Webster Financial Corporation

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 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 third quarter of 2012.

I'll now introduce your host, Mr. Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Thank you, Luis. Good morning, everyone.

Welcome to Webster's Third Quarter 2012 Earnings Call and Webcast. Our earnings release tables and slides are in the Investor Relations section of our website at wbst.com.

I'll provide highlights of the quarter; President and COO Jerry Plush will discuss key aspects of performance and trends in our business units; CFO Glenn MacInnes will review the quarter's financial results, and then we'll take your questions.

Our strong third quarter results continue the momentum that we've built through targeted investments in key businesses combined with a tight rein on expenses. Net income of $0.48 a share increased 7% from last year and 9% linked-quarter and our earnings have now regained pre-recessionary levels.

Pretax earnings reached $64.5 million, the highest level since 2005, and core pre-provision net revenue, or PPNR, of $69 million was an all-time high. We reported continued progress on almost every front, including loan and deposit growth and mix, revenue growth from both net interest income and noninterest income, continuing progress and expense control, improving asset quality, higher capital levels and progress in executing strategic initiatives.

These favorable results generated positive operating leverage that drove the efficiency ratio lower linked-quarter by about 1.5%, keeping us on track to deliver a 60% ratio in Q4. Return on assets rose to 92 basis points from 86 in Q2, return on equity climbed to 9.2% from 8.6% and return on tangible common equity exceeded 12.6%.

These improving returns, amid a modestly expanding regional economy and a gradually strengthening housing market, underscored the measurable progress we're making toward achieving our overarching financial goal to earn economic profits over return above our cost of capital.

One of the highlights in the quarter is the continuing strong growth in our commercial loan book, which is noteworthy because our Middle Market and Small Business banking teams are at the heart of our relationship-building strategy. Commercial nonmortgage loans and commercial real estate loans were up a strong 4% linked-quarter and 17% year-over-year.

We added 6 relationship managers in the quarter and further upgraded our Cash Management services as we continue to beef up our revenue-generating capabilities. A tip of the hat to Joe Savage, who has done an outstanding job leading the Commercial Bank.

Our Small Business banking group continues to advance as loans rose nearly 4% linked quarter and over 10% year-over-year, while transaction account balances climbed 17% year-over-year. We're already seeing the results from our Q1 initiative to certify our branch managers as Small Business bankers.

In Q3, fully half of our Small Business loans were originated by these newly minted business bankers. We saw a very strong contribution from mortgage banking activities, a direct result of our strategic decision to double our sales force to more than 70 originators and emphasize Jumbo mortgages as a key building block in developing new and deeper customer relationships.

Regarding unsecured consumer credit, our credit card relationship with new partner Elan is off to a very fast start, well exceeding expectations. The growth that we're seeing in Private Banking reflects the recent addition of 4 net new relationship officers, bringing the total to 9, and we plan to add 5 more over the 2014 planning horizon.

We now have coverage in all 7 of our regional markets, and I'm pleased to report that our new private bankers are producing at the levels we anticipated. We continue to exercise pricing discipline on our cost of deposits bank wide and a shift to greater share of deposits to lower cost accounts.

Transaction account deposits grew smartly once again and now represent 39% of total deposits, the highest level ever.

While our net interest margin eased 4 basis points linked quarter within the range we had guided, net interest income increased modestly due to higher loan volume.

Also notable in the quarter was the continued improvement in asset quality. Nonperforming assets declined 3.5% in the quarter and are now at their lowest levels since 2007, while commercial classified loans dropped 12%.

Given the positive credit trends, accompanied by strong commercial loan growth, we held our loan loss provision at $5 million against net charge-offs of $17.7 million. Loan portfolio coverage is a healthy 1.6%, and nonperforming loan coverage is well over 100%.

I want to update you briefly on our progress to date on our key initiatives and a few things to expect in Q4. As you know, we're focused on shifting our investment from physical to electronic delivery channels in keeping with customers' changing preferences and to gain efficiency.

To date, about 80% of our 251 deposit-taking ATMs have been converted to envelope-free image capture capabilities with touchscreen convenience and customized preset preferences, which reduces the time required to complete a transaction. Our seasoned envelope-free ATMs, meaning those that have been operational for at least 28 weeks, have seen a 41% increase in the number of deposits since deployment.

We're also seeing an encouraging response from retail customers to our eChecking product that was introduced in April. This product is intended to attract and retain customers who value the convenience of banking online and on the go.

Since introduction in April, eChecking has accounted for 22% of consumer checking sales, and checking account attrition has declined. Additional electronic offerings will be deployed in Q4, including our new mobile app and, shortly thereafter, Remote Deposit Capture for consumers in early 2013.

These technology upgrades enhance our brand by enabling customers to choose how they interact with us with the greatest of ease. They also free up branch personnel for relationship cultivation and more needs-based interactions with customers.

In that vein, we've just rolled out the first phase of our previously announced Universal Banker program, initially in 10 branches. Our universal bankers will participate in special development programs designed to help them assist customers with a wider variety of banking matters than has typically been the case, breaking down the silos that separate the teller line from other branch functions.

Universal Banker will make us more financial advisory-oriented and, over time, significantly more efficient.

In the fourth quarter, we'll be opening our full service branch and Private Banking facility in Greenwich, as well as our relocated Simsbury branch. Both branches are smaller, more efficient, well-situated facilities that capture the essence of what future Webster branches will look and feel like, consistent with our pledge to both rationalize and enhance our physical distribution network.

Organizationally, we've realigned to reflect our strategic priorities. Jennifer Buchholz has joined us as Chief Human Resources Officer, and Dan Fitzpatrick will be joining us later this month to lead the Private Bank.

We're pleased to have these 2 seasoned executives join the management committee.

In July, we announced our comprehensive new affinity marketing agreement involving the University of Connecticut. In addition to the numerous brand awareness opportunities that accompany our association with the University, we expect to add a significant number of new student, alumni, fan and faculty and administration account relationships in coming quarters.

Finally, I want to comment on capital. As I've told you previously, with our tangible common equity ratio approaching 7.4% and our Tier 1 Common ratio exceeding 11%, we have ample room to grow the balance sheet and to increase exposure to higher risk-weighted assets that contribute to economic profits, meaning we can support meaningful loan growth at 100% risk weighted.

And as I've indicated in the past, Webster is fully compliant with the Basel III capital standards, significantly exceeding all estimated well-capitalized regulatory requirements on a fully phased-in basis.

Regarding capital deployment, nothing new here. As earnings improve, so does the likelihood of dividend increases.

Doubling our regular quarterly cash dividend in April brought us into the low 20% payout range. We expect to push that ratio to 30% or so in the quarters ahead, and we're taking a close look at implementing a stock repurchase program.

While our focus is riveted on executing our strategies that increase economic profits and shareholder value, we're mindful of likely industry consolidation. Should the opportunity arise to strengthen our franchise through negotiated in-market or contiguous market combinations that meet our rigorous standards, we're well-prepared.

But as I said before, we do not view acquisitions as a requirement for success or as a necessary condition for generating economic profits. One need only observe our progress and momentum to conclude that we're making measurable, organic progress and that we can achieve our goal to be a high-performing bank.

We're fully committed and have the discipline to invest capital and allocate resources in support of strategies we believe will boost economic profits.

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

Thanks, Jim, and good morning, everyone. It's great to have this opportunity to review with you how our principal lines of business are doing.

Let's start on Slide 3 with our Commercial Bank.

So here you can see in the top left chart that the Commercial Bank has $4.7 billion in loans and posted solid growth in outstandings over the past year and again this quarter. We're growing across the middle market and investor commercial real estate businesses, as the Commercial Bank posted overall loan growth of $191 million or 4.2%, up from June 30, and $550 million or 13% from a year ago, and that's inclusive of a net plan decline of $16 million in equipment finance from June 30, and over $117 million from the prior year.

Equipment finance now looks to be leveling off at around $400 million, and it should begin to grow some time next year. The yield on our portfolio decreased by 15 basis points to 4.14% in Q3, while the spread decreased by 9 basis points to 3.02%.

A significant amount of this decline relates to the higher level of deferred fees that we took in, in the second quarter as a result of the higher level of prepayments that occurred, as well as from our entry in the quarter into municipal lending, and the originations there totaled $37 million at a tax adjusted yield of 2.07%. The 3.02% spread in Q2 -- or excuse me, Q3, otherwise compares well with all but Q2 when you look at the 5 most recent quarters.

As you can see in the top right chart, our loan origination fundings totaled $347 million in Q3, and that's compared to $424 million in the second quarter and $275 million a year ago. We're pleased to have over $300 million in fundings given the seasonality of the third quarter, where we posted solid Q3 of a year ago.

The yield of new originations in the quarter was noticeably lower than in Q2 for a couple of reasons. We had one significant investment grade rate of credit of approximately $33 million that funded where we enjoy a very broad deposit Cash Management relationship, but this funding reduced the overall yield on new originations by about 20 basis points.

And you also have to take into account the new municipal lending volume I just mentioned. The rest of the yield differential from Q2 relates to mix and putting on high-quality transactions that have the effect, of course, of lowering yields or driving improved overall asset quality.

We anticipate a rebound in the fourth quarter of yields and spreads on new business.

Our Commercial Bank relationship managers focus on the full banking relationship with their customers, so it's also worth noting that we did 18 interest rate risk management transactions, primarily swaps, caps and collars that we booked for clients during the quarter that generated $1.5 million in noninterest revenue. Also of note, our demand deposits increased to $941 million at September 30, and that's up 23% from June 30 and up over 44% from a year ago.

The Commercial Bank team has opened 434 new demand deposit relationships so far this year in comparison to 354 new accounts through September of last year.

Now if we turn and look at the chart at the bottom left, our classified loans in the Commercial Bank have declined by $229 million or 41% over the past year and now represent about 7% of loans compared to 13% a year ago. Glenn is going to speak to total commercial line classified trends in his remarks, but it's very clear that you can see here the Commercial Bank continues to make strides to improve this key asset quality measure.

Finally, on the bottom right, you can also see line usage trends within the 4 business segments of the Commercial Bank. You can see the Middle Market posted a slight uptick, and we actually take the recent upward trend in asset-based lending as more than just seasonal strength heading into the fourth quarter.

The Commercial Bank pipeline totaled $380 million at September 30 compared to $365 million from last quarter. The pipeline is strong, and we do see some opportunities for further expansion.

Let's turn now to Slide 4, and we'll talk about our Retail Banking group. You can see here that we have a total of $10 billion in deposits, and included in this figure are $1.7 billion of Small Business deposits.

Our Small Business unit also had $955 million in loans. The retail segment also includes Webster investment services that has $2.3 billion in assets under administration.

So if we look at the top left chart, you can see how Small Business loans have grown by $34 million or 3.7% from June 30, and they're up 10% or $89 million from a year ago. This growth is occurring while we continue to reduce nonperformers, which are down by 2.3% of the portfolio versus 3.1% at the same point last year.

Our Q3 Small Business new loan originations were $74 million, and that compares to $79 million in Q2 and $74 million a year ago. Approximately half of the Q3 originations came from our Small Business certified branch managers and the other half from our dedicated business bankers.

Of note, the pipeline remains strong at $63 million at September 30, just about the same as it was at June 30. The 15-basis-point decline in portfolio yield compared to the second quarter reflects the continued repricing dynamics of the portfolio in the current low rate environment.

In the bottom left, we show our Small Business originations. Again, at $74 million, it's remained in the range that we've seen over the past year.

During the quarter, we saw a 20-basis-point decline in 3 to 5 year rates that contributed to the 13-basis-point decline in the yield on originations.

Looking at the top right chart, you can see the progress that we've made in taking transaction account deposits to a little over 31% of total deposits in Retail Banking. The group has seen transaction deposit growth of $308 million or 11% over the past year, and that's led by Small Business, which grew $183 million or over 17%.

At the same time, we've seen significant increases in average balances in transaction accounts. Our Small Business transaction accounts had an average balance of $22,700 in Q3, which is about 15% higher than a year ago.

Similarly, when you look at the consumer average balance per transaction account, that's over $5,500, and that's up over 9% from a year ago. The emphasis on transaction accounts and overall deposit pricing discipline has helped the Retail Banking group lower its cost of funds significantly over the past year.

You can see in the bottom chart, on the top, the 44 basis point cost of funds in Q3 is now 3 basis points lower than the Q2 numbers and 15 basis points lower than a year ago. The chart on the bottom right shows the progress that the group has made in migrating its business to lower-cost channels.

In part from fewer branches from combinations and closures over the past 18 months, our median branch size in Connecticut was $65.58 million at June 30 compared to $63.56 million a year earlier. As per the latest FDIC deposit market share update, we also continue to see a steady increase in the number of active online users, which is now over 60%.

If we turn to Slide 5, we can review our Consumer Finance group results. Our originations including loans sold with servicing retained were almost $500 million in the third quarter.

It's down slightly from Q2 but represented growth of 61% over the same quarter last year. Our yields on new portfolio originations improved by 6 basis points over the second quarter.

The pipeline in Consumer Finance remains very strong. It's at $649 million at September 30 compared to $573 million at June 30.

You'll also note that our portfolio balance were lower by $45 million compared to Q2, and that's the result of consumer refinancing and deleveraging, and we continue to sell our fixed-rate conforming mortgage production. These same factors contributed to the 6-basis-point decline in the portfolio yield from Q2.

If you look at the bottom left chart, you can see the success we've had in growing our Jumbo mortgage originations. You can see that they now represent about 69% of our total originations for portfolio in Q3 compared to 54% last quarter and 46% a year ago.

We've really focused on increasing our Jumbo mortgage percentage within existing territories with new hires in Jumbo markets and a strategic correspondent lending partnership with a premier real estate company in our footprint. You can see that our total percentage now of the portfolio is just over 40%.

On the bottom right chart, you can see the progression in key asset quality metrics in the Consumer Finance portfolio. Delinquencies posted a slight decline from Q2, while our non-accruals posted a slight increase as a result of proactive non-accruals of $2.4 million that were taken for junior liens with distressed first mortgage loans.

Net charge-offs were flat.

One final note on Consumer Finance. We're really pleased, as Jim referenced before, with how our new third-party credit card arrangement that we began earlier this year is progressing.

Our new program got underway late in this first quarter, and we now have over 13,000 accounts booked. Our credit card revenue was around $0.5 million or 60% higher than the first quarter, which is really the last relevant period compared to under our prior arrangement.

We'll turn now to Slide 6 and take a look at the results of our Private Banking unit. This group has almost $2 billion in assets under management and administration as of June 30.

The increase of $92 million from June 30 was primarily market-driven, although it did include some net client inflows. Our Private Banking originations declined slightly in the third quarter, and tandem with the chart in the lower left, we nonetheless saw an increase of about $8 million in loans during the quarter, our gross up about 27% compared to a year ago.

The pipeline in the Private Bank remains very strong at $103 million, very comparable to the $116 million or so that we had at June 30, and it's up substantially from the $58 million that we had over a year ago. We're seeing a nice lift in deposit balances, with growth of $36 million in the quarter and $68 million from a year ago.

Deposit growth in the quarter includes 5 significant new clients, each with over $1 million in deposits, the bulk of which in their cash positions.

We'll turn now to Slide 7, and we'll cover our HSA Bank unit. We ranked #2 on a pro forma basis among the top 20 Health Savings Account custodians in the country with over $1.2 billion in deposits and another $367 million in linked brokerage accounts.

We have invest in -- investment relationships through Ameritrade, Debonair and Vanguard for the linked brokerage account business. As you can see on the chart in the top left, we added another $30 million of deposits in the third quarter, and that's important to note as you have to keep in mind that the majority of our growth comes in the first quarter of each year.

Looking at the chart at the top right, you can see our accounts have pretty much grown in tandem with the growth in deposits, and they're up around 26% compared to a year ago. And with deposit balances, you can also see the seasonal strength in account growth in the first quarter, when the benefit plan year starts for many employers and their employees.

Looking to the bottom left, that shows you the reduction in HSA bank's cost of funds over the past year by 26 basis points. We continue to tightly manage the tiered rate structure that we pay on Health Savings deposits.

For additional information, you can go see HSA bank's full rate and fee schedule on their website at www.hsabank.com.

The chart on the bottom right provides our average balance by age of account. We think that HSA's sole focus on the administration service and support of Health Savings Accounts underpins our better-than-market performance in the important metric of average balance by age of account.

Another important development for HSA in the third quarter was the addition of roughly $180 million in 25,000 accounts, mostly brokerage from HSA administrators in Virginia. You can see the effect that this had on our brokerage balances in the top left chart and the number of accounts in the top right chart.

Let's turn now to look at our overall origination and balance page on Slide 8. You can see that overall balances total $11.7 million (sic) [billion], and that shows growth of almost $190 million or $1.6 million -- or 1.6% linked quarter, and $678 million or 6.1% year-over-year.

Our total originations, including residential loans originated for sale with servicing retained, were over $1 billion in the quarter and, as just reviewed, the pipelines for the commercial and residential side of the house remain very strong. So, overall, another good quarter for loan growth with expectations for continued solid growth in the fourth quarter.

So with that, I'll now turn it over to Glenn, who will provide some comments on our financial results and also on the outlook for the fourth quarter.

Thank you, Jerry. Let me start by turning to Slide 9, which provides a quarterly trend in net income available to common shareholders and a return on average equity.

I'll talk more about the drivers of our performance in a few minutes but note the $44.4 million in earnings this quarter represents a 9.2% increase over prior quarter, a 7.2% increase over prior year, EPS of $0.48 per diluted share, a return on assets of 92 basis points and a return on average equity of 9.18%.

Slide 10 highlights our core earnings drivers. Let me first highlight 3 non-core items which were incurred in the quarter and are reported in the pretax income.

First, we had a security gain of $810,000 on the sale of $102 million in agency mortgage-backed securities. Second, we successfully completed the redemption of $136 million of troughs on July 18 and had a nonrecurring expense of $391,000.

And finally, we had a $205,000 expense in contract and branch facility charges as we continue to reduce our overall operating cost structure.

Now turning to the core earnings drivers. Average interest earning assets increased by 1.4% over prior quarter and 8.7% from a year ago.

The $248 million increase compared to prior quarter was led by a loan growth of $201 million. The $1.4 billion increase in average interest-earning assets from a year ago was a result of growth of $800 million in the investment securities and $641 million in loans and loans held for sale.

Net interest margin for the quarter was 328 basis points, which represents a 4-basis-point decline from prior quarter and a 21-basis-point decline from a year ago. The NIM compression for the quarter was a result of lower overall portfolio yields, particularly in the investment portfolio, which contributed 5 basis points of the NIM compression.

This was driven by cash flow reinvestment and lower rates, partially offset by lower borrowing costs. NIM was down 21 basis points versus prior year, primarily driven by investment balance growth and reduced yields in the investment and consumer loan portfolios, partially offset by declines in deposit cost.

Despite the compression in NIM, as you see on the next line, net interest income increased by $512,000 over prior quarter. Growth on our earning assets contributed $2.3 million to the increase but was primarily offset by lower spreads.

Versus prior year, net interest income grew by $3.2 million. This was achieved by solid loan growth, investment purchases and pricing and favorable mix changes in the deposit base.

Core noninterest income was $47.7 million for the quarter, up from prior quarter by $2.9 million or 6.5%. The increase versus prior quarter was primarily for mortgage banking activity, which was up $2.9 million over prior quarter.

During the quarter, we originated and sold $208 million in conventional fixed-rate mortgages at a gain on sale of 303 basis points. During Q3, other noninterest income was impacted by lower direct investment income and fewer client interest rate protection product sales.

The market-based nature of certain items in this line can cause variations on a quarterly basis.

Versus prior year, core noninterest income is up by approximately 7%. The increase of $3 million versus prior year more than compensated for the adverse impact of $3.7 million in lost interchange revenue due to Durbin.

Core noninterest expense totaled $123.6 million in the quarter, which was lower than prior quarter by $800,000. Results also include approximately $800,000 of expense associated with an almost 10% increase in our stock price during the quarter.

The expense is the result of remaining outstanding phantom shares, which will all vest by December. Likewise, as you compare to prior year, the expenses of $119.7 million, recall that Q3 of 2011 benefited by $2.6 million due to the temporary decline of our stock price from $21.02 to $15.30.

Excluding expenses driven by stock price changes, core expenses would've been flat versus prior year at $121 million. We continue to focus on growing the business while controlling expenses, and the third quarter was no exception as we demonstrated positive operating leverage of 2.5%, and for that matter, positive operating leverage in the last 3 quarters.

At the bottom of the slide, you can see our pretax pre-provision earnings along with our reported pretax income. As Jim highlighted earlier, reported pretax income of $64.5 million in Q3 represents our highest quarter since the fourth quarter of 2005.

In summary, we are reasonably pleased with our results, and we will continue to build on the momentum going forward.

Turning now to Slide 11, which highlights our asset quality progressions. I'll start with non-performing loans in the chart on the top left, which declined $6 million in Q3 or 3% and $72 million or 30% from a year ago.

Our NPLs are now 1.39% of total loans compared to 1.47% in Q2 and 2% a year ago. At September 30, OREO totaled $4.9 million, a modest increase from prior quarter but down from prior year by $13.9 million.

The increase from prior quarter was in repossessed equipment and was a result of a single asset which is expected to be sold Q1 2013.

The chart on the bottom left highlights commercial classified loans. Here we show the classified loans, a key factor in determining our overall allowance for loan loss, continue to decline and totaled $392 million at September 30, driven primarily by payoffs and upgrades.

As you see, commercial classified loans declined 12% from June 30 and 38% from a year ago, and we continue to make solid progress.

In the chart on the upper right, our past due loans have been below 1% of total loans for 10 quarters now and were $67 million or 57 basis points at September compared to $66 million or 57 basis points at June 30. The increase was primarily a result of a single commercial real estate asset of $3.6 million, which has since made payment.

We have also included the NPL reconciliation on this page. For the quarter, new non-accruals increased by $13 million primarily due to a $9.5 million Middle Market credit that is now in liquidations -- liquidation.

Cure and exits [ph] increased by $9.1 million as a result of our continued focus on resolution.

Before I move to the allowance for loan loss, I will discuss an upgrade -- update in regulatory guidance regarding the accounting for troubled debt restructuring or TDRs. During July, guidance was provided to the industry by the Office of the Comptroller of the Currency relative to borrowers who had been discharged of loan obligations through Chapter 7 bankruptcy.

The OCC guidance requires these loans be classified as TDRs as they were troubled loans and had received concession by court order. For Webster, this resulted in an increase of approximately $39 million to our TDR balances.

$34 million of this is accruing, and we have reserved for any level of impairment. The remaining $5 million was already classified as non-accrual loans.

We have consistently provided transparency on our TDR trends, and you can see the increase of $39 million reflected in our earnings presentation in the Appendix on Page 35.

We'll turn now to Slide 12, which highlights our allowance for loan loss. Our provision was $5 million for the quarter, and net charge-offs were $17.7 million.

Our allowance for loan loss now represents 1.59% of total loans, and our coverage ratio was 114% of total non-performing loans. Our provision and allowance for loan loss level of $186 million reflect the continued improvement in our key asset quality indicators.

Our investment portfolio is highlighted on Slide 13. The portfolio totaled $6.3 billion at September 30, evenly split between AFS and HTM portfolios.

The total portfolio continues to represent under 1/3 of our total assets. As highlighted with the yellow line in the top chart, the overall portfolio yield was down 17 basis points in the quarter, primarily as a result of prepayments and lower reinvestment rates.

Included in the reduction in yield was an increase in premium amortization by $2 million to $16.9 million versus the second quarter. The increase is a result of a modest increase in our agency MBS CPR from 27% to 29%, which was anticipated, as well as continued reinvestment in securities at premiums to par.

During the quarter, we purchased $579 million of securities at an average yield of 212 basis points with a duration of 5.2 years. Virtually all of the purchases were agency MBS.

Prepayments calls, amortization and maturities amounted to $466 million, with a yield of 324 basis points. We also sold $102 million of securities yielding 133 basis points at the aforementioned gained -- gain of $810,000.

As indicated in the bottom chart, the total investment portfolio duration was 2.7 years at September 30, which is slightly down from June 30. The most significant influence on the portfolio's duration has been the rate in spread environment.

Recall that we grew the investment portfolio beginning June 2011 through March 2012 to enhance and protect our earnings in anticipation of declines in long-term interest rates and a protracted low rate environment. The recent actions on part of the Fed have thus far validated this positioning.

With a neutral interest rate risk profile to a rise in rates, with some exposure to foreign rates, we continue to maintain asset duration to reinvest on the cash flows.

Prepayment rates picked up modestly in Q3 as rates fell in anticipation of the Fed actions. Absent further changes in rates, we expect sustained level of prepayments going forward but not a significant increase in speeds.

The recent drop in reinvestment rates resulted in an extension of duration to maintain yields above 2%, and our risk profile and rate outlook support these actions. As with the past 6 months, we don't expect the balance of the investment portfolio to change significantly the next quarter unless our ALM means or the environment changes.

Let me now turn to Slide 14 for a review of our deposit trends. The top chart highlights that balances remain relatively stable to a year ago.

However, as a result of price discipline and mix, we've reduced our cost by 3 basis points versus prior quarter and 15 basis points from prior year.

The lower chart highlights the progress we've made on increasing transaction accounts, which now account for 39.3% of our total deposits. This is a high for us and, as you can see, was driven by $196 million increase versus prior quarter and a $937 million increase over prior year.

In addition to the pie chart that you see here with the deposits by line of business, we've included a slide in the Appendix, which also slows -- shows deposit costs by line of business.

Note that the net deposit growth of $439 million in the quarter was primarily led by growth in money market balances of $370 million in the municipal portfolio.

On Slide 15, we highlight our borrowing mix and cost. Borrowings totaled $3.1 billion at September 30, a decrease of $107 million versus prior quarter.

Short-term borrowings remained flat over prior quarter, and our cost was relatively stable at 141 basis points.

For the quarter, the cost of long-term borrowings benefited from the trough redemption, which reduced our aggregate cost by 94 basis points to 3.59%. Given the current rate environment, incremental funding is primarily done at short-term rates from 25 to 35 basis points.

The duration of total borrowings is 1.8 years at September 30 compared to 2 years at June 30.

Slide 16 highlights the progress we've made against improving our operating efficiency. As you see on the chart, our core operating efficiency improved noticeably in the third quarter.

Positive operating leverage of 2.5% over prior quarter resulted in our ability to improve our operating efficiency by 150 basis points versus Q2. As I noted in my initial comments, Q3 core expenses include $800,000 in expenses related to the increase of our common stock price, without which our efficiency ratio would have been below 62%.

As a comparison to prior year, the increase in expense versus prior year is primarily attributable to $800,000 phantom stock related to the expense as a result of the 10% increase in our stock price. In addition, as I outlined earlier, the third quarter of 2011 included a net benefit of approximately $3 million, as our stock price went from $21.02 a share to $15.30 a share from Q2 to Q3 2011.

The majority of this volatility will be taken out of the P&L as the remaining phantom shares fully vest during Q4 2012. As you see, core revenue is up versus prior year by $6 million.

This was driven by an increase in net interest income of $3 million despite NIM compression of 31 basis points and a $3 million increase in non-interest income, primarily as a result of mortgage banking activity. Again, I would highlight, we more than offset the $3.7 million negative impact to Durbin, which began in the Q4 of 2011.

We've achieved positive operating leverage over the past 3 quarters and are on track to achieving our 60% efficiency ratio in the fourth quarter. We anticipate an increase in the ratio in Q1 2013 due to seasonality but expect to operate at a sustainable 60% efficiency ratio from Q2 2013 forward.

Slide 17 highlights our capital position. We have at least $400 million in excess capital at the holding company that required to be well-capitalized by current regulatory ratios.

We remain well above regulatory capital levels and exceed Basel III requirements, including the estimated change in risk-weighted assets, truck reclassification and all buffers. We have ample room to grow the balance sheet and risk -- and higher risk-weighted assets provided they contribute to economic profit.

So before turning it back over to Jim, let me provide a few comments on expectations for the fourth quarter of 2012. With respect to average earning assets, we expect our average earning assets to continue to grow in the range of 1% to 2% in the fourth quarter, almost entirely through the loan portfolio.

Regarding net interest income, the industry continues to be adversely impacted by low rate environment. As an example, the 30-year Freddie Mac mortgage rate of 365 basis points at the end of June fell 25 basis points to 340 at the end of September.

While we continue to take management actions to minimize the adverse impact, NIM compression could be in the range of 3 to 6 basis points in Q4.

That being said, we think our net interest income will be relatively flat to Q3, taking into account our earning asset growth being offset by the projected lower NIM.

As we highlighted, credit continues to experience positive trends along all key asset quality metrics. Assuming this continues, expect a moderate increase in Q4 provision commensurate with our anticipated loan growth.

Expect core noninterest income in Q4 to increase approximately 4% to 5% over Q3, as the net result of mortgage banking activity, loan-related fees and improved -- improvement in wealth management. With regard to noninterest expense, we expect a reduction in line with achieving a 60% efficiency ratio and expect the majority reductions quarter-to-quarter will likely be in marketing and technology.

We remain committed to achieving a sustainable 60% or below rate ratio beginning the second quarter of 2013, given Q1 contains seasonality such as payroll taxes, 401(k), et cetera. Our effective tax rate on a non-FTE basis was 30.2% in Q3, and we expect the rate to be in the range of 29% to 30% in Q4.

Lastly, average fully diluted share based on the current market price, I would assume to be about 92.3 million shares.

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

Thank you, Glenn. Third quarter results show good progress toward our goal to be a high-performing regional bank as measured by customer satisfaction, market penetration and our absolute and relative financial performance.

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

First question I have for you. With a 60% efficiency ratio within striking distance, have you begun to recalibrate your expectations?

Is 55% doable over the longer term with the business structured the way you have it?

It's Glenn. We're not giving out that type of guidance yet.

Well, I think what we said is beginning Q2 of '13, we'll be below 60%, exactly or below.

But we can confirm that we intend to continually work to drive that lower, because there's a high correlation, of course, between the ratio and the return on capital.

Okay. And then with the reserve to loan ratio at 1.59%, are we getting close to the point where you'd expect reserve releases to slow or stop?

We think that it'll slowdown, but we think that number will probably be in the 1.45% to 1.50% range for -- in Q4.

Okay. And then lastly, you announced this morning that you hired a new head of the Private Bank.

Should we expect any acquisitions in that line of business or significant headcount addition?

Well, we mentioned that we actually have added several private bankers in the last few quarters and we have plans to add additional bankers. That's consistent with the strategy to grow the Private Bank by offering the totality of banking services to high net worth people.

So that would be obviously depository and lending and investment management services. So Dan Fitzpatrick will come and he will lead that initiative for which we already have significant plans for growth.

So we will be adding additional personnel. It is possible that there will be, let's say, registered investment advisors that we'd like to join our platform.

Again, as we always say with regard to acquisition, the focus is on organic growth and making the most of what we have here, including the fact that we've got over 20,000 clients at Webster that we believe have a net worth over $1 million. We've got a lot of mining to do of the opportunity that we have today.

But I wouldn't rule out the possibility that there could be some partnerships formed along the way.

It looks like operating expenses came in a little higher than we were expecting this quarter. Can you just give us maybe a rough idea how much of the efficiency improvement in Q4 you expect to come from occupancy/technology expense versus, let's say, lower marketing expenses?

It's Glenn. So first off, I would highlight that there is, as I said in my prepared remarks, there's about $800,000 in the quarter that's attributable to the stock increase of 10%.

So that was unexpected. But I think as we go into the fourth quarter, you will see a reduction in marketing expense, which will probably be about 2/3 of the reduction and then the remainder will be between technology and other lines.

Great. That's helpful.

And then with respect to the Universal Banker model, in the event this pilot that you've launched here presumably early in the quarter is successful, over what period would you might expect to roll that out to the entire branch network going forward?

We would roll it out to the network over, say, a 12- to 18-month period, and we would expect it to pay continuing dividends through building client relationships and through the efficiencies we gain in that process. So we're up to 3 years or so.

Also, the Universal Banker works well in combination with the changes that we're making in the physical infrastructure. So we will also, over that time, actually over a longer period of time, be rightsizing, optimizing, enhancing, as we call it, the physical infrastructure, making sure the branches are in the best locations, at the right size, with the right electronics and technology to take maximum advantage of this Universal Banker program.

Okay, great. So assuming that you plow back some of the savings from this program, you reinvested back into the business in various ways, do you have any thoughts around kind of how much of a driver this might be to lowering that efficiency ratio over the long period of time?

Is that going to be meaningful?

I guess we would look at it as -- let's look at this inside the retail bank and say that this will significantly improve efficiency within the retail bank by driving revenue and lowering costs. And given that the consumer deposits part of the organization is the one under the most pressure to generate returns on the capital that's invested in it, this is very important that we do that.

So it will also have an effect as part of the overall program to drive the efficiency ratio down for the company.

And Jason, it's Jerry. If I could add to Jim's remarks.

I think you have to take the Universal Banker initiative. And I think Jim did a nice outline of a number of things that we're going to be rolling out.

If you take into account the enhancements we're going to be making to our online services and capabilities, you couple that with the downloadable app, the full rollout of all the image capture machines and the increased usage, you can see the transactions are going to become more and more electronic, which reduces the need for more transaction-related activities in the branch and more consultative advisory transactions to take place. So definitely will be some personnel shift, but you'll also see a shift of the bulk of the consumer transactions now starting to become more and more automated, and we're clearly seeing that in our numbers.

And you have to think to look at the totality of all those initiatives together to say that yes, down the road we'll get greater and greater efficiency. I think, to add to the comments that also -- that Glenn had been making before in terms of the efficiency ratio and what to expect as we go forward, there's still a lot more that we know that we want to do.

And again, we've made some references to that in prior calls and then also, again, in this call, that we continue to rationalize our distribution network, which means that you should see that we'll continually look to shift our branches to where there will be smaller, better located, more efficient facilities. And I think that we'll be rolling out more and more details on that not only into the next call but also throughout 2013.

I wanted to start on the commercial loan growth. It was really solid this quarter.

Curious, as you talk to your customers, do you think the improvements in the pipeline you're seeing line usage looks better is sustainable, particularly given all this uncertainty we're hearing about over fiscal cliff and items like that?

Steve, it's Jerry, great question. I think, right now, we'll continue to stay the course and say, yes, utilization's up.

I think people are seeing a little more demand. I think this really, though, is a tribute to all the quality folks that we've added, which is greatly enhancing our capabilities to attract new relationships, continue to maintain existing.

So you see some of the uptick again coming from the fact that we've got more feet on the street, high-quality folks that are out calling. So we're gaining greater share.

I think it is part of this, as well as we are seeing some signs of economic improvement. But I think you could -- safe to say that it continues to be pretty much the same as we've said in prior quarters, which is we're gaining greater market share, particularly when you think about the expansion we've done up in Boston, the emphasis we've placed towards New York, in addition to the solid results our folks across the rest of the network continue to bring in.

But Jim, do you get the sense that the customers you've taken right to market share, that those customers may be pulling back a bit here?

Actually, the notion of uncertainty, there is a lot of it out there. I guess our comment is that businesses, in particular, have adapted very well to the new environment.

They're not happy with the circumstances, but they've adapted to them. People look at the fiscal cliff and they say, that could have a negative impact for a quarter or 2, eventually it must be addressed, I think is the attitude.

So maybe there's a little bit of slowdown in the expenditures and in borrowings that might otherwise have occurred. We can't really tell.

All we're seeing is this gradual improvement. A little bit of improvement in the usage.

We're attracting a lot of clients to Webster because they want to do business with a regional institution that is known in its markets, that makes local decisions at the local level. There are a lot of things that are going well for us right now.

So without being able to be all the way inside the heads of our clients, we know that they believe in themselves, that they are continuing to move forward, although at a relatively modest rate. And while there could be a blip from the fiscal cliff, we don't expect it to be a brick wall.

Got you. I had a question on the securities yields, which are still very high rate, 3.48%.

Did you say that you're adding new securities at over 2% yield, first? And then maybe could you talk about what you think the roll forward or pressure will be on those securities yields?

So, first with respect to what we're adding, I think in my comments I did say that we purchased at an average yield, let's say, 212 basis points and a duration of 5.2 years. And so -- and with respect to rollover, I mean, I think we're going to see more of that and we're focused on maintaining our duration.

That's helpful. Maybe just one final one, following up on Mark's reserve question.

If the reserve moves to 1.45% to 1.50%, is there much more room in 2013 to move that down? Or is the absolute reserve getting to a level where maybe it will flatten out or even need to grow with loan growth?

Yes, well, we said in the longer term we would expect it would probably go as low as 1.25% and around that range. And really, what's driving it, Steve, is when you look at our commercial classified trends, you see an improvement of 30-plus percent year-over-year.

I mean, that's what's driving that ratio down.

Glenn, just following up on the reserve question. Would you expect much movement in the liquidity portfolio reserve?

You've held that allowance steady while you've brought the portfolio down pretty significantly.

No. I mean, we've been pretty consistent there.

So I would expect it to stay about where it is.

In dollar terms?

In dollar terms, yes.

Okay. And then, maybe, Jim, could you talk about the payment solutions business?

Looks like you've rebranded that line of business, and that's where you really saw the most deposit growth this quarter. What can we expect going forward from that group?

Sure. As we reported earlier, we have consolidated all of our treasury base and Cash Management services into a single group, and Phil Picillo has joined us and is off to a very fast start and has made recommendations for investments in the platform to enhance it and also to help us move up market a little bit.

So I would say we're seeing some early benefits from that, but not the impact that we'll see over the next several quarters. So we would expect the positive impact from Cash Management and Treasury Services to increase in the quarters ahead.

Just with regard to the long-term reserve target of 1.25%, you mentioned it's the improvement you see in the commercial classified that's driving it down. So given the continued improvement you're seeing there, specifically this quarter, again, based on your outlook for the commercial classified going forward, is that 1.25% something we could see you end 2013 with?

It could be -- Russell, it's Glenn, but I wouldn't give specific guidance with respect to a quarter.

Okay, that's fair. And then just lastly, can you give some color on what the expenses could be and what the drivers of the fourth quarter 60% efficiency would be?

You mentioned that you'd expect to be able to stay below that post seasonally high 1Q. Could you give us a sense for what the drivers there will be?

Yes, I think Jerry hit on a few of those. In other words, we'll get there in the fourth quarter.

We still continue to rationalize our delivery channels, the branch network in particular, and some of our infrastructure costs as well. So I mean, that is an ongoing program.

And we've -- quite frankly, while we're doing that during the course of this year, we've continued to invest in the business. So you're starting to see that come through on the revenue line where you're seeing mortgage banking activity, where you're seeing Private Banking fees, where you're seeing Treasury & Payment Solution fees on our swap.

So I think we've positioned ourselves such that we can get it on both lines. You'll see revenue continue to grow.

It'll obviously be impacted by NIM, but we continue to rationalize our expense base. I've said it before, it's primarily in the back office that we're in, some of them are our vendor contracts and our service agreements and things like that, where we're really focused.

And it's a rationalization of the front end as well, our delivery channels.

This is actually Tom Frick for Bob. Just one question.

With 7.4% TCE ratio and over $400 million in excess capital, what is the capital deployment priority for you? Obviously, you guys are growing loans at a pretty good clip.

I mean, you talk about buybacks. I mean, how do you really feel about buybacks with your stock trading at kind of 1.4x or 1.5x tangible book?

Well, specifically, on the buybacks, you make a good point. So we would look at buybacks as opportunistic for us.

So that if we had an opportunity, what we thought were favorable prices, that we'd buy the stock. I guess the important -- the baseline here is that we have ample capital to support growth in our loan portfolio even after the fully phased-in Basel.

So if I were prioritizing, I would say that is most important. At the same time, we've indicated we expect to pay out about 30% of our earnings as we move forward, and we'll have the stock repurchase program available for repurchases in -- when it suits us in opportunistic areas.

When you talked about where you see incremental production yields going in Commercial Banking, you mentioned those should rebound from that 3.24% level. I mean, should we expect those to rebound closer to 3.80% or 4%?

Where are you seeing those today?

Dave, it's Jerry. I think what we said is that we would rebound closer to what you would think is normalized.

We gave you a couple of blips that occurred in activities, specifically one particular relationship that is investment grade of about $37 million that we really enjoy a great relationship with the borrower and it's a deep broad relationship, the other one being the municipal lending. If you take those 2 into account, they're the 2 deals.

I mean, that's a significant part of our production, right? I mean, 1 [ph] and 30 in the other that pulled the yields down.

Our anticipation is that -- our expectation is that you won't see that activity again in the fourth quarter, and those alone are going to get you much closer to the type of returns that we saw from production in the third -- or, excuse me, in the second quarter.

Got you. Okay, great.

And just back on the NIM, you had mentioned the decline in reinvestment rates, and I know you just talked about maintaining duration a bit. But we're still seeing that agency MBS yield down a lot in the last few weeks.

I was just wondering if you're considering at all diversifying away from agency MBS and maybe more -- getting more into CMBS or corporates as long as those yields remain really low.

Yes, I think the short answer to that is yes. And we have seen, obviously, as you noted, prepayments at a level of -- I think we're at 29 right now.

So we are looking at other alternatives as well.

And where is the agency MBS yield right now for the stuff you're investing? And is it 15-year or 30-year product?

It's 30-year and it's about 2%.

And what's the average yield on that portfolio, just the agency MBS, at this point?

It's probably just a little over 3%.

I was just wondering, Glenn, could you just talk a little bit about your -- the impact from mortgage banking activity expected in the fourth quarter?

Well, we sold and originated $208 million in the second quarter, and it still looks -- in our third quarter, and it's still looking good for the fourth quarter. It's hard to peg down a gain on sale.

It's 303 basis points. But it seems to be holding up so far, so we feel good going into the fourth quarter as well.

Okay. And then you also said for the driver of a 4% to 5% linked-quarter increase on noninterest income going into the fourth quarter was also, in addition to mortgage banking, was also going to be wealth and investment services, is that correct?

That is correct. And there are -- and along the lines, there's some smaller items as well.

We put it in a new pricing -- retail pricing schedule in July, so we don't have the full benefit of that in the quarter. We'll get the full benefit of that in the fourth quarter as well.

There's a few things in there. We continue to do well on a Treasury & Payment Solutions on swap income, as Jerry highlighted.

And so that trend is building as well.

Okay, great. And then, I guess with regard to expenses, what impact does the phantom stock have on the overall comp and benefit line?

D In the quarter-over-quarter, it impacted us by $800,000.

Okay. And then I think you said at the end of next quarter, there's no more expenses associated with phantom.

Yes, it invests, and therefore the volatility is out of our P&L.

Okay. But there's no...

No, there's no big service charge. The stock -- we closed at $23.70.

So if it were to stay at that level, there would be no incremental costs.

Okay, great. And then lastly, Jim, I guess for you, with regard to the dividend outlook, I think you said you targeted a 30% payout ratio.

Is there any change to that philosophy? Is that still kind of what you guys intend to do for the long term?

Yes, I did mention that.

On your margin outlook, it looks like you're looking for 3 to 6 bps of compression now for the fourth quarter. And that compares to, I guess, 3 to 4 bps of compression you were looking at for this quarter when you gave it in July.

So pressure seems to be mounting a little bit there. Just wanted to see where you're seeing incremental pressure as you move along here in terms of the margin.

Yes, John, so we saw the biggest increase in the securities portfolio Q2 to Q3. We're starting to see pressure on the resi and the MBS as well.

So as we go from -- into the fourth quarter, I'd put it against the investment portfolio, the resi portfolio and in some respects to some of the commercial real estate. We don't have the benefits -- we don't have the full quarter benefit of the TruPS redemption either, which we took -- we had -- that helped us in the third quarter.

Right, okay. And then on premium amortization expense in the third quarter, do you have that amount that you recorded?

And then what the unamortized premium remaining in the portfolio is?

Sure, the unamortized premium is $212 million, and we recorded $17 million in the quarter.

Just want to follow up on the NIM. I was just wondering what kind of room you guys have on the deposit side to push that lower, especially the wholesale borrowings, which was a pretty big helper this quarter?

Yes. I think we have 2 to 3 basis points, and we're looking at that, and you drive that down.

You're talking about on the wholesale or?

Total deposits, yes.

So -- all right, so the 3 to 6 down NIM this quarter is predicated on the funding cost going down 3 bps?

Deposit costs. Yes, we had some opportunity in the first quarter -- or we'll have some opportunity in the first quarter, I think, to reduce some of the borrowing costs.

But for the fourth quarter, I think it's primarily -- the offset would primarily be on deposits.

Okay. All right then, Jim, I appreciate your comments on the M&A and how the strategy is not dependent upon it.

Just curious, are you guys seeing -- are you getting -- are you hearing more chatter in your footprint about sellers just a little bit more willing to perhaps listen to some tie-up opportunities given what's a pretty tough operating environment?

Yes, I'd say chatter is the right word for it. Not a lot of action, but definitely some chatter, and I think people are coming to grips with the difficult world that they're likely to be operating in over the next couple of years.

And that could have an influence on price expectations and on the propensity to seek a partner. And so what we're trying to do is just continue to build our good relationships we have with so many of our colleagues, our franchise and around it to be prepared for what might become available.

Okay. Is that -- I mean, would you say that, that's kind of maybe holding up the buyback, the opportunity that you may get to pick up a target at an attractive price?

No, I wouldn't directly relate those 2. I mean, both of them are good uses of capital, of course, under the right circumstances, but one is not determining the other.

Just a couple of sort of housekeeping questions. Jerry, you had mentioned when you were running through the slides that the spread on the commercial business, I think you said, was like 3%, 3.02%.

Do you have what the spreads are on the retail and then on the Consumer Finance businesses as well?

Yes. We'll dig those out and give them to you before the end of the call.

Okay, okay. And then the other question, the -- I think it was $87 million or so that you guys portfolio-ed of Jumbo mortgages.

What was the yield on those?

Collyn, while you were -- So on the resi side, you're probably in the spreads around 1.70, in home equity around 2.60, and then you also, I guess -- what else would you -- we had covered commercial, right?

Commercial, you said, and then Consumer Finance.

Yes, consumer was the 2.60-ish spreads.

Okay. And then if you're digging -- while you're digging through the -- go ahead.

Collyn, hello. It's about 3.75.

Okay, okay. And then just a question probably geared more for you, Jim.

You guys have -- you've talked about sort of rationalizing the delivery channels for the bank, and I think you've been one of the few banks that's been on the forefront, I think, of looking at that part of your business. The one chart that you guys show in terms of the percentage of online usage increasing and relative to your branch numbers, I mean, how do you think about that?

I mean, is it the type of thing where you kind of are thinking, okay, if that online usage percentage gets to a certain number, that then we'll look hard again at our branch network? Or I guess the short question that I'm trying to ask is when -- what would be the triggers that would cause you guys to kind of do another sort of shrinkage of the branch network -- or rationalization, I guess, of the branch network?

Yes, Collyn, it's a process, and part of that process was identifying the branches that we could go ahead and consolidate without affecting our clients' service, and that's partly because of the change in consumer behavior. So that's going to be ongoing, and more and more people will do more and more of their transactions electronically or online and less of their transactions in the branches.

The branches will become more advisory in nature, and that's what the Universal Banker program is about. Let the transactions get done at the deposit automated image capture ATM or other places away from the branch.

Over time, make sure your branches are smaller and, in the best locations, electronically outdated. That's not going happen at a point in time.

It's happening now. So we would look at this as a 5- to 10-year plan for making sure that we have rationalized, as we say, by size, by number, by location and by fit out all of our branch systems.

So I would say it's underway. And what you've seen in the early going is that we identified the branches that we were able to consolidate, and then it gets a little bit more interesting and gradual after that as we rationalize the whole system.

But that's a program for us that's underway and will be for some time.

Okay, okay. And then, Jim, just one final question.

How are you thinking about -- I mean, you guys have been pretty clear about the P260, and you're expecting to get there in the fourth quarter. But how do you -- how are you thinking about just the ROA and ROE targets or trajectory from here?

I mean, do you think this 92-basis-point ROA, you can expand on that over the next year or 2? Or do you see that coming down given the slowing of the reserve release?

Well, of course, you can't predict, but I will say that all of our programs are designed to boost revenue and control expenses so that we get the positive operating leverage that drives the efficiency ratio down and the capital returns higher. So the goal is to earn in excess of the cost of capital.

The environment isn't exactly cooperating, and so we're moving very assertively toward our strategies that enable us to invest such that we can earn the highest return on capital. And I think you've seen that we're investing in things that will make that happen, including the physical to electronic infrastructure, the emphasis on relationship businesses, all of that is going to help us to move forward even in the challenging environment.

Okay, okay. and I guess it seems like -- I mean, what seems to me needs to happen is that the speed at which you can leverage these businesses in kind of the revenue side needs to come quite quickly as that reserve bleed stops, and I guess that's what I'm -- will you be able to cross that line pretty quickly in order to keep those profitability targets or levels anywhere close to where they are now?

And do you think that through that transition process that maybe we see those numbers come down in the next year or so, but then reignite in future years? Or is it a plan, the way you're managing the business -- the plan, it would be to try to keep those level?

When you say those level, you're talking about the...

ROA and ROE.

Yes. The plan is to invest in the businesses that are going to generate the highest return on capital and to do it in a measured way so as to generate good returns as we go along.

But there's a lot of forces that are buffeting things about, including what's happening with interest rates, that some of which is beyond our control. So what we're doing is we are assertively adding to our production capabilities in the businesses that we think will add the most value while controlling our expenses as aggressively as we can.

And without predicting what's going to happen in the future, that's the course that we're following and the strategies that we're pursuing.

Two questions. So the first one just on expenses.

It sounds like a lot of the reduction that we're going to get in the fourth quarter is much more discretionary, so the marketing and technology. How much of the reduction in those line items is something that's just we're doing for fourth quarter, you hit the 60% and then they come back in first quarter?

I think why I highlighted marketing is, one, and I don't think that we're reducing, although we're reallocating our fronts on marketing. I mean, you'll expect to see some of that come back next year.

But really, what will happen is you'll start to see offsets beginning in the second quarter in more of the core operating expense or the reoccurring expense. And that would be along the lines of back office-type expense, vendor-type-related expense and rationalization branch network type of expense.

Okay, all right. And then the other question I have, can you just talk about the trade-offs between investing longer durations?

So I know you said you were buying 5.2-year duration securities in the quarter. Talking about the stray [ph] if you're -- as you're seeing it, because if you're buying 30-year MBS paper, presumably the extension risk when rates eventually go up is going to be pretty severe and then, obviously, at least a higher AOCI losses.

So that versus let's buy longer duration paper to keep our yields above 2%, if that makes sense.

Yes. So the 5-year duration would probably extend to 7.5 and 8, right?

And -- sorry, I'm not sure if I get...

Yes, I guess I was just saying, like, it seems like there's a lot of risk -- I mean, whether you assume 7- or 8-year duration extension, it seems like the AOCI hit related to higher interest rates eventually is a pretty severe risk. Or I want to know your view of the risk versus just trying to get a little bit extra yield now?

Because I guess one of the concerns is, more and more, I guess, people I'm talking to were discussing about the -- is it right for banks to extend duration given the risk of higher rates?

Yes. I mean, I'll come back to you offline.

But I mean, I think one point you should recognize is that we're sort of neutral from an interest rate risk standpoint, first of all, and from an economic value, it would be okay.

But we want to say we're very sensitive to that question.

I'll come back to you on that, Ken.

I apologize, I got on the call late, and -- if this was in your prepared remarks. Was there much difference in the commercial loan demand between the different markets, say, Connecticut versus Massachusetts?

Or was it pretty much across the board pretty strong demand? I mean, I saw the line usages were up, but is that -- was it pretty consistent across all your markets?

Yes. We believe that we're continuing to take share in all of our existing markets, as well as in the comments that I made in some of the Q&As, that we're also seeing the payoff from the expansion of the footprint up into the Boston market and down into the New York market.

So there's no question that we're definitely, because of new officers on board and a lot of momentum that we've generated, that we're seeing good fundings occur in those sides of the footprint. We're also continuing to see deals closing across the footprint.

Just getting back to the margin discussion. So it was down 3 to 4 basis points in terms of guidance in 2Q, 3 to 6 this quarter.

Where do you see that going throughout the quarters of 2013 if we don't have much of a change in the absolute level of rates and spreads with that sequential compression past?

I think you can expect compression, if we don't go much further, out in the next quarter, though, as far as guidance.

Okay. But no commentary just on the magnitude of it?

Not until next year. I mean, I think some of the conversation we're having with reinvestment rates and things like that, you could sort of build your model that way.

Sure, okay. Just on the tax rate, I noticed you guys added some BOLI [ph].

Any changes in what we should be seeing there to impact the tax rate going forward into 2013, and what should we be using longer term throughout '13 for tax rate?

Yes, I think the tax rate I gave going into Q4 is probably 29% to 30%. I would use that for next year as well.

Thank you, Luis. Thanks, everyone, for being with us today.