Good morning, and welcome to Webster Financial Corporation's Third Quarter 2012 Results Conference Call. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, with respect to Webster's financial condition, results of operations and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements 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…

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…

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…

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.

[Operator Instructions] Our first question comes from the line of Mark Fitzgibbon with Sandler O'Neill Partners.

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.

Our next question comes from the line of Jason O'Donnell [ph] with Marion Research [ph].

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.

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

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.

Our next question comes from the line of David Darst with Guggenheim Partners.

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.

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

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.

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

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.

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

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%.

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

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.

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

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.

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

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.

Our next question comes from Collyn Gilbert with Stifel, Nicolaus.

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.

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

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.

Our next question comes from the line of Dan Werner with MorningStar.

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.

Our final question comes from the line of Matthew Kelley with Sterne Agee.

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.

There are no further questions. I would like to hand the floor back over to Mr. Smith for closing comments.

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

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