Webster Financial Corp (WBS) 2011 Q4 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's fourth quarter 2011 results conference call.

This conference is being recorded.

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

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

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

Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the fourth quarter of 2011.

I will now like to introduce your host, Mr.

Jim Smith, Chairman and CEO of Webster.

Thank you, Mr.

Smith.

You may begin.

Thank you.

Good morning, everyone.

Welcome to Webster's fourth 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 will provide highlights of the quarter and full year, and comment on our strategy.

President and COO Jerry Plush will discuss asset quality and capital.

Then CFO Glenn MacInnes will review the quarter's financial results, after which we'll take your questions.

One of the major organizational events in the fourth quarter was the promotion of Jerry Plush to President of the Holding Company and the Bank.

Jerry was also named to the Bank's Board of Directors, recognizing his numerous contributions to Webster's progress, and his increasingly important role in the Company.

I know all of you join me in congratulating Jerry, on his achievement.

Overall, I'm extremely pleased with Webster's 2011 performance.

Our capital strength, credit quality, revenue growth and expense control, our progress in changing our consumer banking model, and our focus on investing in strategies to drive economic profit, have contributed to significantly improved earnings and returns.

I commend every Webster banker for their contributions to these results.

Our customer-first approach is drawing acclaim.

As some of you may have seen last month, ABC World News highlighted the success of our mortgage modification program in their segment called Bringing America Back.

Despite our progress, we have much to do.

We are still well short of our goals for revenue growth, efficiency gains and economic profit.

The key to sustaining strong performance will be to have the discipline, and we do, to invest only in strategies which generate economic profit, to disinvest in those that don't, and to make sure that by the end of 2012, we spend less than $0.60 to generate each dollar of revenue.

Turning to the fourth quarter, and beginning with slide 3, we had solid performance, despite margin pressure.

Earnings per common share were $0.43, compared to $0.45 in Q3, and $0.29 in Q4 2010.

We felt the full impact of the Durbin Amendment on interchange income from debit card transactions; were $0.03 a share, compared to Q3.

And we absorbed a $0.04 a share swing from Q3 from higher compensation costs, driven by the effect of a significant quarterly increase in Webster share price on a phantom share plan from 2008 and 2009 for non-executive officers, and from an increase in value of unfunded deferred comp plans.

Glenn will elaborate in his comments.

These unusual items added about 3 points to the efficiency ratio in Q4, masking, for now, the considerable progress we've made to control expenses, and lower the efficiency ratio in the face of margin compression, but also underscoring the challenge ahead, as we push to achieve a 60% efficiency ratio.

The quarter's main drivers were highly favorable asset quality trends and loan growth, especially in middle market, and small business and commercial real estate.

Credit quality showed meaningful improvement, as non-performing assets dropped by nearly 20%.

Classified assets improved markedly, and coverage remained strong, with the reserve-to-loan ratio remaining over 2%.

Other real estate owned dropped precipitously due to Management actions that we previewed with you in our third quarter call.

And Jerry will discuss this in greater detail.

Another year-long bright spot, is loan growth.

Webster originated nearly a $1 billion in new loans in Q4 across all lines of business, up 36% from Q3.

And for the year, originations totaled $2.9 billion, a 15% increase.

Overall, despite the planned decline in equipment finance, loan balances were up about 2% in the quarter and for the year.

Our middle market and small business groups ended the year on a strong note, with originations of $275 million in Q4, and totaled about $890 million for the year, and our pipeline looks strong.

Our clients are loyal, and our reputation is an increasingly differentiating factor, driving outstandings up by 7% in the quarter, and 17% year-over-year.

Our value proposition as a reliable, local relationship bank has helped us add clients, while booking strong risk-rated credits.

In particular, I'd like to draw your attention to our successful Boston middle market effort.

Only two years after our launch in Boston, middle market loans are $160 million, and the unit achieved operating profitability well ahead of schedule.

We continue to see meaningful growth opportunity in the Boston market.

Another strong performance came from commercial real estate, which saw $294 million in loan originations in the traditionally strong fourth quarter, bringing the year's total to over $600 million.

Taken as a whole, our commercial bank turned in a very strong performance in 2011, increasing it's new loan commitments by 48% to $1.5 billion.

Consumer finance bookings before secondary market sales were $437 million in Q4, marking the strongest quarter in 2011, and totaled $1.4 billion for the year.

Turning to the net interest margin, the strongest headwind in Q4 was low rates, coupled with the flatter yield curve.

The margin declined 10 basis points linked quarter to 3.39%, though net interest income was down less than a $1 million due to growth in loans and securities.

An encouraging note regarding the NIM, is that the yield on loans and the cost of deposits each declined 5 basis points linked quarter, and were 4.31% and 0.50%, respectively, in the fourth quarter leaving what we might call the retail spread flat at 3.81.

Glenn will provide more color on margin management, but I want to note that we value net interest income ahead of margin per se, provided we maintain relatively neutral balance sheet sensitivity, and limited duration of new securities purchases.

We continue to grow core deposits, particularly transaction account balances, which grew almost 7% in the quarter, and 14% year-over-year, and now comprise 37% of total deposits, up from 32% a year ago.

These results come in the midst of a regional economy that is faring slightly better than the nation as a whole.

Most businesses in the Boston Federal Reserve District report modest revenue growth, and expect a continuation of that trend.

Unemployment is trending down.

And both Connecticut and Massachusetts have regained a larger portion of the jobs lost during the recession than has the nation.

While job growth in our region may lag the national average, our region's productivity or real GDP per worker is the highest in the nation.

As the economy improves, it's likely that high quality jobs creation will sustain these states' high per capita income rankings and continue to make this an attractive banking market.

I want to spend a few minutes talking about our plans for 2012.

Our most fundamental base line assumption, is that improving market economics will not cure all that ails the retail banking business.

Generating increasing, sustainable economic profit from core intermediation activities, in particular retail banking, is our biggest challenge in the inexorably changed retail banking world of higher capital, lower fee revenues, especially in the retail bank, and higher regulatory costs.

The new reality requires changes in customer segmentation and marketing, changes in product offerings beyond those we've made to date, and further change to the business model.

Our plan to reach a 60% efficiency ratio by Q4 reflects this new reality.

The question we must answer is how we are going to generate revenue growth in a margin-challenged environment, while driving our efficiency ratio down?

Our answer is partly, the same way we did in 2011, when we grew revenue, held operating expenses flat, improved efficiency, and produced positive operating leverage.

In 2012, we are planning on achieving revenue growth through loan growth and marginally higher securities balances, and higher fee revenue in businesses where we will grow through targeted investments, especially in people and also in technology.

We plan to reduce expenses further, through initiatives already targeted, as well as newly identified actions.

P260 which is what we call Pathway to 60% Efficiency is a way of life at Webster, and won't be seen as something new.

You can see some of our 2012 initiatives in slide 6.

For example, we are consolidating our treasury sales, cash management and government banking groups into a new treasury services team that will expand our offering for businesses and institutional clients and open new doors for growth.

We are underdeveloped in this regard, and have significant opportunity to grow revenue from existing clients, and to claim a growing market share.

We are investing in revenue production capabilities in other growing profitable businesses, middle market commercial banking, small business; doubling the size of our sales forces in private banking and consumer lending, especially jumbo mortgage lending.

We are adding private bankers with proven track records, and are creating a specialized product suite of asset management and credit products and services to meet the high net worth market's needs.

We are changing our credit card issuer relationship to provide a stronger product suite for our customers on more favorable terms for Webster.

And at the same time, we are working hard to lower the cost of supporting all of these businesses.

We are reducing investment in physical infrastructure, in favor of electronic banking services, like alerts and mobile that our customers increasingly demand.

We favor relationship banking over account acquisition, and have begun compensating our teams based on the value of relationships, rather than widgets produced.

In the retail bank, we are investing aggressively in user-friendly envelope-free ATMs across the system.

We are further re-thinking our core product set.

We closed 16 offices in 2011 based on contribution and location analysis, and we pushed activities to the customer care center.

We are retraining our entire retail customer-facing team to be universal bankers, better suited to identifying and meeting our customer's needs.

In the retail banks small business group, every branch manager has completed an intensive business banking training and certification program, increasing our small business sales force exponentially, on top of the new producers we've recruited for the unit.

We launched a sales team in our customer care center to stimulate growth in small business banking.

And in less than six months, this team has generated $700,000 in revenue, and produced 800 leads for our small business bankers at significantly lower cost than the standard lead.

With these programs, which we believe are unique in our market, we will have effectively multiplied our cadre of small business bankers, and enhanced our capacity to help small businesses with their banking needs.

As our earnings have strengthened, we are looking to return capital to our shareholders, through dividend increases over the near term, and eventually through stock repurchases, though we have no immediate plans in this regard.

We also understand that the synergies that can be gained in a merger or acquisition are valued highly in a market as uncertain as the one we operate in today.

It's time now for Webster to participate in the inevitable consolidation of the banking industry, as a partner of choice for like-minded institutions, which share our vision of what a powerhouse our growing regional bank can be.

And we expect to become more active in the M&A arena in the quarters ahead.

As I turn the call to Jerry, I want to reiterate our commitment to taking the steps necessary to become a high-performing regional bank, and create superior shareholder value.

We are confident that our focus on the overarching financial objectives of earning in excess of our cost-to-capital and pushing our efficiency ratio below 60% will deliver those results.

Jerry?

Thank you, Jim, and good morning, everyone.

We are going to turn to slide 8.

And you will see here that we've listed out some the other initiatives we are undertaking in 2012, all designed to improve operational efficiency and effectiveness.

Many of these will improve reliability, like co-location of our data center to a high quality professionally managed facility with full redundancy for our most critical customer servicing systems.

And of equal importance, to make it easier and more convenient for our customers to bank with us, like the rollout of image capture ATMs throughout the footprint and further enhancements to mobile and online banking.

Others are clearly designed to drive efficiency and reduce spend, which is essential as we look to achieve a 60% efficiency ratio by 4Q 2012.

And to offset the investments for growth in the lines of business that Jim covered, and also investments in other functions that I just mentioned.

Let me note a few other items.

The creation of a dedicated team from existing head count to focus solely on continuous improvement opportunities to make it easier to bank with us.

Examples like further streamlining our product offerings, ease of new account opening, availability of self-service online help to complement our branch and customer care center Type W bankers.

We are also focused on getting things done more efficiently internally, such as analyzing process flows to eliminate unnecessary steps to reduce time and effort, and externally via reduced paperwork for customers, utilizing e-statements and e-signature, plus e-forms for originations.

Our procurement team is going to focus on additional contract savings, and will continue to evaluate how we're organized to enable decision making to occur closer to the customer.

And we certainly intend to keep a sharp focus on reduced spending via cost containment in all other areas.

Let's go back to 4Q now, to focus on asset quality, and review the key asset quality metrics and trends.

As we noted in today's earnings release, we were really pleased to report progress in all asset quality measures this quarter.

So you can see on slide 9, the five quarters of information for total non-performing loans, REO and repossessed property, past due loans, non-performing assets to total loans plus REO, and the reconciliation of non-performing loans.

You can see here, the NPLs declined by $32.9 million in the fourth quarter, or by 15%.

The decrease reflects declines of $11.5 million in commercial, $10.3 million in CRE, and $9.8 million in residential development.

We had mentioned on the third quarter call in October, how a new [non-accrualing] CRE of $12.6 million would hopefully be resolved in Q4, and in fact it was resolved.

Our NPLs are now 1.68% of total loans, compared to 2.48% a year ago.

I also mentioned on the third quarter call, how REO and repossessed equipment could be down closer to $5 million range by year-end.

And we are pleased to report that we finished the year at just under $5 million.

We did incur an additional write-down for asset disposition of $1.2 million in the fourth quarter, given market value declines on a few properties.

However, having slightly less than $5 million in REO, compared to the almost $22 million at June 30, we think this reduction was a significant accomplishment by our team to move and resolve 36 properties in the fourth quarter.

And also to significantly reduce the repossessed equipment portfolio from $1.4 million at September 30, to just under $100,000 at year-end.

Of the $5 million or 39 properties left in REO at December 30, each is now marked to price, as to expedite a sale in 2012, and nine properties are already under contract.

But even with the progress we've made in reducing the level of non-performing loans down this quarter to 188, we are going to continue to evaluate alternatives to further reduce the balance of the NPLs, so sales of individual loans, as well as portfolios, continue to be considered.

The portfolio contains about $33 million of [conforming] non-performers, about $14 million in which are TDRs that have been modified, they are paying as agreed, and appropriately waiting for the consumers loans to season, before return to accrual.

And for the commercial loans in that portfolio to complete the various stages of renegotiation to resolve.

The balance of NPLs that the workout team in risk is really focused on is approximately $156 million of non-payers, as of December 31.

While we know there is some work ahead of us in some cases here, we know that this is really worthwhile to get as much of this behind us as quickly as possible during 2012, to further reduce ongoing carrying costs and workout expenses.

Non-performing assets to total loans plus REO declined to 1.72%.

That's down from 2.17% at September 30, and significantly down from 2.73% a year ago.

This is lowest level we've reported since March of '08.

Our past due loans have been below 1% of total loans for seven quarters now, and we are down about 55 basis points at September 30.

That's a slight decline from the 58 basis points that we reported at September 30.

Commercial declined to $11.9 million at December 31, compared to $16.9 million last quarter, and about $24.4 million a year ago.

Consumer did increase modestly to $49.7 million, compared to $47.3 million at September 30, and iss fairly comparable to what we reported a year ago.

We also included on this page the NPL reconciliation.

I will first comment on a year-to-date basis, with the significant reduction in NPLs, from new -- from lower new non-accruals, compared to the third quarter and to the comparable period a year ago.

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 non-performing assets declined by $109 million or 36% in 2011, and now total $193 million.

For the quarter, you can see that our new non-accruals were lower by $12.3 million, reflecting the combined decline of $13.1 million in C&I, and a decline of $7 million in CRE, which some offset for an increase of $7.9 million in residential mortgages.

Of the $7.9 million in Resi, $3.3 million of those are to one borrower with five properties, that we expect to resolve in the first quarter.

Cures and exits increased by $15.9 million, as $18.3 million of commercial payoffs and note sales took place in the quarter.

Our net charge-offs were $26.4 million for the quarter, or about $2.5 million lower than Q3.

As we've done in past quarters, you can find individual credit and other performance data for our principal loan segments in the supplemental information that's posted in the IR section of our website.

It includes disclosure on troubled debt restructurings.

You can see the TDR balances that are accruing and not accruing, the yields before and after modification, and the total loans modified greater than a year.

And it really shows strong performance of the loans that have been modified.

In fact, 77% or $253 million of the $330 million in accruing TDRs were modified greater than a year ago, and are paying as agreed.

TDRs totaled $397 million at year-end.

That is a decline of $39 million or 9%, from the $436 million we reported at September 30.

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

Let's turn now to slide 10, to take a look at the allowance for loan losses.

We reported a provision of $2.5 million for the quarter, noticeably below net charge-offs for the sixth quarter in a row.

Our allowance for loan losses represents 2.08% of total loans, and our coverage ratio is 124% of total non-performers.

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

Including the fact that commercial classified assets declined by $77 million, or over 12%, in the quarter, as well as the overall adequacy of the allowance when measured as percentage of coverage to non-performers that we've previously covered, and also due to declining levels of past due loans.

Our net charge-offs were $26.4 million, and that's after recoveries of $4.8 million in the quarter.

And as you can see, the recoveries were very consistent, on average, with recent quarters.

So let's turn now, and take a look at capital on slide 11.

Our tangible common equity ratio was 7% at December 31, compared to 7.13% at September 30.

And that reflects the increased asset size in the organization of about $490 million that is supported by capital at December 31, as well as some pension and accounting adjustments to equity in the quarter, that Glenn is going to provide more details on during his remarks.

The Tier 1 Common and Risk-Rated Assets ratio, which we review is a very important capital measure was 11%, compared to 11.06% at September 30, and 9.92% a year ago.

Tangible book value per common share increased to $14.57 as of December 31, and that's up 6% over the past year.

And it marks seventh consecutive quarter of growth in tangible book value per share.

We will note that our capital levels remain well in excess of regulatory requirements, and also above our internal targets.

And that provides with us significant flexibility in terms of future loan growth, our dividend policy, and potentially share repurchase activity down the road.

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

So with that, I will turn it over to Glenn, who will provide a review of our financial results, and also an outlook on the first quarter of 2012.

Glenn?

Thank you, Jerry, and good morning, everyone.

Let me start by turning to slide 12, which highlights our core earnings and reconciles our reported pre-tax income to our pre-tax pre-provision earnings.

As you see, our reported pre-tax income was $54.2 million.

On this slide, we highlight eight actions that were taken during the quarter.

The first, our provision for loan loss is reflective of continued improvement in asset quality trends and portfolio growth in commercial, commercial real estate, and our residential portfolios.

Our allowance of $233 million continues to provide strong coverage and represents 124% of non-performing loans.

Before I discuss the remaining seven items, you will note that the sum of these actions listed total a net expense of $1.1 million.

With that, you see the first item, debt prepayment.

During the quarter, we elected to pre-pay $100 million fixed rate long term advance, with a maturity date of December 2013, and incurred an early repayment charge.

The effective rate on the advance was 311 basis points, and will be replaced with short-term advances costing about 15 basis points.

Obviously, having a favorable impact on both net interest income and NIM.

Contract termination and severance includes $2 million associated with a transition to a new credit card provider in Q2, 2012.

The remaining expense is associated with severance, as result of staff optimization.

The branch and facilities optimization charge includes expenses associated with our branch rationalization program.

In 2011, we closed a total of 16 branches.

As you know from our prior calls, we continue rationalize our delivery channels and staffing requirements.

The write-down to expedited asset disposition includes a $1.2 million charge associated with the market value declines on several properties in our REO portfolio.

The preferred stock redemption includes a recognition of the original issuance cost associated with the fourth quarter retirement of $10 million of REIT preferred stock with a coupon rate of 8.62%.

The litigation benefit, as previously disclosed, represents a net benefit of a settlement in Q4.

And then lastly, net foreclosure gains summed to a total net credit of $100,000.

As you see, the net of all these actions results in a pre-tax pre-provision of $57.8 million.

While this is down from prior quarter, it includes the impact of Durbin, market change -- market value changes in compensation, and NIM compression, which I will discuss in more detail further in my comments.

Turning now to slide 13, which highlights our core earnings drivers.

Before I discuss the details on slide 13, I would highlight, as we did in the press release, that we have provided corrected financials for prior periods to reflect a deferral of certain commercial loan fees.

In general, this involved a reclassification from non-interest income to net interest income, and resulted in a higher net interest margin and lower non-interest income.

Comparisons made to prior periods in this presentation, and in the earnings release, are to the revised figures.

To put some texture around the correction, the impact to net income for Quarters 1 through 3 of 2011, is a positive $105,000, and a cumulative reduction and represents -- and also includes a cumulative reduction to equity of $4.1 million.

Terry and I would be glad to follow up with you if you would like further assistances in identifying areas of the financials that were specifically affected by the correction.

With that, I will turn it back to slide 13, and highlight some of the key drivers.

Our average interest-earning assets, as you see, our average interest-earning assets increased by 2.4% over prior quarter.

The $392 million increase is driven by $99 million in average loan growth, and $293 million in average growth in the investment portfolio.

With regards to net interest margin, NIM for the quarter was 339 basis points, which represents a 10 basis point decline from Q3.

The decline was a result of a 14 basis point reduction in earning assets, primarily from our securities portfolio, and was partially offset by a favorable reduction of 5 basis points in our funding.

Despite reduction in NIM, as you can see on the next line, our net interest income held flat quarter-over-quarter, as we had targeted during our Q3 earnings call.

Non-interest income was $42.4 million for the quarter, down from Q3 by $2.4 million, primarily as a result of the loss of $3.9 million in interchange fees attributable to Durbin, which was implemented in October.

Non-interest expense totaled $125 million in the quarter, which is up over prior quarter as a result of higher compensation expense, primarily from a swing in market value for phantom shares and deferred comp.

Both of these items were primarily driven by a 33% increase in Webster stock from $15.30 per share in September, to $20.39 per share at year-end.

I should note that about 50% of the phantom shares were paid out as of December 15.

2011, and the balance are due next December.

There are no other grants.

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

In summary, we remain pleased with the progress, but obviously felt the impact of Durbin and compensation expense volatility, which I will discuss in more detail.

Slide 14 provides a quarterly trend in net income and return on equity.

As you can see, we maintained our momentum in the second half of 2011.

I will talk more about the drivers of our performance, but would highlight the $40.4 million in earnings this quarter, is up 26.4% over prior year.

And represents EPS of $0.43 per share, ROA of 88 basis points, and ROE of 8.67%.

Moving on to the balance sheet.

Our investment portfolio is highlighted on slide 15.

The portfolio totaled $5.8 billion at December 31, with $2.9 billion in available for sale, and $3 billion in held to maturity.

The total portfolio duration was 2.9 years at December 31, compared to 3 years at September 30.

As you can see the duration is shorter in the available for sale portfolio, given it serves as a primary source of liquidity, although the gap -- the duration gap to the held to maturity portfolio has narrowed as rates have fallen.

The AFS portfolio totaled $2.9 billion at December 31, and had a duration of 2.7 years and a yield of 3.09%.

Purchases in the AFS portfolio during the quarter were primarily agency CMOs, and well-seasoned high coupon agency passthroughs, in the three to four year duration range, and with limited extension risk.

The average yield on $508 million of purchases in the quarter was 245 basis points.

This contributed to the 47 basis point sequential decline in the AFS yield.

The held to maturity portfolio has a duration of 3.1 years, and a yield of 4.55%.

While the HTM yield has been consistently in the 470 basis point range over the four quarters, the 15 basis point decline in yield in Q4 reflects some purchases at lower yields, and some municipals that were called.

We purchased $56 million this quarter at an average yield of 247 basis points, which includes $8 million of short term TANs and BANs for government banking customers.

The held to maturity portfolio is generally 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 is $646 million in municipal bonds and notes.

The municipal portfolio comprised of bank qualified bonds, over 95% rated A or better, and over 81% rated AA or better.

In addition, 86% of the portfolio is in the general obligation bonds.

The overall investment portfolio yield was down 34 basis points in the quarter as a result of the decline in the AFS segment, which reflects the purchase of lower yielding securities and low reinvestment rates.

The shortening of our investment and residential portfolio duration due to low interest rates had increased our asset sensitivity.

We have tried to mitigate that change in our overall risk profile by increasing the size of the investment portfolio, while purchasing securities with short durations with limited long term risk.

As a result, and in combination of funding actions, we have moved to a more neutral profile.

We expect the size of the portfolio to grow in Q1, and again provide protection to net interest income.

Slide 16 highlights our loan mix and yields.

Yield on the portfolio decreased 5 basis points to 431, as higher yielding fixed rate loans continue to refinance or mature.

The commercial yield decreased 6 basis points, primarily due to the continued runoff of higher yielding fixed rate equipment finance loans, while the commercial real estate portfolio remained flat at 4.54%.

Note that consumer yields increased 6 basis points to 4.01%, as Q3 was depressed due to accelerated write-off of deferred costs unique to that quarter.

Jim noted earlier how the planned decline in our equipment finance portfolio, and a seasonal decline in this quarter in asset-based lending is masking otherwise solid growth in the commercial portfolio.

Growth of $119 million in commercial non-mortgage was partially offset by declines of $44 million in equipment finance, and $57 million in asset-based lending, what sees many of the borrowers turn cash positive, resulting in a seasonal decrease in utilization during the fourth quarter.

The $70 million growth in residential portfolio reflects a continued focus on jumbo mortgages.

Jumbo mortgages represent 39% of our residential mortgage portfolio, while jumbo originations in Q4 were 41% of 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 $8 million in the liquidating consumer segment.

We'll now turn to slide 17, and take a look at our deposit mix and costs.

Total deposits increased by $70 million from September 30, the net result of a favorable mix shift as demand, interest bearing checking and savings increased by a combined amount of $379 million, while money market and CDs declined by a combined amount of $309 million.

Transaction account balances, consisting of demand and interest bearing checking were 37% of the total deposits, compared to 34.8% at September 30, and 32.4% a year ago.

On an average basis, demand deposits showed continued growth, and represent 17.3% of average total deposits, compared 17.1% in Q3, and 14.7% a year ago.

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

For the quarter, we are at a deposit cost of 50 basis points, a 5 basis point decline from Q3, and a 20 basis decline from year ago.

Turning now to slide 18.

One of Webster's competitive advantages is it's ability to gather deposits across five lines of business.

In the fourth quarter, the $132 million increase in commercial included $71 million in demand.

The commercial group opened 105 new demand deposit accounts in the quarter, with $26 million in new balances.

While the government and institutional balances saw a seasonal decline of $128 million, the group nonetheless saw an increase of $23 million in demand deposits from September 30, and opened 47 new demand deposit accounts.

On slide 19, we highlight our borrowing mix and costs.

The $436 million increase in short term borrowings from September 30 helped fund the growth in loans and investments.

Given the current rate environment, we are borrowing primarily from FHLB with short terms, at rates from 15 to 30 basis points.

As I touched on earlier, we incurred $5.2 million in debt prepayment charges in the quarter in connection with the early redemption of $100 million fixed rate FHLB advanced, maturing on December 2013, with an effective yield of 3.11%.

Having done so provides us with a lower cost of funding, and reduces our interest expense by about $5.7 million over the next two years, assuming the current level of short-term rates remains unchanged.

Slide 20 highlights the progress we have made against improving our operating efficiency.

As you see on the chart, our core operating efficiency edged up to 65.8% in the fourth quarter.

This is primarily due to a $4 million reduction in revenue as a result of the implementation of Durbin, and a $2.4 million increase in compensation expense, due to market driven increases and phantom share expense, and deferred compensation.

Recall that our stock has increased 33% since the prior quarter-end, and this drove that added expense.

Excluding the expenses -- items associated with market volatility, our efficiency ratio would have been 64.5%.

As a comparable to Q2, excluding both Durbin and the market volatility expense, our efficiency ratio would have been closer to 63%.

So before turning it back over to Jim for concluding remarks, let me provide a few comments on our expectations as we enter 2012.

Starting with average earning assets.

Given the increase in loans and investments at the quarter-end, coupled with projected loan and investment growth in Q1, we expect an increase in our average earning assets, as compared to fourth quarter of about 3%.

Non-interest income.

We would expect non-interest income to improve slightly over the fourth quarter level.

NIM, in the first quarter will continue to be adversely impacted by the current rate environment.

So while we expect to maintain net interest income, we expect NIM to be in the range of 335 basis points.

Credit.

As we have discussed, credit continues to experience positive trends along all key asset quality metrics.

Assuming this continues, we would expect to see comparable levels of our provisioning in the third and fourth quarter during the first quarter of 2012.

Non-interest income.

With regard to core non-interest income, the fourth quarter reflects the adverse impact of Durbin.

While we expect to see the first quarter to be relatively flat to the fourth, we expect to see growth as a result of our initiatives beginning in Q2.

Non-interest expense.

We would expect core non-interest expense to be modestly higher in Q1 due to seasonality, but also to improve as our efficiency programs are implemented.

A portion of the Q1 increase will be the result of the seasonal nature of some of our expenses such as FICA taxes, 401(k), and HSA contributions.

From Q1 outward, we would expect to see consecutive reductions, as we are targeted to achieve our 60% efficiency ratio by Q4.

With regards to tax rate, our fourth quarter tax rate of 25.5% includes discrete items.

Excluding these, our effective rate would have been closer to 29%.

So a 30% tax rate would be appropriate in Q1.

And lastly, fully diluted shares based on our current market price, I would assume to be about 91.5 million.

With that, I will turn things back to Jim for his concluding remarks.

Thanks, Glenn.

In closing, I will just say that we try to provide you with highly transparent information on our operating results and on our plans for the future.

I trust that you find this information useful, and I hope that you can see that we are making meaningful progress toward to our clearly stated goals.

By achieving those strategic and financial goals, we expect to generate increasing economic profit, and create superior shareholder value.

This concludes our prepared remarks.

We'd be happy to take your questions.

(Operator Instructions).

Our first question comes from the line of Dave Rochester with Deutsche Bank.

Please proceed with your question.

Good morning.

Good morning.

Hi Dave.

Hi, Dave.

Just a quick question on the share repurchases.

You had mentioned those to be expected sometime down the road.

I mean, would you expect that, that could be a 2012 event?

It's hard to put a fine point on it, Dave.

I would say, it wouldn't be an early 2012 for sure.

I wouldn't rule out the possibility, but I'd try to be careful about saying, eventually.

And I think that right now, we will focus on the dividend, with the idea that we will then follow on with repurchase programs at the low quality appropriate time.

Great.

Thanks.

And switching to the margin, do you see any other debt prepayment opportunities to boost NIM?

I think, Dave --it's Glenn, we are always looking at.

This was one, that made obvious, economic sense.

We are continuing to look at it.

So, the answer is yes, there is probably some that we are still evaluating.

Great.

And with the securities yield compression, how much of that was an increase in premium amortization in the quarter?

And do you happen to have, just a general sense for how much of that potential amortization there is in the books?

Zero for the quarter, premium amortization as an impact.

And going forward, I think we will probably be -- zero for the quarter.

I think you could use that going forward.

Great.

And just one last one, I appreciate the expense guidance there.

For the year, where do you think, just in terms of general range, you will end up on non-interest expenses?

I think we gave the guidance that you will see some seasonality pop in Q1.

Yes.

But we will see that trend down consecutively, quarter over quarter over quarter, until we hit a range sub like the 120 on core operating yields.

So if we were at 124, say, or 122 today, you will see a pop and then you will see it go down somewhere between 115 and 120.

Great.

All right.

Thanks.

Nice loan growth.

Thanks.

Thanks a lot.

Our next question comes from the line of Jason O'Donnell from Boenning & Scattergood.

Please proceed with your question.

Good morning.

Good morning.

Can you just characterized whether you have seen any shift in the competitive landscape recently, particularly with the entry of First Niagara into the market earlier this year?

I'm wondering how much more aggressive your competitors have been, on both the commercial and consumer lending fronts?

I think we would say that the market is very competitive.

There is a lot of strong players in the market.

We wouldn't point to any particular competitor as being more aggressive than they were before.

But we would say it's a very competitive market, especially for high quality credits.

Okay.

Great.

I want to add to that, that our own position seems to be improving.

We are always in the considered set, particularly in business lending.

Our reputation continues to grow in a positive way, as a regional, strong regional commercial bank.

And I think that explains why, particularly in middle market, we have been gaining share.

Yes, Jason, it's Jerry.

If I could just add to Jim's comment.

One of the things, and we have been talking about this awhile, and we going to start to -- in 2012, one of our plans is to start to break things out regionally.

So, as we have got the focus on the seven regional hubs, and the teams that are in those respective markets.

I think the tough part about answering the question is, that it's different sets of competitors in each and every one of those markets.

Clearly if you think of the biggest organizations that operate across our footprint, some we compete in every market, and some maybe just one or two of the markets.

Again, depending whether you are closer to Boston or New York.

I think generally speaking, the really important thing to take away is, we feel very good about the inroads that our teams that have been making across the board, in all of the markets.

And I think that's what's really reflected in the C&I, and the CRE results that we just reported.

And I think the good news is, look at where the loan yields are holding up.

So, I think that team in particular, has been doing a very nice job of, staying to a real discipline around pricing.

Okay, thanks.

And then just one more.

Can you provide an update on the status of the prototype branch that was highlighted -- I think it's at the Scarsdale Station, you've highlighted that in the past.

I'm wondering what the breakeven point is, in deposits for a location like that?

And whether, more importantly, whether you think that model has the potential to be applied to other markets?

I think -- I will go first, take a crack at that one.

I think in terms of the prototype, we like that a lot.

And I think it's important to note, we've actually got branches, so to speak in that particular location, on both sides of the tracks.

We had an existing location that had been a de novo, much larger location.

We think this one makes a lot of sense, because there is a natural divide.

And with the low cost to have a 600 odd square foot location like that, we think it's really necessary for the customer convenience.

And that actually is going to branch out, and give us a lot more small business opportunities, because where that branch faces off, is right into the heart of the business district there, like the downtown.

So, a little too early to give you any specifics on that.

But again I would say, in compare and contrast to your typical de novo, when you open something with the cost structure of this one, at that size, it's going to be much, much easier for us to get to breakeven.

And we will make it a point of reporting out on that in the future quarters.

Great.

Thank you very much.

Sure.

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

Please proceed with your question.

Thank you.

Good morning, everyone.

Good morning, Gerard.

On your growth in commercial growth portfolio, was any of it syndicated loans where you were a participant in the syndication?

A small amount of it, I think, Gerard.

Not a big meaningful amount.

Okay.

Most of the originations we have done during the quarter were in footprint.

Okay.

And in defining footprint, I know you traditionally use the Northeast.

If you are focused it more New England versus the Northeast which would include the mid-Atlantic, is it more New England or mid-Atlantic, or pretty much even?

Yes.

I mean, if you look at it, we do define it differently.

Our CRE portfolio, Philly to Boston, and ABL the same way.

But the bulk of our growth was in the middle market, which is what I would define New England, Boston to Connecticut, and New York.

Okay.

And so none of it is out of footprint, on the commercial loans?

No.

A very small amount.

Gerard, in the traditional sense of the middle market, the folks that are leading all the different regions, they are our experienced middle market team, that report up to -- John Ciulla is our regional -- is the head of the regional presidents.

That is all core footprint.

We do traditional middle market C&I lending in the footprint, and so strong growth from that group.

I think there continues to be, as we reported, good growth out of [Bill Rank's] team in the CRE side.

And that, of course, is -- also has that focus within the footprint, sort of, I will call it, the Westchester to Boston.

But Bill and his team do a significant amount as well out of the south Jersey/Philly market.

So you've got strong production pretty much across, to your earlier comment about, it includes the mid-Atlantic as we define it.

The only thing I would add a little more color, Gerard, is that for the fourth quarter our spreads actually improved, versus -- and were the highest for the year.

So our pricing is pretty effective.

Speaking of spreads or just yields I guess, I think you mentioned about some of the yields you are obtaining in the securities portfolio.

And I didn't understand it -- I thought it was for customers or something.

I guess my question is, with the held to maturity portfolio yielding 455 and a duration of 3.1 years at December '11, what are you finding today, when you go out and buy securities for that portfolio?

What yield are you finding today, in a similar duration period?

I would say, we are probably getting -- what we are finding is 245.

Okay.

All right.

If I could, just to add to that, not just about the yield on the portfolio.

One of the things that we made comments on in the call is, good asset growth of about 490.

Basically, the way we are looking at things, it all starts around capital, what we define as our capital levels.

I mean, currently our thinking is, that we want to be in and around that 7% range, and leverage whatever we generate in earnings, and make sure that is on the balance sheet.

So to Jim's earlier comments about, right now we were focused on NII than we are necessarily on NIM.

Clearly, if you are buying securities, short duration stuff and keeping it at AFS, that's going to actually compress your NIM.

But you're levering the capital that you have, and until such point as we either dividend capital out or we enter into some type of repurchase program or we see to --.

Again, to Jim's earlier comments about M&A opportunities to lever the capital that way, our sense is that for the time being, it's an okay thing for us to utilize the capital, add to that portfolio, continue to stay very short.

That stuff has good speeds to it and -- in this market and we will -- we've kept it at AFS for a reason.

I think that's probably is the best way to say it.

So, it's short duration.

It will continue to pay down, and if not, we feel the need to use the capital, deploy it in other ways, including increasing the dividend.

You will see it slow down or stop or even sell out of that portfolio, if need be.

I hope that's helpful, because I think one of the things that's important to note is, we are merely starting every decision we make, with what's our capital level?

What's the best use of that, giving our alternatives?

So, we are going through a very tight decision tree process, of clearly, we'd like to use it for organic growth, first and foremost above anything.

And we'd like to make sure that we get the highest returns back to the share holder.

That's our priority.

So what you are seeing us do, with the securities portfolio, and again in particular, not buying -- not stacking the balance sheet with 20 and 30 year mortgages.

And not taking a lot more interest rate risk in the future is to keep things short and to give ourselves the maximum flexibility.

Regarding capital, obviously, our large banks in this country are going through a stress test.

I know you have done that internally as well.

These banks appear to -- going to have to carry a Tier 1 common ratio of 7% plus a SIFI buffer.

The federal reserve has indicated it's going to be a modest SIFI buffer for the banks that are not considered global SIFIs.

If we agree modest is 50 basis points, maybe it's a little higher.

Most of our biggest regional banks looks like they are going to carry 8% Tier 1 common.

Where do you guys come out on your Tier 1 common ratio?

Obviously, it's very strong today.

And second, what kind of dividend payout ratio are you expecting to target as well?

Gerard, it's Glenn.

I think our Tier 1 common target would be closer to 8%.

And I think with respect to our dividend payout ratio -- so if we are in a10 or 11 range, longer term we'd look to get back to our 30% range over a course of time.

Sure.

And then just one final question.

I think Jim you mentioned that, this is all being considered.

There is any guideline on -- I mean, what's holding you back from announcing buyback sooner than later, as a use of that excess capital?

We are really taking one step at a time, Gerard.

When we talk about 8% for Tier 1, that wouldn't be any time soon.

We would be saying, that's our target, but we will work our way there over time.

We'd probably start by moving down closer to 9% over a period of time, as opposed to doing it immediately.

And I think a lot of the banks are going to be careful, about how quickly they move down toward those targets.

And we view that re-establishing the dividend levels, probably ahead of the repurchase program.

It's just a prudent way to go.

And so we are being careful.

We want to make sure that while over time we may have a 6% to 6.5%% target for a tangible common equity ratio, we think we were comfortable around 7% right now.

So there is a couple of drivers we are looking at, even though ultimately we think that Tier 1 common is going to be the key ratio.

And so we think the best way for us to approach it, is boost the dividend gradually and then start with the buy back program.

Thank you.

Thank you.

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

Please proceed with your question.

Good morning.

Good morning, Bob.

I was hoping you could touch a little bit more on the market base compensation expense.

I know you mentioned that the phantom share plan, I think 50% of it was completed this past quarter.

So does that mean if your stock hypothetically were flat that you would see, next quarter or something, more like $2 million of expense?

Or is the expense really related more to the shift?

Just how do we think about the expense on the run rate?

Okay, Bob, let me take a shot at that.

So in the second quarter, our stock price was $21.02.

By the close of the third quarter, the market was down and our stock was at $15.30.

And if you recall during my comments, I highlighted during the third quarter, that we had a one-time benefit of $1.9 million, which was the same item.

It was the performance of the shares that drove down the valuation, and a $1.9 million credit in the third quarter.

That has turned, and so our stock has gone up closing, at $20.39, up 33%.

And so you have -- when you look at the third quarter to the fourth quarter, it's actually a swing, just in that line alone, 1.9 went back to 1.5.

So that -- you have 3.4 is a swing third quarter to fourth quarter, right there.

What we are highlighting on the chart, is 1.5 is the market driven for the phantom shares.

And then there is also about a $1 million in deferred comp during the fourth quarter.

The sensitivity to this going forward is -- and you are right, a 50% of the shares on the phantom side did vest, so that takes some of the volatility out.

But for example, if our shares were to go up $1.00 by the next quarter, we'd expect to see expenses of $600,000.

If they were to stay flat, it would be more like $400,000.

So it drives it up to that degree.

And it would be a significant reduction though --

If it goes down.

-- from the effects of Q4.

Yes, from the Q4 in either case.

Yes.

So in other words our stock were to stay flat, the 2.5 that you see, would look more like $400,000.

Okay.

Okay.

So it would be a sequential benefit --

Yes.

-- if you all are flat.

Yes, exactly.

Okay.

I got it.

That is helpful.

And then I was curious, too, you mentioned in your introductory comments, that now is time no participate in M&A.

I'm just a little curious, sort of what you are seeing today, that's different than maybe six months ago?

Or what's making you more inclined in that direction?

Well, I think it's clear that with the regulatory pressure, higher capital -- I won't go through all of it -- that there is going to be earnings pressures on a lot of companies.

And I think people will be more willing to look around now, and say, is there a partner out there that I can identify with, that I'd be interested in teaming up with?

I think equally important -- And so, we think that consolidation is near.

And it's nearer than it was six or 12 months ago.

But at the same time what we said all along is, that we are working on improving ourselves.

And that we were not interested until we thought we made serious progress in that regard, and even entertaining the possibility of M&A.

We think we've made a enough progress in our own performance, even though that still 98% of what we are going to be focused on day in and day out, including driving down that efficiency ratio.

It's time for us to be able to look around, and consider the possibilities, in what's going to be consolidating market.

Okay.

Thank you.

Sure.

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

Please proceed with your question.

Okay, thanks.

Jim, first question is for you.

Just on the M&A comments, obviously pretty strong words, we heard.

Would you just mind clarifying, when you say joining with a like-minded bank, are you referring to banks that are smaller than you, or banks that are bigger than you?

We are very open minded about the possibilities.

I would say we are likely referring to banks our size or smaller, that have a shared vision of what we can be as a regional institution.

That's primarily what I'm referring to.

Okay.

And to a lesser extent, bigger banks who share your philosophy?

Sure.

Okay.

And then just a minor clarification on the margins.

So I think guidance I heard was 335 in first quarter.

You are at what, 339 now.

Obviously, the change is going to be less next quarter.

Can you or maybe Jerry clarify exactly, why it's going to be less?

Like what's -- why it's going to be less?

Thanks.

Yes, I think we highlighted that we would see a 10 basis point reduction over Q3.

That is what we realized.

The bulk of that was in the securities portfolio.

When I think -- when we look out, we also said we would see up to sequentially 5 every quarter.

We have seen sort of -- you are seeing lower rates and reinvestment rates in the securities portfolio, but our loan yields are holding up and we continue to reduce the deposit and funding costs.

So it's a combination of all three of those.

I guess the question is just, is it that you have less securities repricing in first quarter, than you did in fourth quarter?

Or you have more deposits that are repricing lower than you did in fourth quarter?

I guess I am looking for incremental -- the change from quarter to quarter, why is the change less going forward, than it was last quarter?

It would be less on the investment side coming in, going out.

Meaning, over the next couple of quarters.

Got you.

Okay.

Great.

Thank you.

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

Please proceed with your question.

Good morning.

Just a follow-up on Ken's question while we are there.

So on the -- Glenn, when you gave the 3% earning asset growth target, was that on a linked quarter basis from 4Q to 1Q?

Yes, it is.

Yes, it is.

Okay.

Which I guess incorporating that, makes me also sort of scratch my head in getting to that 335 NIM.

Are there deposits that are repricing in the first quarter?

Yes, I mean, there are deposit actions.

There are obviously, there are CDs coming due.

But there are deposit actions as well.

Okay.

So if we think about on the flexibility on the deposit side.

So you -- your current CD rate was 150.

You are advertising a 12 month CD at about 50 basis points.

So, as we look at the maturation schedule, can we kind of think that you could be getting a pick up there, of say, 100 basis points or so?

100 basis points on CDs -- I don't I think we could get some pick up.

But we are going to get it on -- we will get it on the mix as well, as well as the money market accounts, and the savings account.

There is some room there.

If I -- if we are at 50 basis points now, I think we have room to go down, say another 5 to 7 basis points throughout the year.

Okay.

And on the total portfolio -- the borrow -- or the deposit portfolio.

Okay.

Okay.

That's helpful.

And then just again, understanding, obviously, that the target here is a 60% efficiency ratio by the fourth quarter.

Are you -- and Glenn, you gave the earning asset gross guidance for the first quarter.

But I mean, as I'm kind of running the numbers, it seems like you are going to have to see some pretty robust balance sheet growth continue throughout the year to get there.

So is an 8% loan growth figure kind of what you guys are thinking about, in terms of getting to that 60% efficiency ratio?

Or maybe sort of bracket your loan expectations?

And I know, Jim, you talked about a $1 billion originations in the third quarter.

Try to, if you could, quantify some of that for us?

So we are within that range.

Let me say that.

But I think there is also non-interest income initiatives coming in as well, that will benefit our efficiency ratio.

And those are in the form of cash management, some of the other fees that we have put into place.

P260, when we talked about it, in the third quarter, is not all in the number yet.

And as Jim pointed out, it's not a one-time event.

It's an ongoing event.

When we talk about P260 in the third quarter, the 10 year swap was at 235.

Well, today it's at [2], right?

We talked about it, before Durbin came in.

Well, now it's in.

So even with all of that headwinds coming in, I mean we have identified the original P260 pre-tax number of $38 million.

And then we have to make up these additional items, the head winds from the rate, the NIM compression, as well as things like Durbin, regulatory head winds.

We have initiatives in place that get us -- I would say, yes, the loan growth as you indicated, is probably in that range.

We've also non-interest income growth, but expense reductions as well.

Okay.

Okay.

And then Jim, just on the M&A commentary, I know you touched on it a little bit.

But can you just round out, kind of run through just maybe three criteria or whatever the top criteria that you are looking for in kind of a like-minded partner?

I mean, in market, is it a deposit based funding that you are looking for?

Maybe just talk a little bit more about the strategy there?

I would say that we are talking in market or contiguous market where -- I said in my comments that, what's valued highly are the synergies that can be gained in a combination.

So, it's likely that getting the efficiencies would be a primary attraction, both for us and for a possible partner.

I would rate those as the top two criteria.

Okay.

That's great.

That's helpful.

And you have to have compatibility.

I know that's kind of overrated, but we are really talking about partners that truly want to team up with us to create something more valuable.

Okay.

That's great.

Thanks very much.

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

Please proceed with your question.

Hi, good morning.

Good morning.

Hi, a couple questions on capital.

Understand that you are going to be pretty gradual, if and when you do come with buyback.

But just wondering, does that mean that capital return would not exceed 100% EPS?

In other words, would you still be accreting capital, even with buy backs and dividend, a 30% dividend payout.

Well, over the near term, yes.

Yes, because it would be paced, to hit our targets, as Jim highlighted.

Got you.

And then, just some follow-ups on the M&A commentary.

I know in the past, you have sort of said that you would be not be participating in an auction-type format.

Is that -- does that still hold, or would you now be more willing to participate in those types of opportunities?

Well, let's say, we would not be unwilling to participate in an auction, but we'd be still somewhat reluctant, because we are really more interested in negotiated transaction between like-minded partners, to see the value what they can do together.

And generally, what we've seen, particularly in our markets, is that auctions tend to transfer more value to the seller than the buyer.

And so, yes, very interested in looking at opportunities.

And yet truly interested in -- we talk about like minded partners.

Those are people we know, that we can talk to, that believe in what the combined institution can be.

So it's not likely you are going to find that in a competitive auction.

Got you.

Okay.

Then the last one for me on loan growth.

The equipment finance, is that runoff?

Are we close to stability in that book?

Or is that another quarter or two away?

I think that we -- for the first three quarters of the year, we were reduce being $60 million a quarter in our balances.

This quarter, it was 47, as you've likely seen.

So we are feeling good that, we've sort of bottomed out there, and you are going to start to see growth.

Got you.

Thank you.

Sure.

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

Please proceed with your question.

Hi, good morning, everyone.

Good morning., Steve,

Before I get to my question, I just want to clarify on the margin.

Did you say that you still see up to 5 basis points of pressure per quarter through 2012?

I wasn't sure if I heard you right.

Yes, we could see up to 5 basis points.

Okay.

My question, how do we reconcile that, you are seeing commercial loan growth, yet transaction accounts and savings deposits continue to grow?

Wouldn't you expect your customers to start drawing down liquidity, before you saw increased borrowings?

That's a great question.

I think that one of the things, we've highlighted in the past is you're pulling, from five different lines of business to pump up those balances.

We are certainly attracting customers that are deposit only customers, in addition.

And then, you can see that the spread is across the lines of business.

And I think that that's another way to think about that.

We are still not seeing -- small business balances continue to show some growth.

I think we are fairly stable in most of the growth on the middle markets.

I think most of the growth would have been more on -- we are acquiring new relationships.

Got it.

And just a follow-up on the M&A comment.

The pace has been pretty slow.

Are you seeing more banks start coming to you that are looking to sell?

Or is this is something you expect to happen?

What we are really saying is -- we are quite clear for a while.

I think it's interesting it attracted so much attention that -- we were saying, we are not interested in M&A.

I think what we are really saying today is, we think we are in really good shape in terms of our own progress.

And therefore, we are willing to look at something, that a year ago, we were not.

We do think that the chatter is starting to increase a little bit in the market.

We believe that the consolidation is going to be inexorable, that it will occur, because of all the pressures on banks, particularly smaller institutions, that are going to have a hard time meeting the capital requirements, and with the lost revenue, and with the regulatory costs.

That when they look at what the returns on capital are going be, it's going to be a lot tougher for the smaller institutions, than for the medium sized institutions, to address all of those issues, and still earn economic profit.

That will eventually influence people's views, as to whether they want to stay independent.

And we think that will start happening fairly soon, and that we will be a participant in talking with those companies.

So your comments are more about your comfort level with doing a deal, rather than a comment on the landscape for M&A.

Yes.

Although, we think the landscape is such, that the consolidation wave is imminent.

Okay.

Great.

Thanks.

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

Please proceed with your question.

Hi.

Good morning.

How are you?

Good morning.

Most of my questions have been answered.

But I guess with regards to the debt restructuring, what point of the quarter did that take place in?

That occurred in the last month, last week actually.

The last week of the year.

Okay.

So is it fair to say that -- I know it was only $50 million, but would that have some positive impact done on sustaining the margin, and reducing the amount of compression in the first quarter?

It's $100 million --

I'm sorry, $100 million, yes.

And it is in the guidance that I gave, although we continue to look at our borrowing structure as well.

Okay.

Great.

And then I guess this is probably more for Jim or Jerry.

Just in light of the strong performance of your stock in the last couple of years, especially since Warburg has become a partner with Webster, can you kind of give us an update what maybe their thoughts are?

And kind of how they look at the longer term prospect of their investment in the bank?

Sure.

Just say, I think they are pretty happy with it.

I think their view is, that they believe as keenly in the value of the regional banking model, as they did when we started talking to them three or four years ago.

And that they have been a great partner for us in that regard, and a great source of information.

And that they still believe very keenly in the power of that model and so do we.

Okay.

Fair enough.

That's all have I for now.

Thank you.

Thanks.

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

Please proceed with your question.

Yes, hi.

Just getting back to the securities portfolio, can you give us a sense of what the cash flows were in the third quarter, going into the fourth quarter, and then your expectations for Q1?

And also, I didn't catch this during the call, what is the total unamortized premium on that portfolio?

Let me take it, one at a time.

So 200, say 225 goes to 300, on the portfolio.

And as I indicated -- I think I indicated on the call, it's coming off at say, 335 going on 245.

That's the first part.

And then --

That's the dollar amount of pre-pay --of amortization in the portfolio?

No, that's the dollar amount of cash generated.

Okay.

All right.

And the dollar amount of the premium is $120 million.

Okay.

And then -- I thought you had a third question, but I --

What are the expectations for cash flows in the fourth -- in the first quarter, that's kind of baked into your margin?

It's about 300.

Okay, great.

And what about branch closures in over the next 12 to 18 months?

How many additional spots could be considered?

Yes.

Hi, Matt, it's Jerry.

I don't think we really are going to commit to what we would or wouldn't close.

I think the way we were looking at it is, we are continually going to look to see that we are in the best locations.

Do we have the right size offices there, are they -- and I think that it will just come naturally.

I think we did a -- obviously a very big push in 2011 to look at what I think we said were clearly locations that we didn't see future growth, weren't the right sizes, et cetera, and that we can easily consolidate those into existing facilities to minimize customer disruption.

I think now, we have got to look at it as, okay, what we have left, do we see growth in the opportunities in all of those locations?

Are they the right size?

Is there is an opportunity for us to relocate for better visibility, to be closer to the heart of a business district, et cetera?

So a lot more to it, I think, as we look at distribution on a go-forward basis.

And pretty clearly, you can tell from the comments today, that on the consumer side as well as the commercial side, we are investing in cash management.

We are investing in image capture ATMs.

We are reflecting what we think are, the changing behaviors of our customers, and the acceptance level of getting everything electronically, and transacting electronically.

So we think that's -- as that continues to shift, I think the answers will become clearer and clearer about what we would do, on any other physical distribution changes.

Yes.

And I want to add to that, that we are not forecasting that we will have a significant number of closures in 2012.

In fact, I think we should anticipate we will not.

That the closures in 2011 were based on the contribution and location analyses that we were able to do.

And so, anything thereafter becomes a more difficult decision based on it's economics, particularly given that all of the remaining branches have better contributions and better locations than the ones that were closed.

So I doubt there is going to be a significant impact on synergies from additional closures in 2012.

Okay.

And then last question, reserve coverage to total loans, went from 3% in '10, to 208 at the end of the year.

Where do you see that kind of troughing out -- as you start to put on some growth, what is the reserve coverage to total loans that you think we are going to kind of trough at?

I think that depends on the mix of assets as we go forward.

If you continue to balance between a 50/50 split commercial and consumer, you could easily see it.

And again, remember most of the consumer -- virtually all of the consumer we do today is secured, backed by one to four.

So we look at it as -- that in and of itself, requires lower levels.

So you are probably looking as a migration over time, that you get closer to the 1.5 to 1.75 range historically -- which is I think a little bit more where you'd see -- I guess I will call it in quotes, historically or traditionally.

But and again, what's going to happen with reserve levels is going to be dependent on the mix of assets.

And if we continue to have -- see better profitability and opportunity in one area versus another, that's going to shift that number around.

We are going to have to provide or hold reserves appropriately for the risk that we are taking in the portfolio.

Okay.

Thank you.

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

Please proceed with your question.

Good morning, John.

I'm sorry if I missed it, but can you tell us at what cost the FLHB advances were brought on the books this quarter?

15 to 30 bps.

Okay.

All right, great.

And then can you just remind -- I'm sorry if you talked about this, but can you talk us to about the tradeoff in the investment and securities portfolio versus the other needs of capital deployment, particularly given you are looking at M&A now?

And in terms of potentially getting more aggressive on that front, can you just kind of talk to us again, about that tradeoff of why lever up here, with the securities book?

Well, it's -- John, it's Jerry.

And I made some earlier comments to this.

It's -- the decision we are making with the best use of capital, and what's our flexibility to do that.

So given the process you go through to get approvals, to do dividends to do buybacks, to run all the stress testing, we believe that right now that if -- and what we did was look for opportunities for organic growth.

And you saw that in the portfolio in the loan side, and we took opportunities to buy very short duration, classified AFS securities on -- (multiple speakers) So I think we're -- I think that the best way to characterize it is, is that consider that we elected to lever up, because our options for organic growth, and/or reducing the capital base via distribution backed, be it dividend or buybacks, those tools weren't available at that point in time.

As we stated earlier in the call, we are certainly exploring how to increase the dividend.

And then also to add another tool for capital management to look at buybacks down the road.

And I just want to add to that, to your point, John, if another alternative came along, you have the flexibility to sell it.

That -- it's in AFS, it's relatively short duration.

That's part why it's there.

Yes.

And I guess what I was just getting at -- and thanks for saying that.

I know you mentioned it earlier on the call, but the -- I worry a little bit about the [convexity] of the instrument -- if the ten year does find it's way north here, and how that could impact the securities you are buying?

I know they are short duration, but I just worry here about extension.

And then you are sitting on some short term funding.

We hear you, and we are trying to bear that in mind as well.

Yes.

I think we mentioned that we were asset sensitive, and we're moving more toward a neutral position.

Okay.

Fair enough.

On a --

Okay.

Thank you.

Sure.

Thanks.

There are no further questions.

I would now like to hand the floor back over to management for closing comments.

Thank you very much.

Thank you all for being with us today.

Good day.

This concludes today's teleconference.

You may disconnect your line at this time.

Thank you for your participation.