Webster Financial Corp (WBS) 2013 Q3 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's third-quarter 2013 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 results -- these forward-looking statements -- on current expectations and projections about future events.

Actual results might differ materially from these 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 within the Securities and Exchange Commission, including our Form 8-K, containing our earnings release for the third quarter of 2013.

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

Please go ahead, sir.

Thank you, Kevin.

Good morning, everyone.

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

I'm joined by CFO, Glenn MacInnes, for about 20 minutes of prepared remarks, focused on business and financial performance in the quarter, followed by your questions.

Beginning on slide 2, Webster delivered solid third-quarter results, as our bankers continue to excel in service to our customers and communities.

Solid performance was driven by several factors.

A stable net interest margin, unchanged once again, linked quarter at 3.32%, was aided by strong commercial loan originations, and resulted in another quarterly record for net interest income, which grew more than $5 million year-over-year.

Commercial and commercial real estate loans grew at a 14% annualized rate from June 30, as well as 14% year-over-year, while core noninterest income declined $1.7 million from a year ago on a reduction of $5.8 million in mortgage banking revenue.

Total revenue, nonetheless, grew by 2%.

Core expenses declined both linked quarter and year-over-year, an essential outcome, given the anticipated reduction in mortgage banking revenue.

Positive operating leverage of 3.9% kept the efficiency ratio right at 60% compared to over 62% a year ago.

Improved asset quality was marked by another linked quarter decline in commercial classified assets, a 5% decline in nonperforming loans and the lowest gross charge-off since the fourth quarter of 2007.

Rising housing prices and lower debt service are having a positive effect on distressed consumers' payment behavior.

Given linked quarter loan growth of 2%, or 7.5% annualized, and improving loan quality, the loan-loss provision was flat linked quarter and up $3.5 million year-over-year.

The result was an 8.4% year-over-year increase in core pretax pre-provision earnings, a 1.5% increase in pretax earnings, and a 2.3% increase in earnings per share.

Return on assets reached 93 basis points and return on equity was 8.9%, still short of our goal to deliver economic profit, but bringing us ever closer to our goal to be a high-performing regional bank.

Our capital position remains rock-solid, and each of our key capital ratios saw increases from June 30 on the basis of another solid quarterly earnings performance.

These ratios continue to be well above our internal targets and the fully phased-in Basel III well-capitalized targets.

Our capital strategy provides us with the ability to support our asset growth, return capital to shareholders through dividends and selective buybacks, and confidently pass the annual regulatory severely-adverse stress scenario.

As indicated at our recent Investor Day, a target of 10% for the Tier 1 common to risk-weighted assets ratio allows us to meet these objectives.

We well exceed that target today.

With regard to balance sheet sensitivity, we continue to be well-positioned for the long end-up interest rate scenario.

Economic activity in the Federal Reserve's first District of Boston, which includes the bulk of our four state's footprint, continues to expand at a modest pace, according to the most recent Fed Beige Book.

The market for single-family homes and condos continues to make a healthy recovery, as sales and prices are increasing, the days to market ratio is falling, and more buyers are entering the market, which is good news for Webster, given our increased penetration of the purchase mortgage market.

Other indicators show that the state of Connecticut, which is the heart of our franchise, has added over 14,000 jobs through eight months this year, and the trend remains positive.

Turning now to line of business performance, slide 3 summarizes our commercial banking results.

Overall, loans were up $200 million or 4% from June 30.

And they're up 15% from a year ago, as originations set a record for the third quarter.

We also sold down nearly $80 million during the quarter, as part of our agent-led business.

Our agented transactions generated fees of $1.2 million in the quarter, up from $800,000 in Q2.

Portfolio yield decreased by 9 basis points from the elevated second-quarter level, which had benefited from interest income recapture on a non-performing loan that paid off, and from incremental yield related to the Kerry period for a sizable agent-led transaction.

The yield on new fundings of 3.86% is more representative of the portfolio and the market.

Though the commercial bank pipeline is down slightly from Q2, due to strong late-quarter closing activity, loan activity remains strong.

Deposits of $3.3 billion grew almost 16% year-over-year, while the cost of funds was 2 basis points lower.

Strong linked quarter deposit growth reflects seasonality in government deposits as well as the acquisition of new clients.

Cash management services are gaining traction as we invest in our product suite.

During the quarter, we efficiently launched our eighth regional hub from our asset-based lending headquarters in New York City, having recruited a veteran regional President with the track record and skills to grow our portfolio in this very attractive market.

We're confident in our successful, repeatable business model, as evidenced by our success in our Boston regional hub, which is now over $1 billion in loans.

Slide 4 reviews our business banking unit, which has seen year-over-year loan growth of 10%.

Our portfolio yield was down 6 basis points from Q2, reflective of continuing run-off of higher-yielding loans, though the yield on originations rose to 4.66%, up 35 basis points from both linked quarter and year-ago quarters.

Business banking deposits exceed loans by 74% and provide low-cost funding across the Bank.

Their cost of 8 basis points is down 1 basis point from Q2.

Transaction accounts now comprise about 75% of these deposits, and have grown over 9% year-over-year.

Our overall consumer loan balances have declined -- turning now to the personal bank, have declined about 2% over the past year, primarily due to ongoing consumer deleveraging.

Residential mortgages are essentially flat, largely driven by our strategy of selling conforming fixed-rate loans.

The personal bank portfolio yield declined 1 basis point, while the yield on new originations increased 14 basis points.

Total consumer lending originations were down 12% in the quarter.

First mortgage originations declined 15% to $309 million, and the mortgage pipeline for sale dropped 53%, driven by the sharp slowdown in refinancing activity.

This resulted in a 90% decrease in mortgage banking revenue, regarding which Glenn will provide more detail.

On a more positive side, we continue to see increases in purchase mortgage originations, given our emphasis in this area.

In the third quarter, purchase mortgage originations represented 53% of total residential mortgage originations, compared to 40% in Q2 and 36% a year ago.

We expect mortgage banking expenses to be 20% lower in Q4 than they were in Q2.

The yield on new originations rose to 3.97%, up 14 basis points from the linked quarter and 12 basis points from a year ago, driven by increases in mortgage and home equity rates.

Our credit cards program continued to improve our noninterest income, growing by 23% over the previous quarter.

Personal banking investments assets under administration grew 8.1% year-over-year to $2.5 billion, driven by a 9.4% increase in sales production and increased market valuations.

Revenue from personal banking investments correspondingly grew by 20% year-over-year.

Transaction account deposits grew 5% over the prior year, and now represent 25% of total deposits, up from 23% a year ago.

Our emphasis on transaction account growth, combined with lower cost of CD renewals, has caused a reduction of 4 basis points in the cost of funds this quarter and 15 basis points year-over-year.

We continue to work on optimizing our delivery channels.

Deposits at self-service channels -- that includes ATMs and mobile deposits -- represent 31% of total deposits made compared to 19% a year ago.

Banking center transactions are down 12% from a year ago, and 25% of our consumer deposit households are already active mobile customers.

Since launching mobile deposit capture for consumers in June, we've processed over 35,000 deposits.

During Q3, we opened a new 1600 square foot banking center adjacent to the University of Connecticut main campus, and relocated our flagship branch in Waterbury.

The Waterbury location resulted in a space reduction of 9000 square feet, while adding the convenience of Wi-Fi and digital displays.

These are examples of how we're making banking easier while creating efficiencies by shrinking the size of our physical footprint where it makes economic sense.

Slide 6 presents the results of the private banking unit.

Dan Fitzpatrick and his team are in the process of building a top-notch private banking business at Webster, and the early results are favorable for what we view as a primary growth opportunity over the next few years.

Loans grew over 3% linked quarter and 21% year-over-year.

The large jump in the pipeline is a leading indicator of what's to come, as we provide clients our full range of banking and investment services.

We saw deposit growth of 6% linked quarter and 19% year-over-year.

Assets under management, adjusted to reflect the sale of a nonstrategic AUM portfolio during Q3, increased 7.7% year-over-year, and should benefit from the ramp-up in loan and deposit growth, as well as the quality of our investment and fiduciary advice, and our expanding private banker team.

Slide 7 presents the results of HSA Bank, which crossed $2 billion in footings at September 30, including about $1.5 billion in deposits.

That's quite a jump from $1 billion in footings reached less than three years ago, and is a tribute to HSA Bank's singular focus on providing financial products and expert service to consumer-directed healthcare insurers, sponsors, and end-users.

Deposits grew modestly from Q2, as is normally the case, since most of our deposit growth occurs in the first quarter of the year.

Year-over-year, deposits and deposit accounts continued their 20% growth rate.

We continue to tightly manage the multi-tiered rate structure on these long-duration, low-cost health savings accounts, which resulted in a 4 basis point linked quarter reduction in the cost of funds.

We expect the CDH market will grow at least 20% annually in the foreseeable future, as the Affordable Care Act changes take hold, and consumers assume more responsibility for the cost and quality of the healthcare services they consume.

Slide 8 shows our overall loan balances and originations on a consolidated basis, compared to the line of business breakouts we've just reviewed.

Overall, our loan balances are $12.5 billion, an increase of almost 2% from June 30 and over 6% from a year ago.

Note that balances in every commercial category are higher linked quarter, a sign of continuing solid performance by the commercial banking units.

Total originations were 24% higher than a year ago and reflect, once again, strong commercial bank performance.

The overall decline in originations from Q2 reflects the sharp drop in mortgage refinance activity.

Before turning it over to Glenn for comments on financial results and the outlook for Q4, I want to acknowledge the service of Jerry Plush, who, as you know, recently left Webster.

In his seven years here, Jerry made many important contributions.

He and I enjoyed a close working relationship, and I always admired his remarkable energy and creative leadership.

Jerry's colleagues and I appreciate his commendable efforts on Webster's behalf, as we progressed along the path to high performance.

We all wish Jerry success and happiness in the years ahead.

Glenn?

Thank you, Jim.

I'll begin on slide 9, which summarizes our quarterly trend of net income available to common shareholders and key performance ratios.

Of note, earnings are up from both prior-year and linked quarter despite the adverse impact of this quarter's decline in mortgage banking, and $2 million of additional preferred dividend costs related to our issuance in December of 2012.

As you see, return on average assets was 93 basis points in Q3, and return on average tangible common shareholders equity was 12.43%.

Slide 10 highlights our core earnings drivers.

Over the next few pages, I will discuss in more detail the key drivers of our earnings growth, but would note our average interest-earning assets grew $243 million compared to the second quarter, and our net interest margin remained flat for the third straight quarter at 323 basis points.

Combined, this resulted in a quarterly record in net interest income of $150 million in Q3, and an increase of $2.9 million from Q2.

Noninterest income declined by $5.9 million from Q2, primarily due to a drop-off in mortgage banking results, which were the result of a decline in mortgages originated for sale.

This resulted in a reduction of $5.2 million in revenue that I will discuss in more detail on slide 14.

The last primary driver of our earnings growth is our continued prudent management of core operating expenses, which reflect a decrease of $1.7 million from Q2.

Taken together, our core pretax pre-provision earnings of $75.1 million were $1.3 million lower than Q2, while up about 9% from prior-year.

Slide 11 highlights the components of our net interest income in Q3 compared to Q2.

The quarterly growth in average earning assets of $243 million more than offset a 5 basis point decline in the yield on interest-earning assets.

This resulted in an increase of $1.6 million in interest income compared to Q2.

Average deposits increased $285 million, while we reduced the rate paid by 4 basis points.

The reduction in the cost of deposits reflects an increase of $120 million in average demand deposits, combined with a decline of $111 million in average CDs, and a 16 basis point reduction in the rate paid on CDs compared to Q2.

CDs represent our highest cost of deposits at 110 basis points.

And for the remainder of the year, 15% of our CDs, or approximately $319 million, mature at a rate of 56 basis points.

To the extent they roll over, our current average cost is around 30 basis points.

Our incremental wholesale funding is done primarily at short-term rates at about 20 basis points.

So, as you see, interest expense for the quarter declined $1.2 million, which contributed to the improvement in net interest income.

The net result is a $2.9 million or 2% increase in net interest income versus prior quarter, and a flat net interest margin of 323 basis points.

Jim discussed the activity in loans and deposits, so I will discuss our investment portfolio, beginning on slide 12.

As you see, we continue to keep the investment portfolio flat at $6.4 billion, as we reinvested our cash flow in the quarter.

Cash flows during the quarter amounted to $369 million with a yield of 316 basis points.

During the quarter, we purchased $399 million of securities at an average expected yield of 236 basis points and a duration of 2.9 years.

Most of our purchases were fixed rate agency MBS, although we added $82 million of floating rate CMBS and collateralized loan obligations at a yield of 195 basis points.

With the 10-year rate essentially unchanged during the quarter, the unrealized gain in the AFS portfolio increased by $8 million.

7% of the total portfolio, or $428 million, consists of high-quality floating rate CMBS and CLO's, yielding around 184 basis points, all of which are in AFS.

Our fixed-rate agency MBS purchases have been concentrated in higher-coupon, higher-premium bonds, which we think will perform better than lower coupons, and will increase in yield as rates rise.

Assuming the 10-year stays flat or increases, we would expect our investment portfolio yield to have reached a bottom in Q3.

Slide 13 provides detail on our interest rate risk profile.

With the short end of interest rate curve seemingly anchored for the next year or two, our attention has been focused on the impact of rising long-term rates.

The long-end-up analysis is part of our normal quarterly disclosure and monthly ALCO process.

We showed data as of June 30 at our recent Investor Day, and have refreshed it here as of August 31.

You can clearly see the growing benefit to PP&R over time.

Note our PP&R analysis reflects scenarios with an immediate increase in long-end rates, compared to a scenario with no change in rates.

The benefit from higher rates is primarily related to slowdowns in prepayments of higher-yielding assets, the reduction of investment premium amortization, and higher new asset yields.

While most use parallel shift scenarios to assess asset sensitivity, that assumes an increase in short-term rates that still seems to be off sometime in the future.

We will continue to take gradual steps to prepare for the eventuality of higher short-term rates, but in the meantime, we wanted to highlight our interest rate risk profile for what seems to be a likely scenario.

Slide 14 provides detail on noninterest income.

As previously highlighted, there was a $5.9 million reduction on a linked quarter basis, which equaled the decline in mortgage banking revenue.

During the quarter, mortgage settlements declined by 8% versus prior-quarter.

In addition, pricing on settlements compressed 45 basis points.

This resulted in a $1.4 million reduction in revenue.

The remaining $4.5 million reduction was attributable to a 53% reduction in our originated for-sale pipeline and 94 basis points of compression.

Note that we have approximately $1.2 million of unrealized gains in our loans held for sale that we were unable to record under the lower of cost to market rules.

We expect to recognize most of this in the fourth quarter, assuming a stable rate environment.

Wealth and investment services revenue declined by $825,000 from Q2.

$200,000 of the reduction is due to a sale of a nonstrategic portfolio of assets under management.

The remainder primarily reflects the seasonality impact on production levels.

Loan fees grew by $335,000 in Q3, driven primarily by an increase in loan servicing fee income.

So, apart from mortgage banking, core noninterest income was essentially flat to Q2 and 10% higher than a year ago.

Slide 15 highlights our core noninterest expense, which decreased compared to both Q2 and a year ago.

A decline of $906,000 in compensation and benefits expense accounted for a little over half the linked quarter decline, and we also saw notable reductions in technology and equipment, deposit insurance, and loan workout expenses.

I would also note that during the quarter, we recognized a $1.7 million correction for a tax provision established during 2008, 2009 and 2010.

This resulted in an effective tax rate of 27.7% during the quarter.

As you know, tax expense is a non-core expense, so the correction had no impact on our efficiency ratio.

Our efficiency ratio is highlighted on slide 16.

Our core efficiency ratio remained at the 60% level, even taking into account the linked quarter revenue decline of $3.1 million.

Our ongoing commitment to achieving positive operating leverage should help us maintain the efficiency ratio at or below 60%.

Turning now to slide 17, which highlights our asset quality metrics, nonperforming loans declined by $9.1 million in the quarter, led by a reduction of $8.1 million in the residential mortgage portfolio as a result of lower inflows and active resolution efforts.

We also had a decrease of $1.5 million in past-due loans.

For the quarter, a $7.9 million decrease in commercial nonmortgage reflects the resolution, as expected, of loans that went past-due at June 30 from a high level of business banking maturities and a single commercial loan.

Past-due residential mortgages increased $4.7 million from June 30, primarily as a result of a positive residential loan movement from nonperforming into delinquency.

We've made continuing progress on reducing commercial classified loans, which declined another 10% on a linked quarter basis, and remained below $300 million in total.

Assuming recent trends remain intact, we think continued improvement in asset quality can be expected in Q4 and beyond.

Slide 18 highlights our capital position.

All capital levels improved over Q2 while supporting $280 million in balance sheet growth, once again highlighting the strength of our core earnings.

So, before turning it back over to Jim, I'll provide a few comments on our expectations for Q4.

Overall, average earning assets will likely grow in the range of 1% to 2%.

We expect average loan growth in Q4 to be in the 2% to 3% range, with continued growth in our commercial banking business.

Assuming that loan prepayments stay constant with the Q3 level, we expect net interest margin to be about flat.

Of course, NIM will vary with loan prepayment activity and loans returning to performing status.

That being said, we expect net interest income to be approximately $1 million to $2 million higher than the Q3 level, driven by loan volume.

Our leading indicators of credit were encouraging during the quarter, and we continue to signal further improvement in asset quality.

Given our outlook of Q4 loan growth, we could see a modest increase in the Q4 provision.

Regarding noninterest income, we do not expect to see a return to the high mortgage refinance activity that we saw earlier in the year.

We believe mortgage activity levels will stabilize as the market moves more toward purchase activity, with a larger ARM component benefiting portfolio loan growth.

Lastly, the favorable [low COM] mark I mentioned earlier should positively affect mortgage banking revenue in Q4, assuming a stable rate environment.

We continue to make progress in the areas of wealth and cash management services, and expect additional fee revenue from these activities.

So, taken altogether, we anticipate an increase of up to 10% in noninterest income in Q4.

We would expect to see core operating expenses modestly increase from Q3, as we continue to invest in our business while focusing on operating leverage, to maintain an efficiency ratio at or below 60%.

And we expect our effective tax rate on a non-FTE basis to be around 30% in Q4.

Based on our current market price and no additional buybacks in the quarter, we expect to see the average diluted share count to be approximately 90.4 million shares.

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

Thanks, Glenn.

In summary, Webster's third-quarter results represent a continuation of our progress as we implement strategies to produce positive and growing economic profits.

We're building profitable relationships across the organization, adapting rapidly in light of changing consumer preferences, and controlling expenses, while asset quality continues to improve and our capital position remains rock-solid.

We've taken another step this quarter toward our goal to be a high-performing regional bank.

We're now pleased to take your comments and questions.

(Operator Instructions).

John Pancari, Evercore Partners.

Your loan growth came in at the higher end of your guidance that you provided mid-quarter and at your Analyst Day.

And can you give us just a little bit more color on what came in better than you were looking at, at the time you gave the guidance?

And what areas are you most positive on, in terms of driving the growth in future quarters?

Yes, actually, we were pleasantly surprised that the quarter ended strong.

And I think those -- that's what actually occurred was, strong, particularly on the commercial banking side in virtually every area of commercial banking.

Commercial real estate, in particular in the multifamily group, got a bump coming toward the end of the quarter.

But generally, it was stronger than anticipated closings on the commercial side.

Okay.

And on that -- along those lines in terms of the loan growth outlook, is it fair to assume you stay in this 2% linked quarter range here in the coming quarters?

Or do you expect a material change from that level?

Yes, John, it's Glenn.

And at least in the upcoming quarter, we feel pretty good about the pipeline.

And Joe and -- Joe Savage and team have built a pretty strong pipeline going into 2014 as well.

Okay.

Thank you.

Thank you.

Dave Rochester, Deutsche Bank.

Outside of that $1.2 million gain that you're talking about for 4Q in the mortgage banking line, just given your thoughts on mortgage activity going forward, where should we expect that mortgage banking line to normalize?

Yes.

So for the fourth quarter, I think that we'd probably see settlements or volume for sale at around $100 million mark, somewhere around there.

The gain on sale rate, I would say $150 million to $160 million.

And so, all-in, I would say probably expect to see $2 million to $2.5 million range, including that recapture of $1 million.

Going into 2014, I think the more normal trend, given the mix between refi and purchase, you'd expect to see about $150 million to $200 million a quarter.

You'd also probably see the gain on sale rate come down to a more normal [125 basis points].

So for the year, you'll probably see about $10 million on a full-year basis.

Great.

So you definitely see upside from here in that line item?

Yes, I think quarter-over-quarter and then going into next year, I think year-over-year will be down, but I think a more normal number for us is going to be $200 million a quarter at 125 basis points.

Great, that's good color.

Thanks.

And then I was just wondering, how much of the expense reduction this quarter potentially came from that mortgage banking operation?

Did you realize any expense saves there?

Not -- it's not fully in the quarter.

We did take some positions out.

I think, on the backside, it was probably about 15% to 20% reduction in cost.

But you don't see the full benefit of that in this quarter.

Can you kind of qualify what that full quarter benefit?

Yes, I mean there's been some redirect and on the consumer side, on HELOCs and stuff like that.

But I think, generally, it's about $1 million, $1.5 million that you'd see on an annual basis -- as of right now, given the current volume.

Great, thanks.

And you had mentioned the stats on the CDs repricing in 4Q.

But would you happen to have a schedule for next year?

Because that -- the CDs that you're saying are going to roll off are at a much lower cost than where we're seeing the costs for the total CD portfolio.

I was just wondering if you've got some of the higher cost stuff rolling off next year?

Yes -- no, not a lot of higher stuff next year.

I mean, [58] -- think the total portfolio is at $110 million.

So nothing real big coming off next year.

Okay.

Great.

Thanks, guys.

Thank you.

Steven Alexopoulos, JPMorgan.

I wanted to start looking at the -- I guess it was 50 basis point decline or so on the $560 million of commercial bank loan fundings.

Are you guys needing to get much more competitive on price to put up the growth numbers you've been showing?

There has been competition on price, but we actually feel that our spreads have held up pretty well.

In this case, we were comparing to a quarter that was an outlier on the upside, when you look at Q2, for the reasons that I explained in my remarks.

So yes, there is pricing pressure.

But when we look at our performance -- and we measure this, actually; we have an outside group take a look at it -- we know that our pricing is holding up pretty well.

And with spreads at about 308 basis points in the quarter, they're holding pretty well.

The only thing I would add to that is that Joe -- we'd say in the commercial, the deals we don't participate in, the ones we walk away, it's split now about 50/50 between price and structure.

And that was, if you go back a year, it was more structure; the last two quarters, it's been more price.

So it's sort of leveling out.

Okay.

Are you guys noticing any disruption to the loan pipeline with all the headlines around the government shutdown?

Not really at this point.

I mean we know that it's tough to get an SBA loan.

We're working hard with our clients to make that happen.

So, where the government is directly involved, some concern.

I guess the question is whether it's going to have a psychological impact at some point down the line.

Okay.

And just final question with the efficiency ratio now just above 60%, and you guys have spent a lot of time, right, getting that below 60% over the past year, with what you're saying mortgage is going to shake out, do you need to refocus the bank on new efficiency initiatives to make some traction there?

I would say we don't need to refocus, because we are constantly focused on it all day, every day.

And we continue to make good progress on the expense side.

And you saw the Q3 relative to Q1 and Q2.

And so we're looking at driving positive operating leverage by improving revenue and controlling expenses, including outright reductions in some areas.

We've got programs for ECM, which is the Electronic Content Management, that could make a very significant impact on the expense side over the next couple of years.

You've heard all the things we've been talking about on reducing square footage in the branch system, moving to the universal banker as we downsize the number of personal bankers overall, because we're pushing transactions to the automated side.

There are tens, maybe hundreds of initiatives that are taking place in the Company to control or drive down expenses, even as we try to improve the revenue.

So, being at 60%, while we continue to look for ways to drive it into the 50s, is consistent with where we thought we'd be about now.

Yes.

The only thing I would add is that, also, if you look on the revenue side, obviously, we're up -- net interest income this quarter was a record for the organization.

And where we're focused a lot of effort is on the private banking and treasury and payment services, which are fee-generating businesses.

And we recognize that to be a top-performing bank, we need to get our annuity noninterest income up as well.

So that's another driver in addition to all the expense rationalization.

Okay.

Thanks for taking my questions.

Thank you.

Bob Ramsey, FBR Capital Markets.

Real quick on the margin front, great to see that margin sort of stabilizing and it sounds like it's going to be there and stay there.

I know you all said in the outlook it sort of assumes prepayments stay where they are.

How much of a benefit was there from prepayments this quarter?

I can't remember if you all said that in the remarks.

I didn't, but it was about 2 basis points.

So -- and it's been 2 basis points for the last two quarters.

So our core, if you just strip that out, and say our core of [321] was [321] again this quarter.

Okay, great.

And I'm curious too, I know you said that on the securities portfolio side, you think that yields probably have bottomed out this quarter there.

But it sounds like you're still purchasing new securities below the portfolio yield.

How is it that you sort of get to a stable overall portfolio yield?

Yes.

I think premium amortization slows down as the portfolio goes out a little further, so that's a benefit.

And that will be a benefit -- that was a benefit Q2 to Q3, and will be even more of a benefit going into Q4.

Great.

I think that's all I've got.

Thanks, guys.

Thank you, Bob.

(Operator Instructions).

Ken Zerbe, Morgan Stanley.

Just a quick question on the taxes.

Is there an opportunity for taxes to be lower?

Because I know you mentioned the 30% is your expectation for fourth quarter.

I believe that was your expectation prior to this.

But if I read the press release right, you mentioned that, I guess, a-half-million-dollars of the tax gain that you took in the quarter related to a reduction in your expectations for taxes this year.

Just trying to make sure I get all the pieces right.

So, that's the UTP or the estate tax provision, which is going to bring us down to the 30%.

It's already in that rate, so we think 30% is the right number.

Okay.

So, no change there.

And then just a broader question on the economic growth or the loan growth -- we've heard some other -- heard from other banks just saying that the improvement that we're seeing in the economy, albeit however modest it is, isn't really translating a ton into loan growth.

Obviously, you guys are doing very well in the loan growth side.

Is Connecticut, the Northeast, just simply a stronger market?

Or is there anything else specifically that's driving the loan growth, aside from economic factors?

What's happening here is we're taking a bigger share of what's out there than we were before.

We've added some bankers in the last couple of years.

And in addition to the strong core we have, have been able to bring new clients to Webster.

We also have been doing very well in Greater Boston.

We're seeing traction in New York and Westchester County, and now down into the city.

We have -- our commercial real estate operations are on a regional basis, so we've had some success in the Philadelphia area.

So, when you look at the loan portfolio, it's not just the franchise but it's the region around us as well.

So we've got a little bit of a bigger market there for CRE, for ABL, for equipment finance.

And all of those have contributed to our growth.

I really -- I want to really be clear that I think that the quality of our bankers, and the reputation of the Bank, and our ability to put out a term sheet and then live by it, is key in our ascension in a considered set.

Thank you.

Jason O'Donnell, Merion Capital Group.

(Operator Instructions)

Glenn, I apologize if I missed it, but with respect to the mortgage banking business, what was the dollar volume of mortgages sold in the third quarter versus the second quarter?

So, the dollar volume of our pipeline there's two pieces.

One is what we settled in the third quarter and the dollar volume went from -- Q2 to Q3 went from [$216 million] to $198 million], so an 8% reduction there.

On the pipeline, which was the bigger driver of the revenue reduction, the mortgage pipeline went from [$210 million to $100 million] or a 53% reduction.

And then we also had the impact of compressing rates, going from 154 to 60 basis points on the pipeline.

Okay, 154 to 60.

Okay, perfect.

Great, that's helpful.

And then on the expense front, given the objective that you all have in place to significantly reduce square footage going forward, how much do you think you can eliminate in the way of occupancy expense between now and, say, the end of next year?

We're still -- I mean I think we're at a total of [$49 million] on an annual basis in occupancy spend.

So I would say take 10% off of that, somewhere around there.

But does it all occur next year?

No, probably some into 2015 as well.

Okay, so 10% but that could be spread out between, let's say, (multiple speakers) next year and the first half of the following?

Yes.

At least.

Okay.

Okay.

And then, Jim, on the executive management front, have you or the Board come to a decision yet as to whether you'll be filling the COO role?

Or is that still an open question at this point?

We have not.

It's still an open question.

I do want to say, though, that we've got a very strong group of executives here who have closed ranks and taken up the responsibilities.

And I think I've already said to you separately that we've laid out what our plans are.

We intend to complete those plans and meet our timelines.

We've got a very good talent development program here.

We have success in planning at every level in the Company.

And so this really has been an opportunity, over the near-term, for team to move up and show what they can do, and doing extremely well.

Great.

Thanks, guys.

Thank you.

Casey Haire, Jefferies.

Just a quick question on the loan growth guide.

It feels, I guess, a little conservative.

If we look back to your fourth quarters in years past, you guys have obviously done pretty well in the commercial front with seasonality.

I'm just curious, are you guys just being conservative?

Or do you expect an acceleration in the slowdown on the consumer side of the house?

Yes.

There was an acceleration last year in the fourth quarter, if you're comparing it to that, which was based off of tax play or tax concerns, as well as, I think it was the sequester going on back then, right?

So there was a lot of pull forward last fourth quarter.

I don't think we'll -- we're not anticipating that in our forecast.

And then I think that we probably also had some commercial real estate paydowns in the fourth quarter -- this fourth quarter as well.

But I think all things considered, that that's why we are where we are, from a guidance standpoint.

And another thing, you mentioned the question about being conservative.

I guess what we'd say is we don't want to overpromise.

We're not conservative by design but we're careful.

Okay.

And then on the fee side, Wealth Management was down quarter-to-quarter.

I know that's an area that you guys are optimistic about.

Why would that be down in an up quarter for market levels?

So, last quarter was a record for the organization in Wealth Management.

This quarter, it was down about $823,000 -- or that's what it was down; and about $200,000 of that was as a result of a sale of a nonstrategic assets under management.

So that's about one-third of it.

The other two-thirds were, quite frankly, just seasonality -- the lower volumes.

Okay.

Got you.

And then just last one for me.

So, on the capital management side, I know you guys are not focused on M&A right now, but why not use some of the excess capital?

Or what's holding you back from using some of the excess capital towards share buyback, given a pretty attractive stock price?

Yes.

Well, we've said that we would look at share buyback, but opportunistically.

And that's just how we look at it.

So, we're funding or capitalizing our loan growth with the horizon looking pretty bright there.

And looking at our dividend, what our payout ratio ought to be.

And then we've got approved to buyback capability that we'd use under opportunistic circumstances.

The other thing I would add is that we're always doing it with an eye toward our stress testing as well and the severely-adverse scenario.

And so that's another component as we look at our capital plan.

Okay, thanks.

Sure.

Mark Fitzgibbon, Sandler O'Neill and Partners.

Glenn, I wondered if you could clarify for us the -- you had mentioned there was $1.3 million in revenue recognition that was delayed in mortgage banking business.

Why was that exactly?

The mark on the asset -- and this is the timing of the lower of cost of the market accounting.

And what it does is it requires you to mark the asset either the lower of cost or the market.

In this case, the cost.

And then as you sell the asset, you get to realize the gain.

There's about $1.2 million that we will sell in the fourth quarter.

And if rates stay constant, we'll realize the gain at that point.

Okay.

And then, secondly, you guys had previously suggested a target for the reserve to loan ratio at sort of in that [$120 million to $125 million] range.

And you're basically there now.

Would -- should we expect reserve releases to stop or slow dramatically?

Or have you sort of recalibrated your targets for reserve levels?

Yes.

So, I think that when you look at reserve releases as a percent of earnings, it's continued to come down, especially when you look at versus prior-year quarters.

But, really, the driver there, Mark, is the portfolio quality -- which, as you saw in our slide, continues to improve.

So, would it come down from the [$127 million]?

Probably, yes.

I think that we've given guidance before saying that [$120 million] was probably right.

And we're always reevaluating that -- whether that's the right number.

But that's going to be driven by the portfolio quality.

You saw also that our charge-offs, our gross charge-offs, were down to the lowest level, at least in five or six quarters.

So, while net charge-offs weren't down, it was because of the lower recoveries.

So there's a lot of favorable indicators that we're seeing, both on the asset quality side and charge-offs side, that lead us to evaluate our provision levels.

Right.

So, there's room for further modest reserve releases over the near-term.

But longer-term, we'd expect that the provision would exceed the charge-offs.

Okay.

And then, lastly, you talked a lot about the strong commercial pipeline.

Could you tell us in dollars how big that is today?

So I think that going into -- (multiple speakers) it's about $330 million?

(multiple speakers)

Around $330 million.

It's probably 10% lower than it was at the end of last quarter but it's actually growing as we speak.

Thank you.

Matthew Clark, Credit Suisse.

Hey, just a couple of quick ones.

You mentioned mortgage expenses expected to be down 10% in the upcoming quarter.

Can you just quantify what the expenses were embedded in the second and third-quarter run rates?

Absolute dollars, I don't have that in front of me, but what I would tell you is, it's primarily in the compensation line, because it's staff-related.

And it's -- for the first tranche is all temporary help and overtime, go away in response to volume reductions, and then it gets more into the core.

(multiple speakers) You see our $900,000 decline in compensation quarter-over-quarter.

A piece -- a component of that is that, but it's not a full component.

Okay.

Actually, we benefit from a very efficient mortgage banking origination, processing, closing, and the like.

We only have about 100 people or slightly less that actually support, from the back office, all the activities we have with our 80-plus mortgage loan originators in the market; plus we've got 20 people in the customer care center.

We've got our branches, our banking centers that are referring business as well.

So, very efficient to begin with.

Been very careful to structure it that way, but there will be savings in Q4.

Okay.

And then on the premium amortization front, can you just give us what the change was there in the quarter?

Quarter-over-quarter, the amortization change was -- oh, let's see -- about -- so it was about, let's see, about $600,000.

(multiple speakers) And if rates stay constant, you'll see an acceleration of that into the fourth quarter.

All right, thanks.

Collyn Gilbert, KBW.

Glenn, just a question on the loan yield.

Could you just tell us what the blended origination yield was in the quarter?

And then also what the rolloff yield was of loans in the quarter?

Sure.

The blended yields for the quarter -- [3.79%], all the production during the quarter.

All-off, I don't have in front of me.

I'd have to come back to you.

I just don't have that

Okay.

And then on the security side, with -- kind of getting to a bottoming of the yield, are you finding yourselves managing that securities portfolio more to yield or duration?

Because I know you guys in the last couple of quarters have been putting on a lot of shorter duration paper.

I would say it's more toward duration.

Okay.

So even keeping that duration on the shorter end or trying to keep it where it is, do you do you still think yields have bottomed here on the security side?

Yes, we do.

Okay.

And then just on the reserve comment, so if we move -- migrate to that sort of [$120 million] or so over the next few quarters or whatever the timeline might be, are you anticipating then a pretty sizable drop in net charge-offs for next year?

Because I'm just trying to reconcile that the provision may be only up slightly for next year.

You're still putting on some good loan growth.

So I guess in order for that formula to work, it would have to assume that net charge-offs drop quite a bit.

Yes, our target is not to have net charge-offs of 47 basis points.

So that will be a steady decline, though.

You're not going to see it drop immediately.

But I think a more normal charge-off number would be in the 30 basis point range.

But it's just a matter stepping down to that.

Right.

And then going back to the comment I made before, the overall asset quality, as well as the loan growth, they'd both be considered, not only in terms of the provision but in terms of what the overall coverage ought to be.

The [$120 million] isn't absolute at the bottom.

It could be -- depending upon loan quality, it could be less than that.

Okay.

Okay, all right.

That was all I had, thanks.

David Darst, Guggenheim Securities.

I wondered if you could quantify maybe what you see as the opportunity in the HSA Bank to integrate with the carriers and the exchanges?

Sure.

Actually, our strategy in HSA Bank is to make sure that we have a full consumer-directed healthcare platform, so that we provide the notional reimbursement accounts, such as the health reimbursement accounts and flexible savings accounts, as well as HSA's, to give us a better opportunity to win business as we go forward, and to move upmarket, to be able to talk directly with carriers and TPAs and benefits administrators, as well as large employers.

And we've been moving in that direction for some time.

We expect that platform conversion to take place sometime in 2014, that will give us the opportunity to offer the multipurse product.

So, by doing that, and recognizing that the world is moving more toward the personal responsibility of the consumer of managing their healthcare expenses, it bodes well for growth overall in CDH accounts, and in particular, in HSA accounts.

The providers that have the multipurse find, in the last year-and-a-half or so, that their HSA accounts grow much faster than they would have, had they not had the multipurse.

Therefore, we think it's reasonable to expect a growth rate.

And we're not going to say it's going to keep growing at [20%], but it's definitely double-digit growth in the foreseeable future.

And it's even possible that adoption of these accounts could accelerate, which would create additional opportunity for us.

As you work on the platform conversion, is there a point next year where there's like a maybe a one-time step-up in the deposit base?

No.

The step-up will come from improved results in the enrollment period.

Most of the enrollments for these accounts take place towards the end of the year, so we see them really show up in the first quarter of the following year.

Because that's when the enrollments take place.

Then, as you saw in the second and third quarters, relatively modest growth over the balance of the year.

So it's by having the additional capabilities that will be more effective in gaining market share from the carriers and the TPAs and the like.

So it's not a step-up immediately as a result of the platform; it's what the platform allows you to do in soliciting for new business.

Okay, thanks.

And then maybe discussing the New York City hub, is there any particular focus -- maybe commercial, real estate or C&I -- that that team is targeting?

And then are you looking to increase the capacity or add more teams there?

Or do you have the platform you want?

Yes, it's really -- it's broadly commercial banking products and services, loans, deposits, cash management services.

We already have our asset-based lending group headquartered where our Regional President will be, which is part of how we keep the expenses low as well.

We already have begun recruiting additional bankers for that market.

We expect, in particular, to see opportunities in commercial real estate, middle-market C&I, and, as I mentioned, ABL.

And, of course, there's a big multifamily market there as well, that we think we could tap into.

Okay, great.

Thank you.

Matthew Kelley, Sterne, Agee.

On the $257 million of originations in commercial real estate during the quarter, how much of that came out of the Metro New York multifamily business?

Oh, let's see --

And what was the yield on that?

-- would be the second question.

So, out of the -- for New York, let's see, for the quarter (multiple speakers) --

Yes, the multifamily, out of the $257 million.

I would say probably $34 million.

It's not a real big number.

Okay, got you.

(multiple speakers) And what are the yields on that compared to the overall commercial real estate origination yield?

Probably mid-3's.

Mid-3's, got you.

And then going back to the HSA Bank, how would you size up profitability for that as a standalone business?

You take in deposits; you presumably are buying securities; with that liquidity, you get a fee income stream.

It looks like the fees cover a bulk of the expenses.

So how would ROAs and ROEs stack up to that as a standalone business line?

And how should we be thinking about that as that grows at these types of rates going forward?

Well, we look at it really as providing low-cost deposits that have long-duration and low elasticity.

Therefore, very stable long-term funding source.

So the way we look at it is to say, right now, the fee revenue covers about 90% of the expenses.

Internally, we'd say we would price the deposits against our transfer price here for deposits of that duration.

We put up higher capital against this business as a deposit business, because it is a specialty business.

And then we'd look at the kind of returns we get.

And we definitely earned well in excess of the cost of capital.

So, if you were trying to figure out how to spread them, we'd say the spread right about now would be around 200 basis points.

Okay, got you.

And then just want to make sure we're clear.

You're trying to integrate your products with the Aon, the Hewitt's, the Power's of the world, that are creating actual private exchanges that we're reading about.

Is that correct (multiple speakers) HSA and the Bank?

Yes.

We're trying to provide a product that would be usable in the exchanges, right, and integrate it into the exchange -- which we have not yet done, by the way, because the exchanges are just coming on.

But we're -- that's part of the ramp-up that we're doing, is ensuring that we are able to integrate with the exchanges.

But in the meantime, we're talking directly to carriers; we're talking to large employers, TPAs, benefits administrators and the like, in addition to brokers and direct to individuals.

Okay, got you.

But the health exchanges will be an increasingly important part of the business.

Got it.

And then one question on expenses -- haven't really quantified or talked about outsourcing some of your IT operations.

You had a separate agreement when you announced the Jones Lang deal on that front.

Maybe just talk about that, give us a little update on what that is targeted to save?

I think we're still, having just done JLL two quarters ago, and FIS as well, we're still in the early stages of that.

I mean, you're starting to see some of that come through on both the occupancy line and the technology.

As I highlighted for the quarter, you saw that come down.

But I don't have an absolute number for each of those.

I think you'll see it become more pronounced in our trends as we go forward.

All right.

Thank you.

Dan Werner, Morningstar.

Glenn, in the investment securities portfolio, are you transferring any securities, specifically agency mortgage-backs, from available-to-sell to held-to-maturity, to kind of protect yourself from capital hits or --?

And if you are, fine.

I'm just wondering, is that a policy or a strategy you're considering going forward, should interest rates rise here significantly?

Yes, I mean, we've been fairly consistent with being 50/50, our split.

And new purchases are going more into the AFS portfolio.

But I think we have retained -- I'm sorry, new purchases are going more into ACM, but we've retained sort of that 50/50 split.

Okay, thank you.

Thank you.

We have reached the end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Just want to thank you all for being with us today.

Have a good day.

Thank you, Kevin.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.

We thank you for your participation today.