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First Niagara Financial Group, Inc. (NASDAQ:FNFG)

Banking and Financial Services Conference

November 13, 2012 11:20 a.m. ET

Executives

John Koelmel -- President and CEO

Greg Norwood -- CFO

Analysts

Erika Penala - BofA Merrill Lynch

Erika Penala - BofA Merrill Lynch

…host for the first time at this conference, First Niagara. So, the full disclosure, we picked an interesting time to launch coverage on the stock shortly after the announcement of the HSBC deal. But I’ll say this about the company, since then it seems like the message from the management team has been dead consistent, inordinately focused on organic opportunities and focused on reaping the benefits from the deals that they’ve already struck. Today on the stage with us, we have President and CEO, John Koelmel, and CFO, Greg Norwood. And without further ado, I’m going turn the stage over to you John.

John Koelmel

Thank you very much, Erika. It’s good to be here for our first time. So, thank you very much for the invite and hosting us. Right I think at this time last year we were getting our act together to chase some capital to make sure we effectively funded that last transaction. So, it’s a pleasure to be here this time around and continue to impart our views as to, how we are navigating the new normal obviously, and sort of continuing discussion, feel I have two more days of it, today where the challenges are unprecedented and continuing but as always we enjoy the challenge and think that the winners will be more readily identified as a result and are confident that our position, profile and performance in the years ahead will again positively differentiate us from the pack.

My comments today, going off a little bit of what you just heard from Erika will further what you have heard from us throughout 2012. The essence is we very much like the business we’ve built and the footprint within which we operate given that this is the first time in my tenure that the company is now completely and totally focused on running the business we already have, be assured we are all the more excited to execute and further deliver real value for all of our constituents.

So, let me start by giving you a quick little recap of how we look at who we are today. The business we’ve built up with confidence and resolve that the Northeast is the right place to be, strong demographics, both commercial and retail, resilient economically and with the right density, to be efficient and effective, can’t win if you’re a mile wide and an inch deep. So, know that we were very deliberate not to spread ourselves too far geographically and instead focused on building out a footprint that we can efficiently leverage.

[We will add] [ph] with our commercial team that was a very conscious decision. Our initial focus five or six years ago was on small and middle market businesses, when the meltdown occurred in ‘08, ‘09, we are able and well positioned to step in further not only at that level, but also to move up market and compete very effectively against much bigger competition.

Our teams have been punching above their weight as I’d like to say over since winning more than their share of the customer battles, and so our slice of the commercial market pie continues to grow at industry leading levels in spite of a stagnant to at best slow growth overall market.

With a string of acquisition, we also now have a very solid retail distribution system, more than 420 branches across four states; with the benefit of the HSBC transaction a market -leading presence across Upstate New York. Again progressively competing all the more effectively to take retail market share, acquire new customers, deepen relationships, I’d like to say win hearts and minds and then share of wallet.

It’s all I would say we’re other then growing up as a full service commercial bank, no question. As you’ll see in a moment we’ve continued to have both capacity and competency with these transactions and they have yet to fully realize our potential which in this environment in particular spells real opportunity everywhere we do business.

Our unwavering and consistent focus on the customer throughout the crisis in ‘08, ‘09 has earned us incredible confidence wherever we do business. Our favorability ratings are very high, we help make good things happen, we’re real difference makers and are highly valued and positioned as a result, that means the First Niagara brand is stronger than ever. That’s the outcome of assembling one of the best teams in the business. With the accelerated growth path we were in, we needed a ‘been there, done that’ team. Sure, we’ve continued to develop our legacy talent. But we recruited a team of leaders and managers from competitors across the country and around our region that are excited to have the opportunity to help us build and grow our business and ensure we’re positioned for success both today and tomorrow.

And we haven’t got ahead of ourselves, (inaudible); we’re in very good standing with our regulators and have a very scalable business model all because of the team we’ve assembled.

But as solid as a footprint of franchises, as well positioned as we are, as terrific as the team performs, we know, we deem to deliver even better results, and do that by totally focusing on the business we have today, being all the more effective and efficient with all that we do, create that operational excellence, (inaudible) talk about to deliver solid consistent and improved results and returns.

So, how do we make it happen? Well, this is a footprint built on and around the major interstates across the Northeast. Foundation is our legacy market across Upstate New York, now even stronger with the benefit of the HSBC transaction, so no boom, no bust geography, this has proven to be very resilient throughout the economic rollercoaster over the last few years, and one where both our commercial and retail teams have built continuing strengths and taking a bigger slice of the market and deepening the relationships with all of our customers.

Western PA, [Nat][ph] City transaction in 2009 has served us very well, similar demographic to Upstate New York, so set in just on a grander scale, we’ve built that business from scratch and it’s grown up quickly and it is delivering very solid and consistent results.

The eastern front, that’s the key focus for us, well Upstate New York and western PA anchored us very well; it’s eastern PA, New England, and the tri-state regions that give us tremendous growth opportunity not just because of the strong growth demographics in those areas, not just because of the density of the population and businesses but because our value proposition, customer focus, relationship driven with local decision making, plays very, very well against the larger players that have long dominated those markets.

We’ve recruited top talent in each of our new markets, who know the geography, more importantly know the customers. They’ve in turn built both commercial and retail teams that are just beginning to realize their potential. They know it would take more than a terrific franchise in Upstate New York to really win, so our expansion strategy was focused and deliberate. And we’re now excited to really get after it and fully leverage the strengths of the platform we have.

This next slide tells that story very well, the demographics of the Northeast regional footprint literally stand very tall against any of our peers, and position us well for both the near and longer term.

Sure we’re in a heavily banked region that includes virtually all of the biggest and the best. But let me reiterate what I’ve said throughout my tenure, got a team that can go toe-to-toe with anyone and has done so consistently and successfully each and every year.

Commercial growth rates we report quarter after quarter after quarter best exemplify our success, which you’ll see in everywhere you look, we’re winning more than our share of the hearts and minds and taking an extra larger slice of the market as we go, and an even better news we’ve just said on the eastern front, we’ve just gotten started.

To make that last point all the more clear, we offer these next few slides. As solid and consistent as our business fundamentals have been throughout our growth for the last several years, we’re still in the very early stages of development in our newer markets. There’s significant capacity to be tapped. And that’s now true even in the most mature market Upstate New York with the benefits of the HSBC transaction.

On this slide you’ll see some comparative commercial metrics, loan balances and fee income per RM [Relationship Manager]. The trends reflect the consistently steady and strong growth we report every quarter. But the absolute levels of portfolio per Relationship Manager make clear the upside potential to do more with what we already have there, using Upstate New York as a bit of a benchmark, it’s clear that in each of the other regions where we now do business substantial ground to plow just to hit a new normal for us, just to establish a relevant run rate in terms of the size of the book each RM works.

The same is true when you look at fee trends improving in every market but with real upside to catch up to the Upstate New York foundational level and that surge you see this year in New England is real evidence of all the team there is making that happen, they’re delivering terrific results particularly leveraging our capital markets team, those are now beginning to make real inroads.

In addition to capacity, we’ve also significantly enhanced the competencies we have to leverage as we further build out the loan portfolio. We made that transition from thrift to commercial bank a number of years back and committed to do that by leading with our commercial business followed by an immediate opportunity to move up market and play at an even higher level in more geographies, we’ve significantly invested in a broader range of products and services to ensure we’re a relevant and scalable commercial player and you see that depicted here.

What’s your takeaway? It’s only in the last couple of years that we’ve had what one would call a more complete suite of products and services. We’ve been making that happen with talent and relationships; a team that now has many more of the tools they need to really be successful. So whether its capacity or competency, the upside in commercial and playing the hand we already have and already hold is still substantial.

And that trend holds in retails; in the slide you’ll see core deposits per branch employee as well as households per branch, both cases you’ll see the same dynamic I just talked about with the commercial team, consistent and positive growth trends, but absolute levels that make clear the capacity we’re just beginning to grow into in our newer markets.

I know that the retail trends have been hindered by the need to reposition the deposit book given all the hot money and other high rate accounts we inherited with a couple of those businesses in particular.

That’s why our focus in ‘13 is to establish a much more relevant baseline outcome from which to measure and evaluate our performance and to string together for those long awaited clean quarters and show the real potential of the franchise we have built.

(Inaudible) the consumer finance piece of the equation storyline we think it’s even clearer. We’ve always talked about each deal accelerating our growth and progress and that was again true with the HSBC transaction. Here you’ll see the much, much greater depth of the relationships that deal brought with it, almost 25% of those customers have multiple relationships with us, transistors, savers and borrowers, that means more profitable relationships, that’s more than double what we inherited in New England, and even 50% more than what we’ve been able to accomplish to date on Western PA, and obviously sets a new and right standard for us and makes clear the upside potential in our current existing customer base. And that’s the low hanging fruit we’re focused on everyday and we’ll be throughout ‘13. When you look at the evolving mix of our consumer loan book see we’re now able to more fully mine our existing base with a more relevant suite of products and services.

So, again we are growing up as a commercial bank and are fully focused on realizing the potential we’ve created. As you always heard and seen from us, we won’t be growing up at the expense of credit, no matter what combination of metrics we put up here, we will distinguish and differentiate against any combination of peers, the sector at large have always been among best in class. Why is that? We know our markets, we know our customers, our guys are smart and disciplined and we win with the strength of the relationships we’ve built over the years, always respond to the simple comment, and our underwriting isn’t conservative, it’s just smart and consistent; you don’t need to stretch to grow let alone resort to what I’ll call goofy structures and unsustainable standards of the moment.

We’re focused on the right mix of customers as well as products and services and managing risk in a prudent disciplined fashion, and yes, as you heard us say, we’re already seeing our words silly and goofy are back, but be assured that’s a game we don’t and won’t play.

As we absorb the capacity we’ve created and fully leverage our increased competencies across all of our business units, are assured our focus is on doing that in a manner that’s both effective and efficient, and that’s how we define operational excellence.

Yeah, we all understand the need to be efficient, and we’ll always run our business with that imperative in mind and across the top of the slide, we’ve recapped several of the actions we’ve taken over the last 12 months to be more efficient in all we do and there are certainly many more. We want to be clear that whether it be our distribution network, cost of deposit, managing talent levels or how we otherwise run the business, our eye is always on optimizing results and outcomes.

But, and it is an important ‘but’ for us, we built this franchise for growth, we didn’t build it just to tear it back down. Of course the economic environment is very different than anticipated, and we need to and have, and will react accordingly to ensure our infrastructure is optimally aligned. But know that we’re focused on fully absorbing our capacity with continued growth in our newer markets in particular, focused on more fully leveraging the expanded array of products and services we now have as a more mature commercial enterprise.

With that I’ll reiterate what I said in second quarter earnings call, repeated in the third quarter; there’s nothing about an efficiency ratio with a six handle that excites me in a positive way. We will be much, much better than that. We were in the past and we’ll be again. But it won’t be at the expense of delivering on the investment we’ve made in our new markets and additional products and services.

But thus that take some time? Obviously. Is the time an enemy for all of us in this environment? No question. And will we continue to adjust and adapt along the way? Be assured. But we’re confident that the combination of effectively leveraging the capacity and competency we’ve built in all of our new markets will deliver an efficient outcome.

You see some of the how we make it happen captured on this slide. Again be assured front, middle, back of the house, it’s all about operational excellence, with a differentiating efficiency ratio being the outcome. As I said multiple times again this morning, we’ve got the people, process, systems and infrastructure to deliver a much more efficient outcome with the benefit of fully focused execution as early as next year. With no distractions or alternative agenda we’ll create a relevant baseline performance for us and I’m confident you’ll see us begin to make meaningful progress toward our long standing efficiency target.

But again will we be there next year? No. But will we continue to adjust and adapt to the circumstances as we go? Absolutely. But we will do much more with what we already have today.

Capital, a hot button topic, everyone is talking about it, you don’t hear a lot from us. The same slide we used at Barclays back in September, a short version of the capital, starting for us is we are in a good place, we like our capital position very, very much. I’d like look forward to a time when we would be right sized and didn’t have to carry excess capital any longer, we did that throughout the crisis to ensure we could continue to advance our growth strategy, and with the four deals behind us, having deployed our capital in a manner we’re confident that we’ll deliver on the promised returns over the longer run, we now have a mix and structure today that is well aligned with the risk we have, or from my standpoint, don’t have, in our balance sheet and that positions us well to meet the evolving standards in the years ahead. So I caution everyone don’t be too quick in comparing our capital levels to others. Know that for us it’s about managing capital accumulation and build up in the years ahead to best balance the needs of running our business meeting the new regulatory standards and optimizing returns to shareholders.

So what can you expect from us, or for me better said what do we expect from ourselves in the years ahead? What will be the result of operating more effectively in efficiency, efficiently achieving operational excellence and fully leveraging our current capacity and competencies?

Hopefully these next three slides look familiar, we used them again two months ago at Barclays and have referenced them in both our Q3 call as well as other messaging since. The results of our efforts over the several months to refresh our look ahead given the business we now have and the challenges if playing our hand in a very different environment than anticipated, taking what we have today and driving improved results to earn that 1 point ROA that was our old benchmark, and with the benefit of some modest improvement in rates expect to push that return up closer to 1.25 over the next three to four years.

How we will make that happen is summarized on the slide, and what you’ve just heard from me, one rotate the balance sheet and fully absorb our capacity; two, do that while perpetuating a differentiating credit story; three, leverage our expanded competencies to in particular create more fee driven relationships, more profitable relationships, and further stabilize our revenue stream, and four achieve operational excellence in all that we do.

That means moving that loan to deposit ratio back up into the mid 90s, pushing fee income above what we deem a threshold level of 30% of total revenue, do that effectively and efficiently to drive that efficiency ratio down under the 55% target we talked about 18 months ago when we announced the HSBC transaction.

Again, please note, this isn’t foreign territory for us, we don’t need to reinvent ourselves to hit those targets, we just need to execute with total focus on discipline just as we’ve done in years past.

So when you roll all that up it’s what’s depicted here. Again before we started down our latest path, we were delivering solid returns and consistently so and even over the last four years amidst our dramatic growth more than held our own relative to peers.

But obviously we made conscious decisions to be bigger not just better, to really win over the longer run greater scale and reach were important, we needed a larger, more vibrant footprint, we needed to invest in ourselves to create additional capacity and competency.

And now it’s all about being better, better at a more challenging time than any of us have seen or expected, it’s about making even more with what we’ve already built while adapting to our new reality to ensure we’re effective and efficient. And I’ll close by assuring that we’re ready, poised, focused and already executing on just that.

Fully focused as an organization, top to bottom I openly say that starts with me, no distractions, platform, credibly comfortable, terrific, one we’re proud of and excited to leverage, leverage the great position we have in all of our markets, some of which no question is a well established market leader, others we’re the new high energy kid on the block.

We continue to win with talent, win with one of the best teams in the business, a team that’s really smart and savvy, all very, very good business people who know their customers and our markets very, very well. And some of that is why you have my and our commitment to deliver on our promise whether it would be to our customers, communities and all of you our shareholders. Thank you very much for your time and attention. And Erika, Greg and I would be happy and pleased to respond to questions.

Question-and-Answer Session

Erika Penala - BofA Merrill Lynch

Sure, let me kick it off. Could you give us more specifics on the opportunities where you’re the new high energy kid on the block in terms of what products that you feel are going to contribute the most to organic growth next year? And what is an appropriate realistic range for us to expect in terms of the contribution of those opportunities next year?

John Koelmel

I’ll take the front-end of that and Greg can hop in as well. I think whether you look at anywhere up and down the eastern front, so we’ll continue to focus that on, focus you and others on the opportunities there whether it would be sequentially eastern Pennsylvania, New England and the traction that we have now started to get as we said eastern Pennsylvania more of a fix her up or more of a turnaround than anticipated that momentum has just started to pop, the upside potential is there and up market disruption with other transitions our guys have been able to step in to with the full array of products on both the commercial and retail side.

In New England, the one state you saw there again real opportunity and additional momentum as we had to reposition that team; excited about the progress that we’re now seeing. And down the lower Hudson tri-state with the benefit of the HSBC transaction creating some additional density; for us frankly it’s less about the products, its more about who we are, my simple little stick is what you will never differentiate or win, how we do it, clearly differentiates local decision making, our ability to connect with our customers and who we are is why we win. So, those end market teams empowered and enabled the momentum and their early surge has been very exciting. So, we are looking forward as being able to carry that over on a full run rate basis over the benefit of ‘13 that gives us something that we call then look to and look at as relevant, Greg.

Greg Norwood

Yeah sure, I think as John said one of the things that we are looking at is as we look at ‘13 is to accelerate both the treasury management service execution and deployment as well as the digital, even this week we’re looking at how to layer those product feature functionality enhancement, so that in the middle of the year it really starts to have a impact to our fee income generation. So, just looking at those initiatives alone, you know, I could see us increasing that in the 7% to 10% range around that, if you are thinking of where consensus is for the fourth quarter.

Erika Penala - BofA Merrill Lynch

Okay. And we appreciate the color that you gave us with regards to the stress test that the bank your size are going to go through the next year. So, you know, it’s clear that you have been focused on rebuilding back your capital ratios. Does the stress process in anyway impact the, you know, the speed at which you can get to whatever you were, you know, BASEL III or TCE goal is over the long term, meaning does it accelerate the compliance. And if so, you know, clearly there is some loan growth story for next year, is keeping the total balance sheet size flat an option to contend with the Fed or you don’t think it’s going to be that stringent at all, apologies for the contend question.

John Koelmel

You want to. Go ahead, take the lead and I’ll try to back for a little.

Greg Norwood

So, first of all, I would say the timing of the regulatory stress test rollout isn’t a major driver in how we are looking at capital management and capital planning, we look at it relative to as you said, what is the right balance sheet, what is the speed for which we will rotate out of the investment securities into the loan assets.

When we think about it, I look at as I said in the call, you know, for a securities book we’re not going to do ‘a student body’ left or right, I thought most people understood that metaphor, but we’re not going to drive a securities book immediately, we are not going to take a hard right turn, we will migrate it and in our strategic planning timeline we begin migrate it during the middle of 2013 and it starts to roll down as the loan growth starts to take hold.

So, clearly our capital management is predicated on a small increase in balance sheet, not a big increase in balance sheet and the return focus is to move into the loans that will create the greatest opportunity; clearly the fee income initiatives around treasury management as to increase the profitability of the commercial growth and certainly around digital and credit card, two areas that we will make significant progress in 2013, helps us in the transaction (inaudible), which also helps us in a return focus.

Clearly summarizing we look at how we were focused in the strategic perspective for the next three to four years, it was a return base focused; it was looking at what is the way to get higher returns on the asset we are deploying.

John Koelmel

I’d certainly reinforce that with the simple little analogy, our returns on the securities book are not that significant; our returns on the securities book aren’t going to enable us to achieve our hurdle rate factor diminishing. So, every dollar we’re able to rotate out of those securities (inaudible) deploy it in loans as incremental and as Greg said whether it would be the simple math, we are not trying to grow the balance sheet or just the economics in the business model of ensuring we maintain the position we’ve created while the rest of the world sorts itself out in terms ramifications of size and scale, frankly I think strategically is beneficial as well.

So, you won’t see absolute growth from us, every time I say that Greg always picks me and says, oh John, make sure they don’t think we’re selling the dollar a securities, for every dollar a loan, (inaudible) of that but I think you can get the directional message.

Erika Penala - BofA Merrill Lynch

So, maybe now it’s the time to open up the floor for questions, anyone in the audience.

The one question I’ve been getting about the bank recently is your reserving level relative to loans is low because clearly there is purchase accounting on the acquired loan. And a lot of investors have started to ask about how we should think about the recent OCC comments on reserving relative to First Niagara. I guess the first question there is, does the fed understand the accounting rules and the fact that you do have the mark. So, the reserve as we see it on the balance sheet may not be an appropriate metric to look at relative to loans, I assume that (inaudible) right.

Greg Norwood

It's interesting. The regulator certainly understand our loan book and the acquired and the originated. And frankly I think we’ve gone out of our way over the last four, five quarters to continue to enhance our disclosures in our Q as well as our earnings call. And frankly I think we’ve seen others in the industry where the acquired portfolio become bigger, starting to look at how to make it more transparent.

From a regulatory perspective, I mean, certainly when we look at our originated book, we see a good place to be at about 1.2%, that may change a little bit one way or the other as we put more in-directs on, the loss rates there tend to be lower than commercial as you put more credit cards on, the loss rate would be higher, but a much better risk adjusted spread when you consider the yield on that.

So, again when I talk to folks and even this morning someone asked, you know, you still feel good about $1.20, 1.2%, I said, yeah, I said, you know, it may move around a lot, and they said well a lot of banks are thinking now more than 1% when I actually referenced the OCC meeting. I think there’s just a concern to really get it right whether it’s our bank or other banks, certainly other banks are bringing their reserves down, which it’s harder to see the cost of their growth because if you’re bringing it down 10 and growing 5 then you’ve got a net benefit to earnings.

So, we try again to make that very transparent in the third quarter, you know, loan growth, we provided an extra about $10 million or $12 million. So, again, we feel good about the 1.2%, we think on an originated basis that is a good place to be. And I’ll close with on the acquired book, we continue to feel confident in the remaining marks we have there and think we’re in a net positive economic perspective, I think people that track the accounting for that know it’s very cumbersome and lumpy, but net-net we feel good about it.

John Koelmel

One thing what I would add to that Erika is, if you go back whatever it was three years or so on when we flip to the OCC of our own accord, we were very open about that 1.20 level as being at a cost of doing business, you know, that was the level at which we had a puncture ticket implied and that was a necessarily indicative of our credit exposure at the time, relative to peers we were going to low even at the 1.20 level was the cost of doing business and hence we continue to support that. You throw in the nuances of the transaction accounting, purchase accounting, and I question Greg every quarter do we have to go through allowance 101 as part of every earnings call, the answer is we obviously do, some (inaudible) because people don’t get it, they don’t focus on it and they don’t appreciate the full coverage that’s embedded in the balance sheet.

As far as the OCC I was just in Washington with a midsized bank, you know, CEO [Group] [ph], what’s my view, I’m happy to see they’re paying attention. I appreciate, I [grub] [ph] those CPA, so I struggled a little bit with how anyone would stand at any podium and tell you they’ve got a target level for their allowance and haven’t appropriately reflected about how everyone’s 90 days that much (inaudible) in terms of what they’re able to take back in through their P&L.

I’m happy to see regulators paying attention and whether that’s the spirit of financial reporting, whether it’s anticipation or worst case Washington send us over a fiscal cliff and all the rest of that, I’m happy to see, there is some attention being paid to what’s just not remotely relevant to us. So, that’s my additional two cents to all of that.

Erika Penala - BofA Merrill Lynch

Anyone in the room? So, with the 55% efficiency ratio. And I acknowledge that you have been pretty clear that you want the capital on both sides of the equation? If the revenue growth in the industry as a whole remains more challenging for longer, what are the guide post that you would look at in terms of maybe starting more aggressively attacking it from the expense side and to be fair, this is a question that has come up in every single bank presentation we have had so far today.

John Koelmel

Good. Well, and you quizzed us on the earnings call a few weeks ago about it and the like, it’s part of what we’re trying to message here, we didn’t build it up to tear it right back down because circumstances at least for the near term and what’s become a continuing near term, whatever (inaudible) near term you know, may suggest that’s what one should do.

On the other hand, you’ll see it continue to refine what we have. But, take very literarily we’re looking at ‘13 as a baseline year for us, we’ve haven’t had a baseline year at least in my tenure with the company level in this seat.

So, will we manage it actively, aggressively in ‘13, continue to ensure, we squeeze every bit of efficiency we can out of the business we built which we’ve built to grow? No question. And hence the point that we are walking and chewing gum there, we’re not just walking straight ahead and ignoring the obvious challenges of the moment.

On the other hand very confident we haven’t overbuilt and it’s for us much more about the execution. So, we’re looking at 13 as a much more of a meaningful and relevant point of measurement for us in terms of our ability to deliver, implied, stated, explicit in that is we’ll actively manage our expense base throughout that, but know that we’re very, very focused as we try to be incredibly clear on further stepping into the capacities and competencies that we’ve consciously created that we know we’ll be beneficial to us. Is that responsive, I’m not trying dodge it at all, I’m trying to be as direct as possible.

Greg Norwood

Let me add a little bit too because you know, often times when we get the question it’s around, are you going to have the expense program.

Erika Penala - BofA Merrill Lynch

Right.

Greg Norwood

And I would just, when we think about that as we don’t have a program per se, but if you even look at slide 13 I think we’ve been very decisive around when we thought we had capacity that we couldn’t utilize in the medium term. So, even when you think about HSBC, you know, we reduced the headcount when we integrated the company, closed the company and looked at it as a combined organization said yes, you know, there’s roughly 200 people that aren’t the right people in the right places, you know, that will have a meaningful impact to next year, and even since the third quarter call, you know, we’ve looked at the realities of where we are and where we were looking at consolidations of some branches, you know, maybe later in 13 is what we were saying, we pulled those up to gain more efficiency.

So, I think what you’re going to expect from us and what John is saying is we constantly look at, can we deploy the capacity we built in the medium term in a positive operating leverage perspective. When we don’t, when we think we can do something to create more leverage, go to the first quarter, example, when we reengineered the branch complement to put more small business lenders, more wealth management people in our branches, you know, we constantly look at that and I think it’s a balancing of, are we deploying the competencies, the products the right way, small business, and are we utilizing the capacity we've built and if we have excess capacity, you know, I think just in the last four months you’ve seen us take that capacity out, we’ll continue to do that, if that, if those six items across there over the last six quarters is a program, then I guess, we have one. But, we look at it every day about running the business with the competencies and capacities for the medium term.

John Koelmel

And don’t want to apply we’re deaf, dumb and stupid to the reality of the moment, but as we built up an organization in a time when economically the world’s moving in the other direction, I’ll go back to Greg’s student body left or right, it isn’t causing us to take an immediate hard left or right, but we also – our eyes wide open, ears wide open in terms of the reality and how we are navigating that, it’s not just bull in the China closet, straight ahead.

On the other hand, we built that up with the confidence more so today, proof in the results, that the opportunities for us are incremental to what they otherwise would be if we had probably stepped into the capacity we’ve created, if we had more fully leveraged the competencies that we’ve invested in over the last couple of years, more runway before the plane really gets off the ground and that’s what ‘13 is all about.

Erika Penala - BofA Merrill Lynch

So maybe one final question from me, I thought it was interesting at our first presentation where Bank of America presented with a room packed with investors and we asked them what sub-sector within financial do you think will outperform next year? I was shocked 53% said regional banks.

And given were your valuation is relative to other midsized names, you know, you would think that this would be the company where investors should be doing the work, if they really truly believe it that’s where - what will outperform next year. So, you know, obviously the MBS sale behind us and the HSBC deal behind us, what do you think the market is not hearing from you guys about your story, right, I mean, obviously consensus estimates for regional banks generally, (inaudible) just the rate environment and the level of activity. But, as the evaluation gap is pretty severe, what’s the market not getting about what’s going on from your vantage point that's positive and could re-rate the stock next year?

John Koelmel

I’ll work with what the market is hearing or not and what the market is seeing or not, I think this might be more of the latter than the former, but you can keep working with us on this. As explicit, transparent as it comes, we wear it on our sleeves in terms of who we are, what we’re about, where we’re going, why we think we’re winning and why we think we can win all the more. Yeah, we pride ourselves on not being on the bleeding edge, but out front and leading from the front in terms of how we think and what’s coming, we got our butt kicked when we do in terms of being too prophetic, there is no joy in Mudville and it turns out we’re right about where rates are going, how to manage our balance sheet risk to take all the rest of that, so know that we’re always out in the front and trying to set the pace and think that that’s what it will take to differentiate.

Having said that, the fact that we have been relatively dismissed of late post transaction and all the rest of that, for me is much more about whether investors in the market needed to see us deliver.

We can talk and talk and we do as much of that as we think as appropriate [but to fully accept] [ph] that I’ve heard (inaudible), John when do we get to see a string of clean quarters, you know, when will that string of clean quarters come, when can we see the real value, the real performance of what you’re building and put together. So, it’s on us, albeit as I said time is our enemy, right now to me personally, and the industry, time is not working to our advantage. But for us it’s much more about delivering and hence the focus on ‘13, it isn’t just proving ourselves, it’s accepting, that right now, investor base is relatively dismissive of the sector has been, there’s a lot of moving parts and pieces to our story, you got to dig deep whether it’s to understand the reserves and allowance, upside in the balance sheet, the securities book whatever, let’s not spend the time, let the story play out. So, our commitment and our focus is on doing just that, so that we can show and investors can see what we are doing, accepting that there’s only so much we can tell the world as to what’s coming.

Erika Penala - BofA Merrill Lynch

And just to tie it altogether you mentioned that you’ve heard from investors that they like to see a string of clean quarters, based on your comments next year is a new base line, 2013, sounds like it, right, in terms of clean quarters for the company?

John Koelmel

Absolutely, absolutely guaranteed.

Erika Penala - BofA Merrill Lynch

If there aren’t any more questions I can’t think of a more fitting way to end that presentation.

John Koelmel

Again thank you very much for your time and attendance this morning, Erika, thanks for the hospitality and enjoyed the (Inaudible) Q&A.

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