hi, good morning.

How are you guys?

Good morning, Damon.

Could you just give us a little color with respect to what you're seeing on commercial real estate front, specifically, like with loans that are coming up for renewal, what you're seeing in terms of new market values on properties and kind of -- I guess, for new originations, what you're seeing for loan-to-values and caps rates?

Hi, Damon, this is John Ciulla, good morning.

How are you John?

Good.

Yes, obviously we're seeing value diminishing, cap rates are expanding.

There's pressure on rent rates and obviously on tenancy.

We're looking at our portfolio as a sort of portfolio to hold now.

Obviously, the capital markets aren't there for refinancing.

So we're again, cautiously optimistic as we head into sort of the teeth of the recession's effect on the commercial real estate category.

And we're looking prospectively at our maturities to try and underwrite them and make sure that the tenancy and the lease rates cover reasonable debt service and refinancing for us internally.

We use PPR externally.

They project that peak to trough we could see 30% to 40% declines based on NOI reduction and new cap rates.

We certainly aren't seeing that yet with respect to the properties that we are reappraising.

So we're preparing ourselves to need to refinance the maturities that are coming up.

Gerry gave you the maturity schedule.

They are spread pretty nicely across the next several years for us.

But we expect to continue to see pressure on valuation, on tenancy, and on cap rates.

And can you just remind us some of the original characteristics when those loans were written, like what the average loan size was and what the loan to value was?

Sure, I think our average on investment commercial real estate deal is in the $9 million range.

We have one exposure over $20 million.

So the portfolio is pretty granular.

Underwriting guidelines were fairly typical at a 140 debt service coverage ratio out of the box based on a market interest rate and a reasonable amortization schedule.

So and I think our underwriting LTVs were around 60% to 65% out of the box.

Okay.

That's helpful.

Thank you.

And then, Gerry, could you tell us what the total DTRs were this quarter?

Total charge with that restructuring?

Yes, we'll get that for you in a second, Damon.

Okay.

And then I guess lastly, with the new branches coming online, is there any adjustments we should be considering from an expense standpoint, and if so should we look for them to hit in the fourth quarter or more in the first quarter?

Regarding the branches, you'll see expense come online -- actually there was expense in the P&L because obviously we leased the space and then hired up personnel.

In terms of Providence, we already have an existing branch that we're relocating from.

It's just to a much more visible location in the heart of the business district.

So, really not going to see much incremental expense other than obviously what we've done to improve the location and the actual cost of that particular location as we work our way out of the other.

Regarding Boston, I think I have given prior disclosure of that.

We've been basically paying through the P&L the lease expense on that throughout the course of the year.

What you'll see is some ramp up in compensation expense, although that's been pretty much -- we have been ratably adding the people over period of time.

Our head of government finance there, our small business folks there, all have been going through the P&L in the current period.

So and that's also part of why you see some uptick in occupancy as well as some uptick in compensation expense in this past quarter.

So I'd have to say all in you're seeing a fair bit of the expense already flowing through in Q3.

Okay, great.

That's all I had.

Thank you very much.

Thank you.

Our next question is from the line of Amanda Larson.

Please go ahead with your question.

Quick question about the sale of the $4.9 million book value securities.

What was the rational for selling them instead of just keeping on the books?

I understand that you would have had OTTI charge but how come just not ride it out?

Yes, our assessment, Amanda, of risk in those portfolios is that there's -- there really was limited upside and we actually saw far greater potential to sell for tax purposes, generate the tax loss, to be able to utilize some of the loss carry backs and drive the DTA down.

So, a fair bit it was our view of recoverability of value in future periods and how long that would take, if any recoverability, as well as the opportunity to continue to be vigilant around the size of the DTA and how we manage that.

Okay, so that's what we are seeing a nice tax benefit that added to that?

Yes.

Okay, very good.

Thank you.

Sure.

Thank you.

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

Please proceed with your question.

Yes, first question.

What is the net deferred tax asset at the end of quarter?

I'm sorry, Matt, can you repeat your question?

Yes, what is the net deferred tax asset at September 30th?

Yes, we are right around a $135 million.

I'm going to apologize, I believe we have it broken out on the release.

Yes, we do, it's a $139.4 million.

Okay.

And then the increase in the commercial real estate non-accruals, any trends in terms of geography there, maybe a little bit more detail on that increase during the quarter?

Sure, hang on one second here.

In terms of geography in CRE, in terms of the non-accruals.

And what we're seeing with the two deals.

Well, 90% of our CRE is in footprint.

They're both in footprint credits, the two large contributors to the investment CRE non-accruals.

What were the types of properties?

What's the story behind those credits?

I mean I think -- one is a rental.

The other one is office space and just lost tenancy.

Okay.

And what part of your current footprint did those occur in?

The Massachusetts, Eastern Connecticut, Fairfield?

I mean what region?

They're in the Boston to Philadelphia corridor.

The two large credits, one is in Massachusetts and one is in New Jersey.

Okay.

And then, the question on the margin, if we stay in a low, absolute level rate, how much additional earning asset yield deterioration do you think we could see?

If we just stay at this current rate environment for longer than people would expect, where is the earning asset yield going?

Matt, I think you've seen that we've been very vigilant about and disciplined around loan pricing.

So, particularly, you saw the pop in commercial.

You've seen the sort of the sea change that happened in consumer in terms of the new production that's coming on board.

So, I tend to think if rates stay as is you've certainly seen the magnitude of the downward pricing flow through.

The one area where we've clearly had a little bit of downward pricing was the pop through in CRE and that's just because of the way certain deals reset based off of LIBOR.

But generally speaking what we've gone through in the course of 2009 has been the immediate depression of loan yields, and what you've seen in terms of some deterioration post Q1 going into Q2 and Q3 has just been from refinancing activity.

That's primarily what's driven the changes in the resi portfolio.

So I would say that in terms of trying to get a bead on that, the volatility quarter-to-quarter may only be a couple of basis points the way the composition of the portfolio is today.

Clearly that can change based on what we originate now in this market and how we restructure loans on a go-forward basis.

Got you.

All right, thank you.

Yes, and if I could, just to jump back to Damon's question, Damon, I apologize.

I didn't have the answer off the top of my head, but I got it now.

TDRs in the quarter were about $68 million.

That was the increase for the quarter.

Thanks.

(Operator Instructions) Our next question is from the line of Collyn Gilbert of Stifel Nicolaus.

Please proceed.

Great.

Thanks.

Good morning, guys.

Good morning.

Just a question on the CRE loans that you are seeing coming due.

Do you know what percentage of those you're offering new lines to versus letting them go to the competition?

Collyn, specifically, your question is around say the $300 million or so that matures in the next 12 to 15 months?

Sure.

Go ahead.

Collyn, I would say we're too early in the cycle to give you any real indication because we're coming up on the maturities.

We've refinanced the majority of the loans that have come due internally and we obviously see less activity from other financing sources.

But now there's not enough of a sample to give you a sense as to what's moving away from us and what we're refinancing internally.

Okay.

So, but the stuff that's been done to date, most of that Has been refinanced internally?

Correct.

Okay.

And then, could you talk a little bit, and Gerry if you covered this I apologize, but what your expectation is for the securities portfolio in terms of future growth, and where you sort of see the allocation of assets into that segment?

Yes, and I think, Collyn, you could tell from just some of the additions in the quarter, we've kept everything very short.

There's a lot of short-term additions into that portfolio.

So you're actually seeing for us a lot of stuff has got durations of one year or less.

We've also got a number of assets that were added that were primarily hybrids.

In terms of overall, really not looking to continue to expand more than maybe a couple hundred million dollars, but I think you can tell that what we're doing is part of the portfolio is searching for places for the strong liquidity that we have.

And just to continue to have sources of liquidity as we turn towards growth in small business and in middle market, and some more geographic concentration around even our national businesses and equipment finance and ABL, more in the Northeast corridor.

So, there really isn't a plan for huge expansion there.

Obviously, it's elevated from where we were at quarter end, last quarter, as well as from year-end.

But at this stage, this is all more for just repositioning.

It's also for asset liability management purposes in terms of the mix of some of those assets that we're bringing on.

Clearly different, when you think about sort of the -- I'll call it the security or safety in terms of all the additions that are coming in and around agency secured stuff or agency backed stuff, I should say.

So, hopefully that's helpful.

And again, I would point you to when you get a chance is to try and get out to the supplemental information on the website.

It'll give you really granular breakout of the new categories in addition to what we have in the slides today.

Yes.

Okay.

That's helpful.

Thanks.

And then just a final follow-up.

On the TDRs, Gerry, did you say increased $68 million from the second quarter?

The new TDRs are $68 million for the quarter.

Okay, so, that's the balance for the quarter?

Yes.

The new TDRs for the quarter.

Okay.

What were they last quarter?

They were about -- I think the balance was about $116 million as of June 30th.

Okay, that's all I had.

Thanks.

Sure.

Thank you.

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

Please go ahead with your question.

Hi, good morning.

Good morning, Bob.

To follow-up on the TDRs, the TDRs dropped sequentially by, I guess, $40 million to $50 million.

Can you talk about --- was that loans that had been performing for six months that were returning to an accrual status or what was the drop there?

I think Gerry gave you the balance as of 6/30.

We'll get you the actual new TDRs for the second quarter.

Just from a trend perspective, we have seen an increase in those seasoned TDRs after six months that return to accrual.

But it's really just a function as well of the activity in both the resi and commercial activities being lumpy quarter-over-quarter.

I think there is a misunderstanding here, were the balances $68 million or were the new TDRs $68 million?

The balance as of June 30th was $116 million.

The balance at September 30th.

-- is $184.6 million.

$68.1 million of new TDR.

Right.

So the balance increased not decreased.

Okay, I apologize.

I misunderstood that then.

And so what is the balance then of TDRs that are actually accruing interest?

I guess you all have got, what, $50 million or $60 million that are non-accrual, and then the other $100 million plus would be --- would be actually accruing interest, is that right?

Well, paying interest, none of them are accruing interest because they are non-accruals technically.

Paying interest we have about $50 million of residential and consumer loans that are TDRs based on modification program that we currently have on non-accrual and are reported as such but are currently paying us interest.

And Bob if I could, I'll point you to -- we've got that breakout in the nonperforming categories.

When you get a change to get through the financial tables in a little detail, all those breakouts are back there.

Okay.

I guess when I look though that though, I see a little bit over $50 million that are classified as performing non-accrual loans.

But what I'm trying to get at is I know you all had in the second quarter about $70 million of restructured loans that were actually classified as accruing.

They were accrual loans and I'm trying to figure out --

This is Gerry.

Yes, that's correct, as we have discussed recently.

And we can provide you the same -- we can look to get you the same kind of breakout for September 30.

Okay.

But as we discussed, yes, we had about $70 million of accruing TDRs out of the $116 million total at June 30th.

So, we now know that the total is up to the 184, was it, thereabouts, and so we can look to get you what amount or what percentage is accruing.

Okay.

And you know --

That would be helpful.

-- that can result because you --- the status of approval and TDR don't necessarily run in parallel throughout the entire course of the classifications.

So, you carry a TDR over through one fiscal year end.

You may return that TDR after a six-month seasoning period if you believe it merits it.

And so you could have a TDR that's actually a return to accrual.

You can also have in certain instances, but the exception to the rule.

Commercial TDRs that are restructuring that based on cash flow parameters and collateral values that you never take to non-accrual.

It's less frequent but it can happen, so there's not a definite lock there in certain reporting periods.

Yes, and the breakout on the non-accrual versus the accrual, about $105 million are accruing and about $79 million are non-accrual.

Okay.

Thank you.

That's very helpful.

And then I guess the next question.

It looks like you all had a couple of large charge-offs in the quarter.

There's a big one in the C&I book and a big one in the asset based lending.

Are you all hopeful that we've reached or our near a peak level sort of in charge offs?

Yes, Bob, I think one comment just to add.

These were classified credits previously.

We had been already monitoring values on these.

So this is --- these aren't new news.

This is actually part of, in an earlier comment, as we work our way through and continue to gain more facts and determine ultimate realization in a short-term of value, we're taking charges.

In the one particular case, we still have opportunity for recovery, but it's just too uncertain to be trying to book something net at this stage.

So, we've taken what we think is the prudent step and taken the full charges, run them through, and then we'll just continue to pursue and take whatever recoveries we can garner down the road.

John, if you have any --

No, I think that's right on.

Okay.

And then could you remind me too, how the timing works for charge-offs in the commercial real estate book?

Obviously, you've got a couple of big non-accrual ones this quarter.

If a charge is ultimately necessary, when would that take place?

That's a difficult question.

It's obviously specific to the credit, so what we'll do in both these instances, we still are working closely with the borrower, hoping for resolution that will work out well for us.

We'll update valuations based on appraisals.

We'll look at leasing opportunities, and we'll look at the borrower's wherewithal, and make a determination as to whether or not an immediate charge is necessary, whether we will impair it and wait another quarter to get final resolution.

But, so it's very, very difficult to say.

I will tell you that they're likely, as you see these things flowing particularly in the commercial categories and the CRE category, where it's not like FFIAC where you're doing it on a timing basis.

You're probably going to get some resolution or indication in a quarter or two.

Okay.

Thank you very much.

That was very helpful.

Sure.

Thank you.

Mr.

Smith, there are no further questions at this time.

I would like to turn the floor back over to you for closing comments.

Thank you all for being with us today.

I hope to talk to you soon.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.