Webster Financial Corp (WBS) 2011 Q3 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's third-quarter 2011 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 might 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 as contained in the Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the third quarter of 2011.

I'll now introduce the faculty -- Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Good morning, everyone.

Welcome to Webster's third-quarter 2011 earnings call and webcast.

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

I'll start by providing highlights of the quarter and comments on strategy.

Chief Operating Officer, Jerry Plush, will discuss asset quality and capital, and report on our progress toward achieving a 60% efficiency ratio.

Then, CFO, Glenn MacInnes, will review the quarter's financial results and we'll open it up for questions.

Beginning with slide three, earnings per common share improved to $0.45 in Q3 from $0.36 in Q2.

About $0.01 of the improvement was tax related.

It was a solid quarter, another other positive step toward our goal to be a leading regional bank.

Our results are attributable to a stable net interest margin; further, though less dramatic, improvement in credit quality; continuing loan growth in key areas; lower expenses; and strategies that are taking hold in influencing performance.

Revenue, excluding securities gains, grew modestly once again, both on a linked-quarter and year-over-year basis.

The efficiency ratio improved to just over 62%, largely due to lower core expenses, in part driven by our Pathway to 60% efficiency ratio initiative, or what we call P260, which we described in our Q-2 call, and which Jerry will discuss in more detail.

We achieved positive operating leverage again in the quarter, and pretax, pre-provision income rose nearly 10% from Q2.

We're committed to invest in strategies that maximize economic profits over time, which we define as earnings in excess of our cost of capital, and to withdraw investment from those businesses that do not.

We're making progress in our quest for economic profit as return on equity rose to 9.15% in the quarter and return on tangible equity approached 13%.

Even as rates declined and the curve flattened in Q3, we were able to hold the net interest margin steady, due to disciplined pricing of loans and deposits -- deposits in particular -- and continued growth in demand deposits, which now comprise over 17% of average deposits, up from 15.9% in Q2 and 13.3% a year ago.

Asset quality improved once again, though at a slower rate than in recent quarters, with non-accrual assets improving by 4%, and commercial classified loans better by almost 9%.

Allowances and coverages remained quite strong.

Loan originations in the quarter totaled $716 million, 11% above Q2 and 19% higher than a year ago.

As commercial non-mortgage lending remains strong, the commercial real estate market continued its slow recovery, and the low interest rate environment encouraged more homeowners to refinance, especially in September.

I want to comment on the commercial non-mortgage book -- that's middle market, small business, and industry segment lending, because it's been a strategic bright spot, with balances up 16% year-over-year and deposits up 17%.

Our growth has come primarily through share gain and strong risk-rated credits, with no underwriting concessions.

Those spreads on new C&I credits have continued tightening from the wider levels we enjoyed a year ago.

Specifically regarding small business banking, Q3 marked the second-highest level of originations ever, at $126 million, trailing only Q2 of this year.

And our pipeline is strong.

Once again, Webster ranked number one in total SBA lending in Connecticut.

Overall loan growth was modest in the quarter, due to our controlled decline in equipment finance of $60 million in the quarter and $240 million year-over-year, as we pull back to a regional footprint similar to our earlier decision in asset-based lending, which has stabilized and begun to grow again.

Based on our strong pipeline at September 30, and our solid position among banks and the considered set in our markets, we estimate that full-year originations will well exceed last year's $2.5 billion, as we provide credit that helps our clients and communities recover and grow.

Clearly, our strategic focus on business banking is paying off.

The core of our value proposition is the service quality model that we refer to as the type W.

personality, which promises caring, knowledgeable, and reliable relationship-based bankers who know their markets and make decisions at the local level.

We believe that this personal connection boosts our reputation in the marketplace, strengthening loyalty of existing customers, and increasing purchase intent.

We're benefiting from what we see as a shift in sentiment, whereby customers are more likely to value banking services delivered by the local competitor.

One of the proof points that there is real substance behind our type W.

personality was the September 8 article in the Wall Street Journal that highlighted the success of our Mortgage Modification Program in keeping 1,200 families in their homes.

I hope you saw it, and if not, Terry will send it to you.

This commitment to add value for those who rely on us is our primary competitive advantage and a big reason why we're winning in the marketplace.

When you look at the $140 million of first mortgages listed in our TDR report, 70% of which are accruing and more than half of which are seasoned more than a year, you'll understand that they're there for a good reason.

Webster enjoys an increasingly strong and differentiated position as a committed homegrown bank.

Our performance comes against a backdrop of a regional economy whose growth slowed a bit during the quarter, according to the Fed Beige Book, which reads like a mixed bag.

Some manufacturers cited softening demand, though others continued to enjoy strong sales.

Retail activity was mostly flat while other businesses noted continued growth.

Real estate markets remained sluggish.

But importantly, the most recent Case-Schiller Index showed a modest increase in home prices for the Boston and New York MSAs, the fourth consecutive monthly increase and a welcome sign of stability.

Strategically speaking, we're in a good place as a strong community-based regional bank, both because of what we've already done, as well as what we plan to do.

Our focus on creating economic value permeates every decision we make.

Some examples I've given already.

We've also talked in recent quarters about our investment in private banking and jumbo mortgage originations, and in cash management activities.

Today, I'll cite our retail banking model as a case in point.

16 months ago, we can see that the retail banking model would be under pressure from legislative and regulatory forces.

Since then, we've revamped our checking account suite to eliminate totally free checking in favor of relationship products, which ask the customer to keep a balance or use a debit card regularly, or for seniors have direct deposit in order to earn free status.

We have premium products which reward customers for bringing more of their relationship to Webster.

We specifically target marketing efforts to attract these customers.

In other words, we're casting a narrower net to attract customer segments that we believe to be attractive.

We've closed 11 branch offices which were low contributors and were not essential to the continuity of our franchise.

We'll consolidate five offices into two in Q4, bringing to 168 the total branch count and to 13 the net reduction in offices this year.

While we'll continue to fine-tune the network, we think this configuration meets customers' needs, given current business and footprint.

We'll gradually reconfigure portions of our branch network into higher traffic locations in smaller facilities, and with enhanced service capabilities over the next three to five years.

We're about to begin installing deposit automated ATMs at all branch locations, and we're significantly reducing the number of our remote ATMs.

In all, we're removing 37 ATMs.

We're investing in technology, such as our new balance alerts in a forthcoming mobile banking app, to ensure -- to enable our customers to perform more routine banking on a self-service basis.

This frees Webster retail bankers, all of whom are being developed into universal bankers, to answer our customers' questions in a knowledgeable, helpful way, and assist with their more complex financial needs.

Our branch bankers spend much more of their time pursuing small business customers.

Every manager is involved in a rigorous development process to be certified as a business banker, which has boosted our sales force exponentially.

Meanwhile, our high-performing customer care center is the fastest-growing, most efficient component of our retail sales force.

So, getting back to relationship checking, when we shifted away from totally free checking, we lost about 5% of consumer checking households, but the balances predictably were strikingly low.

These customers insisted on unequivocally free, and we just can't spend $200 a throw for a free solo checking account.

Much as we hope to woo those customers back as relationships, we saved some money as a result of their attrition on the expense side.

And interestingly, the rate of churn in consumer checking accounts has dropped below the level experienced prior to our pricing actions.

Meanwhile, in the aggregate, consumer checking balances are 8.5% higher and small business checking balances are 11% higher year-over-year.

Balances in new accounts opened this year and seasoned 90 days are over 25% higher for consumers and over 50% higher for small businesses.

Our average balance on all checking accounts has risen over 20% for consumer accounts, and over 30% for small business accounts since December.

The bottom line is that higher-value customers are delivering a better return for our investment, and our strategy will pave the way to economic profit in the retail bank.

The success we've had building relationships with customers -- not simply accounts -- is one reason why we have no plans to institute a monthly fee for debit cards.

We view debit cards as an essential element of our primary relationships and as a vital convenience to our customers' everyday lives.

The moves we've already made to price the relationship rather than the account components to the degree possible are consistent with this strategy, and we will pursue it and refine it over the planning period.

As I turn this over to Jerry, I want to note our recent progress and express optimism regarding the future of responsible banking.

While we face the headwinds of regulatory reform, margin pressure, and economic malaise, we think we can be a powerful competitive force in the businesses and customer segments we choose to compete in, and we're excited about it.

We have the potential to be a high-performing regional bank as we direct all of our resources and energy to pursuing strategies that maximize economic profits over time.

Jerry?

Thanks, Jim, and good morning, everyone.

We'll turn to slide five of the presentation.

Here, you're going to see, as we have in past quarters, there's a listing of all our key strategic priorities.

Now, you may recall that these are based on performance gaps compared to the top performers in the $10 billion to $45 billion in assets commercial bank peer group.

So, again, it's important to note all of our plans -- so, at the line of business level and overall -- all our projects, all our investments, contributing in some way toward the achievement of these priorities.

We're happy to report that we've made solid progress again in the quarter and year-to-date in these priorities.

We'll be covering this over the remainder of our remarks, in addition to ground that Jim just covered.

So let's turn now to slide six for a review of key asset quality progressions.

Here on this slide, you'll see we provided a five-quarter trend in total nonperforming loans, REO and repossessed property, on past due loans, on nonperforming assets to total loans; and we've also provided the reconciliation and nonperforming loans.

Overall, a continuation of favorable performance in all categories -- certainly, at a lesser extent than we reported in Q2, but progress nonetheless.

Performing loans declined by $7.2 million in Q3, which reflects an increase of $12.6 million in new non-accruals in the commercial real estate segment compared to Q2.

This is primarily driven by one credit, an [input] print retail center, which we are looking to resolve in Q4.

Our NPLs are now 2% of total loans compared to 2.85% just a year ago.

REO and repossessed equipment, that declined by a net $2.9 million in the quarter.

As a reminder, our Q2 results included $5.1 million of write-downs to accelerate resolution of the existing inventory throughout the balance of 2011 into early next year.

So sales of existing inventory at June 30, of the existing inventory at June 30, totaled $4.1 million, while new transfers in were $1.1 million in the quarter.

We're very focused on pursuing resolution and note sales, with added emphasis, versus foreclosure or repossession going forward in as many cases as possible.

And the $1.1 million in new inflow represents what was already in process.

Glenn will also comment more on this when he covers earnings for the quarter in a few minutes.

But I should mention here that we also posted over $700,000 in REO gains from sales as well as recoveries during the quarter, compared to $500,000 in write-downs in Q2.

So the remaining $17.9 million in inventory from June 30, $5.4 million is already under contract and scheduled to close in Q4.

We have firm offers on another $4.2 million.

So if all of that closes in the period, plus we believe there's some additional residential and equipment inventory sales in our projections, we can be down closer to the $5 million or so range by year-end.

Of course some changes may take place to delay some of this, but our risk team is incredibly focused on making this happen.

We're also intent on pursuing alternatives to expedite the balance of the nonperforming loan portfolio.

And yes, sales of individual loans as well as portfolios are being considered.

In addition, we have approximately $56 million of performing nonperformers, which means they've been modified, they're paying as agreed, and they're appropriately waiting for the $22 million of consumer to season before a return of -- to accrual status, and for the $34 million of commercial to complete various stages of renegotiation to resolve.

So the real population of NPLs that the workout team in Risk is focused on, is approximately $165 million of nonpaying loans as of September 30.

We'll cover nonperforming assets and total loans.

And here, you can see that declined to 2.17%, down from 2.27% at June 30, and significantly down from the 3.14% a year ago.

This is the lowest level we've been reporting since December of 2008.

Our past due loans have been below 1% of total loans for six quarters now, and they're down to 58 basis points since September 30, a slight decline from the 60 basis points at June 30.

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

First, let me comment on the year-to-date basis.

With the significant reductions in NPLs from lower new non-accruals compared to comparable periods in 2010, and a consistent flow of [cures] each quarter over the course of the year, as well as in REO write-downs to expedite sales as well as sales activity, our nonperformers have declined by $61.9 million, or over 20%, in the first nine months of this year, and now total $240 million or 2.17% of total loans plus REO.

For the quarter, new non-accruals were higher by $18 million, of which $12.6 million related to the commercial real estate, as I just covered.

The balance of increases are primarily in residential and consumer, and the less declines that we've seen overall in the other loan categories.

Charge-offs for the quarter were higher by $5.3 million compared to Q2.

This is the result of policy changes that we made in two areas, and that created $6 million in incremental charges.

That was specific to small business and to consumer.

About $4.5 million related to our decision to write down certain aged small business loans, where value of the collateral securing the loans became more in doubt, just given the current environment; and in the consumer portfolio for $1.5 million, where collateral is in place, but the loan is aged now greater than three years.

As a reminder, you can see individual credit and other performance data for our principal loan segments in the supplemental information that's posted in the Investor Relations section of our website.

Here, we've included disclosure on our troubled debt restructures, and you'll see the TDR balances that are accruing and nonaccruing; yields before and after modification; and total loans modified greater than a year.

That shows the strong performance of the loans that have been modified.

In fact, over two-thirds, or $237 million of the $350 million in accruing TDRs that were modified greater than one year ago, are paying as agreed.

TDRs overall were flat to Q2 levels.

We expect that there should be decreases in the coming periods as deals refinance, pay down, pay off or amortize.

Let's turn now to slide seven to take a look at the allowance for loan losses.

The provision was $5 million for the quarter, noticeably below the net charge-offs for the fifth quarter in a row.

Our allowance for loan losses now represents 2.33% of total loans and our coverage ratio is 116% of total nonperformers.

So, you can see, even with lower provisioning again in the quarter, our coverage of nonperformers remains well above 100%.

Our ability to record provision less than net charge-offs reflects continued improvement in all of our key asset quality indicators, including the fact that commercial classified assets declined $62 million, or nearly 9% in the quarter, as well as the overall adequacy of the allowance when measured as a percentage of coverage to nonperforming loans, and also from declining loans of past -- declining levels of past due loans.

Our net charge-offs of $28.9 million are after $4.9 million of recoveries in the quarter, and again, included the specific policy changes of $6 million that we referred to just a minute ago.

The level of recoveries that we reported in the quarter is very consistent on average with recent quarters.

Let's turn now to take a look at capital on slide eight.

Our tangible common equity ratio was 7.15% at September 30, compared to 7.28% at June 30.

That reflects the increased asset size of roughly $420 million period-to-period on this, supported by capital.

The Tier 1 common, the risk-weighted asset ratio -- which we view as a very important regulatory capital measure -- that grew to 11.06%, up from 10.79% at June 30, and up from 8.16% just a year ago.

Most importantly, our tangible book value per common share increased to 14.52 in terms of dollars as of September 30 -- that's up 11% over the past year.

This marks the sixth consecutive quarter of increased tangible book value per share growth.

Our capital levels remain well in excess of regulatory requirements in our internal targets.

That provides us with significant flexibility in terms of future loan growth, in terms of a dividend policy, and potentially share repurchase activity in the future.

As we stated in the past, we believe we're already fully compliant with Basel III, including the conservation buffers.

We'll turn now to slide nine to talk about efficiency.

This is the slide we introduced last quarter, as we announced our Pathway to 60% efficiency initiative.

And here you can see recent quarterly progressions in our efficiency ratio, as calculated using the SNL database methodology so as to provide consistency in comparison with peers.

This is the yardstick that we measure our progress in managing the Company to an efficiency ratio lower than 60%.

Now, Glenn is going to provide full details on revenue expense in non-core elements that you see here for Q3 in a few minutes.

But there's more improvement that incurred in the quarter as the efficiency ratio came in around 62% compared to 65% in the second quarter.

Our revenues have grown quarter-to-quarter in what's been a challenging operating environment.

And again, the improvement you see in the ratio for Q3 is the result of a reduction in core expenses in the quarter.

We know that the consistent achievement of positive operating leverage is essential to drive improvement in this ratio.

The entire executive management team has been hard at work on the specific projects and initiatives that will get us below 60%, again, using 2Q performance as the baseline.

So, with that, we'll map out the initiatives in progress on what we call the P260 initiative, as we now turn to look at slide 10.

This is a refresher.

We told you on the second quarter earnings call how essential the P260 effort is in face of revenue reductions that will come as a result of the Durbin Amendment that takes place, effective in the fourth quarter; also, from potential margin compression from the current rate environment.

And there's likely more compression when rates begin to rise, given the $2 billion or so in loan floors that are in place.

Those loan floors serve us very well today.

Other factors would include competitive pressure and regulatory compliance costs.

So we recognize that ongoing efficiency improvements from the Q2 baseline would envision contributions from a combination of revenue enhancements, along with expense optimization and reductions.

So what we've posted here is the final outcome of specific decisions and initiatives, the current state of implementation, and the expected date of full implementation that would get us to 60% -- again, pre-Durbin and the challenge of the new rate environment.

So when looking at the Q2 baseline, it would have taken $38 million in additional revenue and a lower expense to achieve the 60% efficiency ratio.

And here you can see that we have $9 million in annualized benefit, or about 24% of the total pretax improvement that's projected to come from revenue enhancements.

Now, specifically, that results from a combination of continued pricing discipline; fee changes in our retail bank in our HSA Bank division; and increased average earning assets -- so higher investments and loans outstanding.

Specifically on the expense side, approximately $29 million of the annualized benefit, or about 76%, comes from expense reductions.

That's resulting from projected annualized compensation and benefit savings expense of about $13.5 million.

That's the result of reductions in headcount -- note that a lot of this comes from attrition and not replacing certain positions; and from the resulting savings in benefit expense going forward, as a result of changes in our business model, and from the consolidation of branch facilities.

So, again, those personnel reductions are a combination of all of those, as well as from changes in how we manage items, such as overtime, temp help, education, conferences and seminars recruitment, among other expense line items.

Our annualized occupancy expense is projected to benefit on an annualized basis again, or about $4.5 million from reductions in the corporate and branch facility combinations that we've been talking through.

Note there will be a net reduction in branches of 14 alone from 2011 actions, and we're currently focused on restacking all our corporate facilities to further consolidate into existing owned or leased space.

So, to date, we've reduced a number of corporate facilities by three -- in Swansea, Massachusetts; in New Bedford, Massachusetts; and in Meriden, Connecticut.

And others are in process.

Finally, on the other expense side, projected annualized benefits would be about $11 million.

That's from a variety of areas, including reduced annualized FDIC expense of approximately $5 million; telephone savings of about $1 million; reductions in supplies, transportation and professional fees among other line items to make up the balance.

Here we've provided timing as to when you would expect to see these benefits flow through.

So for the third quarter, what was in our P&L; for the fourth quarter, what we project; and for all of 2011.

Once we completely roll out all of the other specific initiatives this quarter, we'll provide some further insight into 2012 timing as well.

So with that, I'm going to now turn things over to Glenn, who will provide a review of our financial results and also give an update on our outlook for the fourth quarter.

Glenn?

Thank you, Jerry, and good morning, everyone.

Let me start by turning to slide 11, which provides the quarterly trends, net income, and return on assets.

As you can see, we continue to make progress in each consecutive quarter.

I'll talk more about the drivers of our performance, but would highlight the $42.4 million in earnings this quarter is up 24% linked-quarter, 91% over prior year, and represents EPS of $0.45 per share; a 12-quarter high and ROA of 94 basis points; and an ROE of 915.

Continuing on slide 12, here is an overview of our core earnings for the third quarter.

As we highlight, for the period ending September 30, Webster reported pretax income of $58.4 million.

This compares to $50.1 million in the second quarter and $27.3 million a year ago.

Our core pretax, pre-provision earnings were $66.2 million.

This compares to $60.4 million in Q2, and $56.4 million a year ago, and represents our highest pretax pre-provision earnings since the fourth quarter of 2008.

Net non-core items totaled $3.5 million in the quarter, and fall along three broad areas -- severance associated with P260 actions; branch and facility rationalization, which is also part of P260; and net legal recoveries.

The $5.8 million linked-quarter increase in core pretax pre-provision earnings was driven by a net increase in interest-earning assets, somewhat offset by a 1 basis point decline in margin, an increase in non-interest income of $800,000, and a reduction of $4.7 million in non-interest expense.

The increase in earning assets over Q2 represents growth of $32 million in average loans, primarily on the commercial side.

I'll go into more detail by portfolio over the next few pages.

As you see, our net interest margin for the quarter was 345.

The 1 basis point drop from prior quarter is the net result of a 7 basis point reduction in yield on earning assets, partially offset by a 7 basis point decline on the rate of interest-paying liabilities.

Combined, this resulted in a 1 basis point reduction, as interest-earning asset balances exceed interest-paying liabilities.

Non-interest income grew to [$46.2 million] or by $800,000 as a net result of a $1 million increase in deposit service fees, partially offset by a lower revenue in wealth and investment services, which were adversely impacted by a decline in the market.

As you see, our total core revenue has steadily increased over the five-quarter period.

In fact, we have had six consecutive quarterly increases in revenue.

Core non-interest expense for the quarter reflects a decline of $4.7 million.

This is the result of lower expenses of $3.7 million in compensation and benefits, and $1.4 million in deposit insurance.

Approximately half of the lower compensation and benefit expense is the result of reduction in staff.

The remaining half is the result of lower market-based compensation items, specifically around phantom shares granted as part of the bonus plans several years ago.

The reduction in deposit insurance reflects lower FDIC rates, as our asset quality has improved.

In summary, we are pleased with the solid results for the quarter, as well at the consecutive progress we have made on the path to becoming a top-performing institution, but we know there's much more to accomplish in a tough environment.

Moving on to the balance sheet, our investment portfolio is highlighted on slide 13.

The portfolio totaled $5.6 billion at September 30, with $2.5 billion in available-for-sale and $3.1 million in held-to-maturity.

The portfolio continues to represent about 30% of total assets.

This ratio will fluctuate, primarily based on asset liability and liquidity needs.

The total portfolio duration was three years at September 30.

The decline from 3.6 years at June 30 was driven by a reduction in interest rates during the quarter.

As you can see, we keep durations shorter in the available-for-sale portfolio, given it serves as a primary source of liquidity.

The AFS portfolio totaled $2.5 billion, and had a duration of 2.7 years and a yield of 3.56%.

Purchases in the AFS portfolio during the quarter continued to be primarily in agency CMOs in a 3.5 to 4.5-year duration range, and with limited extension risk.

As seen in supplemental slides, there was a net decline of $23.9 million and a market value of single issuer and pooled trust preferred securities, which reduced tangible common equity by about $15.4 million or 9 basis points on a tangible common equity ratio.

The three single issuer securities are from the top 15 financial institutions.

The remaining seven pooled securities have an amortized cost of [$54.0 million] and a market value of $31 million.

Six of these are fully paying, and the remaining bond is expected to resume payment prior to year-end.

The held-to-maturity portfolio has a duration of 3.2 years and a yield of 4.7%.

The portfolio is composed of longer duration assets to match liabilities while providing protection to the capital position in a rising rate environment.

The portfolio also provides significant liquidity in the form of high-quality collateral for pledging purposes and monthly cash flow.

Included in the held-to-maturity portfolio was $660 million in municipal bonds and notes.

The municipal portfolio is comprised of bank qualified bonds over 94% rated A or better, and over 81% rated AA or better.

In addition, over 80% of the portfolio is in general obligation bonds.

The overall securities portfolio yield was down 12 basis points in the quarter as a result of a 24 basis point decline in the AFS segment, which reflects the purchase of lower yielding securities and an increase in prepayments fees.

An increase in fixed-rate funding and shortening of our investment for (technical difficulty) further duration during the low interest rates has increased asset sensitivity.

As you see throughout the industry, pressure on our earnings and NIM would likely occur in a period of protracted, low, long-term interest rates.

Slide 14 highlights our loan mix and yield.

Yield on the portfolio decreased 10 basis points to [431%], as higher-yielding fixed rate loans continue to pay off or mature.

The more modest decrease of 2 basis points in the commercial real estate portfolio reflected fewer fixed-rate payoffs and maturities.

Jim noted earlier how the planned decline in our equipment finance portfolio is masking otherwise solid growth in our commercial portfolio.

Combined growth of $54.3 million in commercial non-mortgage and asset-based lending was more than offset by a decline of $59.7 million in equipment finance.

The modest growth in residential portfolio reflects a focus on jumbo mortgages.

Jumbo mortgages represent 39% of our residential mortgage portfolio, while jumbo originations in Q3 were 55%, total residential mortgage originations for the portfolio.

Note that we continue to sell all our conforming fixed-rate 20 and 30-year mortgage originations.

The reduction in consumer portfolio reflects continued consumer deleveraging and a reduction of $7 million in the liquidating consumer segment.

We'll now turn to slide 15 and take a look at our deposit mix and cost.

Total deposits [decreased] by $131 million from June 30, the net result of an increase of $144 million in money market offset by a combined decline of $275 million in all other categories.

Transaction account balances consisting of demand and interest-bearing checking remained at 35% of total deposits, similar to last quarter, but up from prior year's 31%.

On an average basis, demand deposits continued -- showed continued grow and represent 17.1% of total average deposits compared to 15.9% in Q2 and 13.3% a year ago.

In this historically low rate environment, our improved mix, as well as our continued pricing discipline, resulted in a further reduction in the cost of deposits.

For the quarter, we were at a deposit cost of 55 basis points, a 7 basis point decline from Q2, and a 22 basis point decline from a year ago.

Turning now to slide 16, one of Webster's competitive advantages is its ability to gather deposits across five lines of business.

In the third quarter, seasonal growth in government and institutional provided some offset to a seasonal decline in retail banking.

On slide 17, we highlight our borrowing mix and costs.

The $499 million increase in short-term borrowings from June 30 helped to fund the growth (technical difficulty) [of borrowing from] securities.

Given the current rate environment, we are borrowing primarily from the FHLB, with short terms at rates from 16 to 35 basis points.

The increase in short-term borrowings took the ratio of borrowings to total assets to 14% at September 30, compared to 12% at June 30.

This ratio has consistently been in the range of 11% to 14%.

The decrease in the cost of borrowerings reflect the relatively higher average balance of lower-costing, short-term funding over the course of the quarter.

Also of note during the quarter, we redeemed $10.3 million in People's Bank shares Capital Trust II, which explains the reduction in long-term debt you see here.

This follows the redemption of two other small capital trust issues earlier this year.

As a result, Webster now has $213 million in trust preferreds outstanding at September 30, compared to (technical difficulty) [$236 million] on December 31.

All three of the instruments redeemed this year were slated to lose their Tier 1 capital status beginning 2013, and we think these were [costly forms of] Tier 2 capital.

Each issue was from prior acquisitions.

So before turning it back over to Jim for concluding remarks, let me provide a few comments on expectations for the fourth quarter.

Take the P260 benefits Jerry commented on in his remarks into account here.

Let's start with average earning assets.

Given the increase in loans and investments at quarter-end, coupled with projected loan growth in Q4, we expect a modest increase in our average earning assets for the fourth quarter.

In regards to net interest income, we would expect this to remain relatively similar to the third quarter, with any reduction in net interest margin, or NIM, would be offset by growing growth in earning assets.

That said, the NIM margin will likely be in the range of 335 to 340, primarily as a result of continued pressure on asset yields from reinvestment in a low-rate environment.

With regards to credit, as we have discussed, credit continues to experience positive trends along all key asset quality measures.

Assuming this continues, we'd expect to see comparable levels of provisioning in Q4.

Regarding non-interest income, core non-interest income, as discussed, we expect Durbin Amendment impact to be about $4 million per quarter, beginning in Q4, or $16 million on an annualized basis.

While we have developed potential offsets, we have not fully recovered the negative impact of this change.

As a result, we expect core non-interest income to be about 5% lower, compared to the third quarter.

We expect core non-interest expense to be relatively flat with the third quarter, bearing in mind we had a $1.8 million benefit in Q3 from lower market-based compensation items.

As you know, we're working hard with an eye toward improving efficiency and are starting to see the results of this effort beginning September and into Q4.

With regards to our tax rate, our third-quarter tax rate of 27.4% included discrete items.

Excluding these, our effective tax rate would have been closer to 30%.

So a 30% tax rate would be appropriate in Q4.

Lastly, fully diluted shares, based on our current market price, I would assume to be about $91 million.

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

Thanks, Glenn.

The third quarter saw the continuation of favorable trends and meaningful progress toward our stated goals.

We're strong, we're focused, we have clear strategies, and we're committed to increasing economic profits for our shareholders.

This concludes our prepared remarks.

We'd be happy to take your questions.

(Operator Instructions).

Gerard Cassidy, RBC Capital Markets.

In terms of the Pathway to the 60% efficiency ratio that you guys outlined on page 10, for 2012, the $9 million of incremental revenue, how are you guys thinking you're going to get that net interest income revenue of $3 million in view -- we're assuming; maybe you guys aren't assuming -- we're assuming lower net interest margins for you folks and everybody because of the rate environment.

So where do you think that $3 million will come from?

Hey, Gerard.

There's no question -- and again, in the remarks, we have been very careful to say when we've looked at P260, that was based off of a run rate in Q2.

So that's pre-Durbin, pre- the margin changes.

So, and as Glenn gave some indication, our expectations are, just given reinvestment rates, you're going to see some downward pressure.

We've been very, very focused on a loan and deposit pricing perspective.

And you can see how the deposit pricing has been coming down rather nicely quarter-over-quarter.

At some point, that's going to level off.

So our expectations are, while there may be a little bit more room there, there's going to start to begin to see that compression.

So there's no question, as you think about us for 2012, as we plan ahead, our thinking is we'll have some of that compression.

So now just -- let's just talk first, before I get into 2012, let's just talk about the fourth quarter.

Part of what our view is, is that you've got a much higher average earning asset base that you're going to be generating net interest income off of.

We are taking the opportunity to leverage the capital that we have.

That was part of the remarks that we made about being about $400 million or so higher period-to-period.

That's going to be in the average, so you're going to see, even with the margin expected to decline quarter-to-quarter, to see that we're trying to hold our net interest income in a relatively comparable place, again.

And I think that's consistent with the comments that Glenn said.

So now as you think about that for 2012, our expectations are that we would continue to see -- that we'll chip away at beginning to have some earning asset growth as you think about us quarter-to-quarter -- strong pipelines, I mean, was the comments that Jim made.

I think our view is it's going to be challenging but we look at this a little bit, as you know there's two moving parts here.

There's a rate part and there's a volume part.

Part of what we're going to do is try and manage this as effectively as we can quarter-to-quarter.

And also part of it's going to be that our expectations are that we're going to leverage the capital that we've got in place, and continue to try to prudently grow the balance sheet where we see opportunities.

So I hope that's helpful to give you some insight.

(multiple speakers)

(multiple speakers) Sure.

(multiple speakers) And I think as we get into -- and in fairness, as we get into Q4, we're going to have a much clearer vision to provide you all with guidance for 2012 and what we're thinking.

We'll certainly include in a view on -- a more specific view for everyone on earning asset growth as well as the margin, in addition to what we just promised on the call, which is to give you more details around the P260 expense components and some of the fee components as well.

All right?

Okay.

Chairman Bernanke has pointed out that he's keeping the Fed funds rate down at these levels probably until the middle of 2013.

You have experienced strong deposit growth.

The industry is experiencing strong deposit growth.

There's -- the excess liquidity, it's difficult, as you guys have pointed out, to put it to work in a securities portfolio.

How low do you think your deposit costs can go when you look at the money market mutual fund industry paying about 2 basis points for their deposits?

The 55 basis points that you're paying, which have come down, which is great, can we get to 10, 15 basis points if rates stay this low for another two years?

Well, I'm not going to say -- sort of look into the future and say that we could be getting at those lower rates.

But I will say that what we continue to focus on, that's obviously becoming more and more a key funding source.

Some of this is coming from customer preference.

There's no question that you've got small business owners and middle-market customers that continue to build cash reserves.

So you're seeing that, as Glenn was commenting, those average demand accounts just continue to expand and we saw growth quarter-over-quarter.

We're seeing some of that begin to pop more and more.

We think there's actually some opportunity, just given all the pressures in the marketplace, that we'll see even some expansion on the consumer side.

So, I think that's a key piece, I think, as it relates to the significant declines that you've been seeing quarter-over-quarter, specific to us.

You know, a lot of the CDs that have been out there, that have been downward repriced as they continue to roll, will come down a couple of ticks here and there.

I think that's also part of it.

So some is going to be future growth.

We think more and more will just continue to go into the demand accounts, and some of it I think is just going to be that CD offerings are continue to going to be, I think, some downward pressure, just given as long as rates are this low, I think that you'll continue to see current rates if not stabilize at where they are today, you continue to see as those things roll, to keep coming down.

So I think that's part of the key.

But that's why I want to be cautious about saying I don't -- I'm not 100% convinced, as we relate to things, which way we should head on this.

Gerard, I just want to add to that -- if you look on page 15, you can see, of course, that core deposits are already down to 27 basis points.

Right.

And then you've got the time deposits at 154, where we think there is likely potential for those rates to come down, given low -- continuing low rates in the market.

So we would say that there is room in a protracted period of low rates for lower deposit costs, which is going to offset the impact of the lower spreads to some degree.

No doubt.

No, I agree with you.

On the loan growth in the originations, which, as you guys point out on slide four, $716 million in originations.

If you could break out for us geographically, are these loans in New England, or they in the Northeast?

Or are there even loans outside the New England Northeast territory?

I think consistently we've been saying as you think about the pullbacks that we've done over the course of the last couple of years, you're looking at the vast majority of the credits that we're doing being in the, what I'll call the Northeast footprint.

So appropriately so, when you think about CRE, or you think about ABL equipment finance, they tend to be the Northeast Corridor credits.

When you start to think about middle-market, and obviously, our residential and consumer efforts and small business, that all tends to be in and around the footprint.

Gerard, I'm going to add to that, that if we took the middle-market originations, for example, they had about $83 million in originations in the quarter.

And 23 of those 25 were in footprint deals that balanced growth coming from various disciplines in all of the seven regions in our market.

If you looked at the commercial real estate bookings, there were, I think, 11 or so transactions that were booked pretty much evenly throughout the footprint.

So these are end market originations, to answer your question.

So is it fair to say then out of the 716, 700 or so are all in footprint?

I mean, I don't know if it's 100%, but is it that kind of high level?

Oh, it's close to that, sure.

The vast majority are in the (multiple speakers) footprint.

(multiple speakers) Vast majority.

Yes.

Hey, Gerard, we're going to need to move on to the next question.

We have a pretty deep queue.

Sure.

Thank you.

(multiple speakers)

Mark Fitzgibbon, Sandler O'Neill and Partners.

I wondered if you could put some metrics around your expansion into Boston and Providence to help us get a better sense for how things are progressing there?

Sure.

I'll just say that the Providence MSA where we've got over 30 offices now is very solid.

We are clearly in a considered set there.

We're a primary competitor.

The other banks in that market have huge shares, and they're all under some sort of pressure right now.

And we see that as a significant opportunity for growth.

And [Bob Toomey], who leads that region as our Regional President, has done a great job, both in terms of improving loan originations.

We've seen deposit growth.

We've seen a lot of interest of people that want to be part of Webster in that market as well.

Boston tracks pretty much on plan.

You know we have the flagship office there.

We are primarily originating middle-market loans and commercial real estate, a little bit of ABL as well.

And we're very much on plan.

So we're quite bullish about the results and the potential for those markets.

And in terms of deposits in both markets, roughly, where are you?

Do we have the breakout of regional deposits?

I don't have that here.

I'll have to come back to you.

The second question I had for you -- and I guess it's directed to you, Jim -- do you feel like you guys are ready to look at acquisitions again?

And also, given the increase in the earnings power of the Company, do you feel as though another dividend increase makes sense?

I'll take the second question first, and say what we've said is that we expect we'll pay 10% to 20%.

That would be our payout ratio of our earnings.

So as our earnings rise and we move up in that payout ratio, it's -- I think one could anticipate that there would be some dividend action in the quarters ahead.

And at some point, as earnings continue to improve, that payout ratio could rise into the 20% to 30% range.

So if you look at this over the planning cycle, assuming performance continues to improve, you could count on higher dividends.

As far as acquisitions are concerned, I want to be entirely consistent with what we've said before, which is that we're 100% focused on increasing economic profits and strengthening our currency, so that we will be able to take advantage of M&A opportunities as they come down the line.

And that we'll be sure that we're exporting a model that works and that can generate increasing economic profit.

So while no matter what our currency value is, we're not interested or likely to be successful in an auction-type environment.

We think there are people out there that may have a desire to be a like-minded partner with us.

And where we can negotiate a good transaction that strengthens the combined institution, we are very interested in that.

And we expect that sometime in the next couple of quarters, that the activity is going to percolate, given all of the pressures on bank earnings today.

Thank you.

Jason O'Donnell, Boenning & Scattergood.

Jerry or maybe Glenn, just given the headwinds on the margin, can you talk a little bit about any other opportunities you have to pay down debt potentially going forward, and your appetite to restructure positions maybe to benefit your margin?

Yes.

I think that we're -- I think we've been consistent, Jason, in stating this in the past, that consistent with the comments Glenn was making about the capital treatment of the trust preferreds, we would look to take some opportunity there to see if once we understand what the -- because, you know, again, those TruPS are a regulatory call, if we were able to get out of those sooner than what's stated.

I think that there's probably some opportunity for us there, but again, we need the regulatory event to be able to execute on that.

When you look at the Federal Home Loan Bank advances, the way that process works is they've actually -- if you go to prepay on any of the higher rate stuff that we still currently have, and again, I think our numbers were probably only around $400 million or so that were actually longer-term, because we were in a -- we [weren't] really [short] to the borrowing side in (technical difficulty) FHLB in Q2.

So basically all the growth that you saw in the FHLB line in the third quarter was predominately borrowing short.

That stuff, the prepayments, the way that works, that's not really going to be an economic event for us, because where the prepayment penalties are, you're really just paying today what that change in value is over the remaining period until maturity.

So we are again, though, I think on the debt side, taking a look at all of the other borrowings that are out there.

And where appropriate, we will certainly be taking a look to see if it is advantageous to us to terminate those and reissue with lower rates.

Jason, it's Glenn.

Just a little more detail.

I mean, we do look at the FHLB in particular, as Jerry highlighted, it's been fairly typical.

It's about a two-year earn-back on the (technical difficulty).

And so it is something we are looking at continuously.

Okay, great, that is helpful.

And then my last question is, can you just give us an update on the size of your municipal deposit base?

And of that, how much consists of time deposits, roughly?

Zero in time deposits.

Size of the base is about 1.5 million --?

(multiple speakers) 1.5 billion, I'm sorry.

Thank you.

Casey Haire, Jefferies & Company.

So my question is on the commercial loan category.

The growth obviously slowed down a little bit this quarter despite originations holding relatively flat.

I was just wondering what was going on there?

Was it increased competition that you guys were staying disciplined on?

Or just people delevering?

Just a little bit more color on the C&I bucket.

Well, one -- we wouldn't say there's -- there may be -- there's isolated delevering that is still going on, of course; but the book overall did not see a lot of delevering within the book.

The utilization is about the same as it was before.

There is a lot of competition for good quality C&I middle-market business and we are seeing that.

We've actually seen it over the last several quarters.

You could see that in some of the spread reductions.

We enjoyed pretty high spreads a year or so ago.

We're not getting quite the same as we were before.

So new business spreads are lower than the book overall.

We are very careful about not making concessions on the underwriting side.

We're writing strong high-risk-rated credits so we think we've got a high quality of the book.

We'd say our originations were reasonably comparable with what we did in the previous quarter.

But to your point, there are some paydowns.

And ours are not so much being paid down because we're losing business to competitors; it's more the point that you made that some people are less reliant on borrowing to meet their needs.

And they're, let's say, more wanting to be self-reliant at this point in the cycle, with what we call the economic malaise that continues to linger out there.

But we like our position.

We're definitely in the considered set.

We're competing for all the good credits in the market.

So we see, overall, our middle-market business is in an upswing.

Okay, great.

And then just last one for me.

On the loan loss reserve, obviously, the credit metrics continue to track nicely for you guys.

As you guys look at -- look out a year, do you have an idea as to how far below your loan loss reserve ratio can go from this 233 level?

Like where -- how far -- how much lower do you feel comfortable bleeding it down?

Coverage to loans (multiple speakers) --?

Yes, you know, I think the key driver, Casey, on the adequacy of the allowance is always going to be first and foremost your classified asset positions.

And I think as it relates to -- that's the key input, right, into the calculation.

And the growing trend -- and again we obviously have to follow what I will refer to as the other key ratios.

Everybody wants to compare coverage ratio of non-performers, those type of things.

But I think as long as we continue to see progress as we move forward, you could argue that we would be in a good position to be able to say that we can continue to provide at the level that we are currently providing at.

The challenge is obvious, though.

You see some numbers that pop around here as it relates to asset quality.

So you get a little bit of an uptick one quarter and one portfolio and in another, so I mean, you have got just a lot of uncertainty that continues to go on.

So it makes it challenging for us as well as any bank to be able to say that we've got clearly sailing ahead as it relates to this.

You've got to look at the trends that are going on.

But I mean, again, we're cautiously optimistic, just given the fact that we are continuing to see good progression in our classified assets.

We are continuing that downward descent.

We are very happy to be able to report a 9% decline this quarter.

I think that that's a key piece and that you're not really seeing any upticks as it relates to what's happening in past dues.

We continue to hover in and around that same range.

We're actually down a little bit this quarter.

So all of those things get taken into account.

But we have to be -- we have to say that there's obviously going to be a little bit of caution here because of the environment that we're in has still got a lot of uncertainty in it.

But for us, specifically, the key driver again is if those classifies keep moving in the direction, we stay on top of all of our risk rating, we don't continue to see any material deterioration in delinquency, then I think we can say with comfort that you'll continue to see the low provisioning, which means then whatever we've got to do on the charge side to keep cleaning things out, that's the way we'll look at it.

So let me just add to that, that -- so if you're looking -- we don't want to have a number in mind, but to Jerry's point, let's say our performance continues to improve and the market continues to stabilize, the economy strengthens.

And you were looking at what might that 233 be two or three years out, it could drop under [200], it could feasibly drop down to a range around 150 or so over the planning cycle.

So we've got plenty of room there, assuming continuing improvement in our credit quality and the strength of the market overall.

Okay, great.

Thanks, guys.

Collyn Gilbert, Stifel Nicolaus.

Just a question, as you guys look at the maturation schedules and the churn that you're seeing in your loan book, how do you see the loan yields evolving here over the next year or so?

I think we -- Collyn, it's Glenn.

Obviously, quarter-over-quarter, we did see some pressure on the loan yield.

We were down 10 basis points, as you know.

So we do see continued pressure there, particularly on the C&I side.

Our commercial real estate yield has held up pretty well.

So we do see pressure on our loan yield as we go into next year.

Okay, is there anything within the book, any kind of big swings?

Or is this just going to be a function of just a gradual decline in the rate environment?

It's the rate environment.

No big swings.

Okay.

Okay, and then you guys are into a lot on the expense side and I apologize if I missed it, but just want to get my arms around a run rate on expenses.

So exiting out all the noise and let's assume that some of these -- the 60% initiatives are in place for the next couple quarters, is kind of a 120 run rate on expenses where we should be thinking about?

(multiple speakers) [Yes.] So we're at 123 this quarter and that has -- it does have some one-timers in it.

So I think you're right, it would be more around a 120.

Okay.

Okay, that's all I had.

Thanks very much.

Ken Zerbe, Morgan Stanley.

Just again on the expense side, how long do you guys expect the severance and restructuring, all the one-time costs to continue to be in results?

Does that -- should that theoretically trail off a lot sooner than when you actually realize the expense benefits?

Yes -- hey, Ken, it's Jerry.

I think that, as I mentioned in the comments, there were some reductions in personnel in the quarter.

And the reason that you've been seeing some severance and other just to relate specifically to where we've consolidated facilities, where we've maybe had to pay an early lease termination, so that factors into that branch and facilities optimization.

The reason it's been happening quarter-to-quarter and we're trying to show you is, one quarter, we did the five branches, another quarter we did the six.

We've got some early terminations we're working our way through, to think about Jim's comments as it relates to some of the remote ATM locations, where there's rental contracts for the space.

So there's a number of items, there's some moving parts.

And I think that that would tie in as we go through P260, to clean a few other items for, here's what we want to have for visibility.

I think you'll start to see that much, much clearer as we think about 2012.

So I think -- I hope that's helpful, because it's just -- we obviously have, this quarter in particular, the lowest number of reconciling items to get through.

And it's just those two line items that Glenn had mentioned, that in the one-timers that were about $3.5 million.

And they tended to be significant because of the number of buildings that were involved this quarter and the people that were involved in particular in this quarter.

All right, so those should trail off fairly quickly then?

And then just as far as the 60% target, obviously, if you look back to a normal rate environment, a lot of the -- so while your peer banks have had efficiency ratios in like the mid-50s, give or take, is there anything structurally different with Webster that you're targeting 60%?

Or is that simply a reflection of the very low interest rate environment, hence the impact on your revenues?

Yes.

I think just given our past performance where this efficiency ratio has been in the 65%, even the high 60's, we believe that setting the target of 60% was appropriate based on that and the number of action steps that you've got to get to.

I think, clearly, we would want to be targeting to go through 60%.

Again, remember the P260, what we've said is that we -- you can look through some of the language, that our target is to get below 60%.

We've got to get to that 60% number from a credibility standpoint.

That's what we want to do.

We want to make sure that people could see.

And that's why, as the way we've mapped this out, Ken, we just wanted to show you the components, folks can factor in.

And clearly, in the future periods -- not 2012, but as you start to think about future periods -- that our goal would be to get through that, below that 60% target, and be more in the range.

You know, there's a lot of angst.

There are very high performers in the peer group right now, obviously, that are much closer to the kind of number that we're targeting.

I know there's a lot of folks that have gone out and said that they want to target a number lower than that.

Our view was to talk to all of you and to obviously all of our investors in the community and our people, about that our goal was to get to 60% based off of that Q2 performance.

And to really take action steps and get it into our P&L so you could see it in our results, as quickly and expeditiously as possible.

Yes, I want to add to that, Ken, if I could, that there are some banks in the mid-50s and we really admire them.

But if you look at the median for our peer group, it's well over 60% right now.

And one of the issues to the point made is that our margin is still a little bit under the peer group, so we gain in part by improving the net interest income as well as by controlling expenses.

We are in a relatively high cost market.

I think we understand that but it's not an excuse for not getting the ratio down.

One of the reasons we like 60% is there's a correlation between getting that efficiency ratio under 60% and earning in excess of our cost of capital.

So that's a benchmark for us to achieve, and then it doesn't mean that that's the limit to our ability.

Got you.

And what do you guys estimate your cost of capital is, roughly, right now?

Which?

Your cost of capital that you just referenced?

We use something around 11% at this point.

Okay.

All right, perfect.

Thank you.

(multiple speakers) Thank you very much.

Hey, before we take another question, I know that Mark Fitzgibbon had asked about some stats related to Boston.

And I thought this would be helpful to just mention that from a middle-market perspective, we have outstandings on the loan side of about $158 million through quarter-end; and on the deposit side, we're around $83 million as of quarter-end.

So I hope that's helpful.

In overall loans, we'd be up over -- if you include everything else that's in the geography, including CRE -- we'd be up over $400 million for the Boston region.

So, Mark, I hope you're still there and picked that information up.

Thanks.

Operator, next question?

Damon DelMonte, KBW.

A couple of quick questions for you on the loan growth.

You guys showed a pretty good ABL growth.

Could you talk a little bit about where you're sourcing that growth from?

I'm sorry, Damon, just on the ABL portfolio?

Yes.

Okay.

No, I think, again, we're primarily a direct shop, and the team is out and they're working that.

I mean, there are still some participations that are in there.

But I think when we have the follow-up call, if you've got anything specific, Glenn will be -- will dig out some details and be happy to chat with you about it.

But I don't think that there is any specific industry segment or that it's -- because we're out being predominantly from the direct or indirect side.

I think it's pretty much business as usual and I think it does reflect market conditions.

The team is very focused on continuing to get the book.

We've been sliding.

I think we've been down as low as in the low-400s to mid-400 range, and I think it was nice to see a little bit of growth obviously come back through.

And I think our goal is to get that portfolio back up to a more meaningful contributor like it had been.

Okay.

Great.

And then with respect to the commercial growth you have seen, could you give us some color on the types of spreads you are getting on the C&I loans?

Okay.

So just, I think, on a total commercial basis, we have seen spread compression obviously.

I think we're probably -- and I'll get you more detail -- but probably we've gone from a Q1 period, I'm thinking total book here of 350, 357 to 346, and we're probably in the 310, 315 range on spread for Q3.

Okay, that's helpful.

And then, I guess, with regard to the reserve ratio, obviously, it's coming down as you charge off some of the problem credits.

If you look further out down the horizon, what would you ballpark the targeted reserve level for, especially in light of the derisking of the loan portfolio over the last couple of years?

Yes, actually we had a question on this already and we were saying we're at 233 loan coverage right now.

And if we had continuing improvement on our own credit metrics and the economy were to strengthen, and we were looking at where we'd be down the line, we would figure probably we'd want to be at least at 150 or so.

So there's some room between here and there.

Remember, there is going to be loan growth too that we're calculating, when you're looking at the absolute amount of the reserve.

Right.

I apologize if I missed this, if you addressed this as well -- as far as charge-offs go for the upcoming couple quarters, should we expect something of this level's result?

Or maybe a re-treatment a little bit?

No, I think, as we pointed out, we had $6 million in this that we spent the -- had, Damon, around policy changes that we made.

So I think the level, if you were to look quarter-to-quarter comparatively with that out of there, you're back at a low 20 range.

Okay.

That's helpful.

Thank you very much.

And I do have to just comment on that.

That's obviously going to depend on actions that we take.

If we can expedite movement in portfolios, there may be obviously some charge related to that.

But I think that that point still stands in terms of just thinking about what the consistent flow has been of late.

Okay.

Thank you.

Steven Alexopoulos, JPMorgan.

I want to start with a margin guidance, which is, I guess, calling for down 5 to 10 next quarter.

First, why do you expect this much pressure, given you still have room to lower deposit costs?

And then second, what does that then imply for future quarters when you do not have room to lower deposit costs?

Sure.

So I think our deposit cost of 55, a large part of that has been driven by mix to start.

I think if you look at our time deposits even in the shorter term, I think we're hitting the elasticity point, I would say.

On the longer-term in a protracted low rate environment, well, sure, we have more opportunity.

But I think we're sort of, at 55, starting to hit a point where we're hitting the bottom, at least over the course of the next couple of quarters.

But where we are seeing the pressure then, as we highlighted, is on the reinvestment on the investment portfolio at a significantly lower rate.

And then on the commercial portfolio, as I highlighted, we are seeing some compression in spread.

So I think we've given guidance that said that the impact could be -- and this was recently, as much as 5 basis points a quarter.

That being said, we're intending to outrun it in part by higher interest earning assets, as we did in the third quarter and as we're looking to the fourth quarter.

Okay.

And maybe just to follow up on that, given where we are at the yield curve now, when you think about management of this, and it's a fairly big asset for you guys, do you take more risk because you think rates are going to stay lower?

Or do you lean towards taking less risk and shortening duration further, like you did this quarter, because you don't get paid for it?

Yes, I think it's pretty clear, Steve, we've been much more focused on keeping the duration short.

That's been -- and Glenn had articulated in terms of the actions that were taken in Q3.

And candidly, a lot of that growth in Q3 because we were going short.

And you take that into the calculation, that naturally is going to give us some margin compression.

But I think as it relates to -- it affects -- and the effect on the margin.

But, I mean, our view is that we've been very consistent over the course of 2011, given the low rates of keeping duration short, as opposed to now -- if we do the occasional addition to CMBS, that obviously lengthens that duration out.

But I hope that's helpful.

Let me just say our attitude is that saying that rates are going to stay down for a long time doesn't keep them there, at particularly longer-term rates.

So we're quite cautious in that regard.

Okay.

And maybe just a final question.

If I'm following the expense guidance correctly, it looks like you are guiding to around $111 million a quarter going through 2012.

How much more room is there to cut?

Because I know you are talking about this quote here that you may have to basically pull additional levers to keep earnings momentum going.

Do you announce a more widescale job cut plan?

Like how are you thinking about this?

Yes, let me start at -- the $111 million I'm not boxing to.

I mean we were $123 million this quarter.

Well, I'm taking your $123 million, I'm taking off $5 million in the fourth quarter, then looking at the 2012, your $29 million is like $7.5 million a quarter?

Yes.

Does that gets us down to $111 million (multiple speakers) --?

The other thing, I mean, as I highlighted in my comments, we had a $1.8 million benefit this quarter from compensation or the phantom shares.

So that's non-reoccurring.

And then we had, as Jerry highlighted, we had a recovery of assets.

So there are some things that are moving in and out there too.

And some of the $29 million is already in Q3 and Q4 (multiple speakers) --

(multiple speakers) Yes.

Yes, and so you'd have to look at it incrementally.

So to the extent we got $2 million in Q3 and $5 million, that's an incremental [$3 million] in the fourth quarter.

Okay, so that's not incremental (multiple speakers).

Got you.

And Steve, I can work with you on that if you want to go through it offline or whatever.

Okay.

Fair enough.

Thanks.

Christopher Nolan.

CRT Capital.

Thanks for taking my call.

A quick question on the runoff of the CD portfolios.

Next quarter or two, are we seeing any sort of larger maturities of any time deposits?

No, not -- Chris, it's Glenn.

We are not.

Okay, great.

And Glenn, for the lower average diluted share counts, so that basically reflect just the lower stock price?

Yes.

Great.

Thanks for taking my call.

John Pancari, Evercore Partners.

It looks like you levered up a little bit with the advances in order to fund the growth in the securities portfolio.

I know you shortened it a bit and that was your strategy there.

But can you talk about your incremental strategy here for the bond book -- if you do plan on continuing to focus on the shorter end, are you looking to redeploy cash flows out of the bond book there?

Or are you going to continue to lever up by taking advantage of cheaper wholesale funding?

Sorry we're not -- I mean we're -- let me make sure I -- can you just repeat the question?

Well, your deposits were down in the quarter but the wholesale borrowings were up with the [FLUB] advances (multiple speakers) --

Yes.

-- increasing.

And with the loans flat in the quarter, your securities represented the bulk of the earning asset growth.

And then I'm just asking what is your strategy for funding incremental investment in your bond portfolio?

I think we're staying relatively flat.

So, I mean, I think you would expect a good part of the loan -- a good part of the interest earning assets to be on the loan side.

Yes.

Hey, John, if your question is in the quarter because you're looking at everything on the period end, we're real short on the borrowing side.

So basically that's just going to the window.

You're talking about all kinds of stuff that's probably seven [in] the 14-day maximum type of borrowings.

And again, the short durations of the CMOs that are being bought, that's predominantly what went into the investment portfolio by the end of the quarter.

We don't expect that borrowings are going to grow much, if that's really the key point here, on a go-forward basis.

We actually continue to think that we will have a good deposit flow and that would either replace some of that or fund any incremental growth.

Okay, yes, that was what I was getting to.

Thanks.

And what are the monthly cash flows coming off the bond book?

About $200 million a quarter.

So maybe a little higher, $300 million a quarter -- $200 million to $300 million.

Yes, I think again -- and I think that's like because of where rates are right now.

But I mean you've got some swings based on what's happening right now with the 10-year swing that just happened going below [$200 million], then that will swing back up [above $200 million].

So it's going to depend a little bit on that volatility remains or if we actually continue to see that it's up and stays up in a protracted.

That's why Glenn gave that (multiple speakers) --

Q3 was [207].

(multiple speakers)

Okay.

And then lastly, on the loan-related fees that held up relatively well this quarter and so did your deposit fees.

Can you just give us a little bit of color in terms of your expectations for those two lines going forward?

Sure.

Well, on the deposit side, obviously we are going to feel in that line deposit service fee the impact of Durbin.

I highlighted that.

It is probably about $4 million a quarter beginning in the fourth quarter.

We think we can recover about half of that through actions we have taken.

And then on the loan side, and as you look at the trend of that, it can be somewhat lumpy.

It's depending on amendment fees and things like that.

So [6.4, 6.8], we've been running sort of around [6], I'd say, I'd use as a benchmark.

Okay.

Thank you.

Thank you.

Our last question is coming from Matthew Kelley of Sterne, Agee.

Yes, just a quick one.

What was the yield on the purchases in the quarter relative to the [356] portfolio yields on available for sale?

So [250].

Okay.

And you're not adding any additional securities or leverage, just to clarify from the last question?

There's nothing in your plan to add additional?

No.

Okay, got it.

And then can you just give a little bit of commentary on just some of the net inflows of new non-performers during the quarter, the $68 million?

And just comment on the bump in commercial real estate?

And also the residential past dues, it looked like it was about the highest level we've seen [over] last year.

Just the 30 to 89, just anything particular going on there?

Or kind of an inflection point or any trends at all?

Yes, I don't think that there is anything unusual that is happening.

I think you're going to just see in certain periods, whether it relates to [either] residentials [tied] in the past dues, that you'll have a pop in one portfolio versus another.

I mean, we're still in uncertain economic times.

There continues to be stress.

So it depends on the portfolio.

In this particular period, we saw that we had a little bit of an increase, obviously, to your point on the resi side going up to the $22 million, $23 million range.

Back to the question, really, we look at the new non-accruals, the consistency of what you had seen in prior quarters, it was really that one commercial real estate project that's an in-footprint deal.

And I've got to refrain from giving a lot of color on that, because we're in the process of working through the resolution, and we hope to be reporting on that resolution in the fourth quarter.

So I think that's the most material change that occurred.

And you know, Matt, that's what's going to happen here in there.

We had a really good trend where the new non-accruals had been on a consistent decline path.

And occasionally, when you get a big credit like that, you're going to have a pop that comes through the numbers.

So I think other than that, there really wasn't any one portfolio or any other really significant credit to talk through.

Okay.

And if I can come back to the margin discussion once again, relative to the 335 to 340 that you got into for the fourth quarter, and with everything you know right now, assuming there is no change in the rate environment, understanding Fed policies in place for the next 24 months, where do you see the margin going in 2012 for the year, relative to the 335, 340 for Q4?

How much additional compression could we see?

Yes, you know, and again, this all depends on management actions, what gets taken.

But you could see several basis points a quarter.

I mean, Glenn had mentioned previously that -- and I think it actually feeds back into the question that was just asked about yields in the portfolio, that if I put on a couple hundred million dollars worth of incremental assets at period-end, that's got a 250 yield, that's naturally going to have some compression.

When you look at Q4 on top of what's happening as it relates to just reinvestment rates and stuff, pays down pays matures, et cetera, and you replace those assets with just what's happening in current period is lower yields, that I think we've been talking about throughout the presentation and the Q&A.

So, long story short, I mean, I would expect that we'd be in that couple basis points range, and the views that we were given earlier as it relates to deposit pricing, I think to echo Jim's comments on the CDs.

Yes, we still see some opportunity, but the bottom line is we've done a material amount of downward repricing in our cost of funding.

And now it's going to be a function of managing that quarter-to-quarter based on the environment at those points in time.

So that would be the current position that we've got on that, Matt.

Got it.

And to clarify on Damon's question earlier, the incremental spreads that you are seeing on commercial, is that C&I and CRE in the 310 to 315, is that --?

Yes.

Okay.

Got it.

All right, thank you very much.

Thank you.

At this time, I'd like to hand the floor back over to management for any closing comments.

Thanks, Jackie, and thank you all for being with us today.

Good bye.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.