Webster Financial Corp (WBS) 2014 Q3 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's third-quarter 2014 results conference call. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations, and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the third quarter of 2014.

I will now introduce your host, Jim Smith, Chairman and CEO of Webster. Please go ahead, sir.

Thank you, Jesse. Good morning, everyone. Welcome to Webster's third-quarter earnings call and webcast. I will discuss highlights of the quarter and LLB performance and CFO, Glenn McInnes, will review financial performance, after which President, Joe Savage, Glenn, and I will take questions.

I would best describe Webster's results for the third quarter as more and better. Solid loan growth, funded primarily by deposit growth, produced revenue growth in excess of expense growth, resulting in the 14th straight quarter of positive year-over-year operating leverage. Credit quality trends remained favorable, reflecting the improving economy and vigilant risk management.

Beginning on slide 2, net income increased 7% year over year to a record $50.5 million, while earnings per share increased 8% to $0.53. Return on average common equity improved linked quarter and declined slightly year over year due to higher capital levels. All of my further comments will be based on core operating earnings.

Looking at slides 3 and 4, loans grew in all key categories, both linked quarter and year over year with notable continuing strength in commercial banking. Overall, loan balances grew 2% linked quarter and over 8% year over year. That solid low growth, 85% of which came in the commercial bank, once again offset margin compression from lower earning asset yields and helped produce record net interest income.

Noninterest income grew 7% linked quarter and 11% year over year, including the first favorable year-over-year comparison from mortgage banking revenue in some time. Total core revenue grew 2.8% linked quarter and 6% year over year to a record. We have now reported 20 consecutive quarters of year-over-year revenue growth, dating back to 2009. Expenses grew significantly less than revenues, both linked quarter and year over year, even as we continually invest in high economic profit businesses and risk infrastructure. The net result is an efficiency ratio below 59% for the first time, pushing core pretax pre-provision earnings up 11% to another record. Favorable asset quality was evidenced by further linked quarter declines in all primary measurement categories. The ratio of NPAs to loans plus other real estate owned reached its lowest level since the end of 2007. The loan loss provision increased modestly to $9.5 million as loan growth was offset by continuing improvement in asset quality.

Since net charge-offs remained below $8 million for the third quarter in a row, we recorded a reserve build of $1.6 million, our third straight, versus a $5.9 million net release a year ago. In a significant development, we announced last month that Webster's HSA Bank Division would acquire JPMorgan Chase's health savings account business. Webster is purchasing approximately 700,000 accounts, including an estimated $1.3 billion in deposits and $175 million in investments.

HSA Bank currently has about $2.5 billion in footings, including $1.7 billion in deposits. So this acquisition will further solidify our position as a leading provider of health savings accounts and will accelerate our strategy to move deeper into the employer and insurance carrier markets.

JPMorgan Chase chose to sell this business to Webster, in part due to the stellar reputation HSA Bank has earned in the marketplace for its excellent customer service, robust online presence, and broad menu of savings and investment options. Evidence of this reputation is the fact that the global health services company, CIGNA, also announced that, in conjunction with the JPM, it is teaming up with HSA Bank to administer the CIGNA Choice Fund health savings accounts. This agreement connects one of the fastest-growing consumer driven health plans with HSA Bank and its industry-leading technology.

The industry has been growing a 20%-plus for several years, and experts expect growth to continue at that rate for years to come as employers gravitate to high deductible health plans to control costs and reward their employees for taking responsibility for their health care decisions. Many of you probably have HSA accounts. We expect the all-cash transaction to have tangible book value dilution of about 3% and to be modestly accretive to earnings in the first year and increasingly so thereafter. We expect the transaction to improve Webster's loan to deposit ratio about 7 points to a pro forma level of 80%, while transaction accounts overall will increase from 46% of deposits today to about 50%.

HSAs are strategically important to Webster because they attract low cost, long duration, purpose-driven transaction deposits, which provide a stable source of funding for Webster's loan growth and liquidity, and for managing interest rate risk. Their enormous value will be seen even more clearly when short rates ultimately rise.

To get a feel for the value of Webster's HSA business, look at the market value of companies in this space that have gone public in the last year or so.

I will now turn to line of business performance, beginning on slide 5. Growth remains strong in commercial banking as we continue to expand this EP-positive business, deepen relationships, and take market share. Commercial banking loans now total $6.2 billion and grew 2% linked quarter and 14% year over year. Growth was led by strong originations in our C&I and owner-occupied CRE activities, while investor CRE originations declined from a strong Q2.

The portfolio yield declined 1 basis point linked quarter as lower yielding investor CRE fundings represented only 10% of total fundings compared to over 30% in Q2. Given this dynamic, the yield on new fundings in Q3 was 3.75% compared to 3.33% in Q2.

Deposits increased nearly $600 million linked quarter, largely as a result of seasonality in the government business, while the cost to deposits was unchanged. You can see the substantial remixing to transaction accounts over the past year as DDA and other transaction accounts now represent 55% of total commercial deposits, up from 44% a year ago, which accounts for the 2-basis-point decline in the cost of deposits.

In summary, commercial banking posted revenue growth of 7.25%, against expense growth of 3.25% year over year for positive operating leverage of 4%.

Momentum continues to build, evidenced by a 25% pipeline growth from Q2.

Moving now to community banking, I will begin with slide 6, which shows its business banking unit, and it continued at steady growth. While linked quarter growth was modest, year-over-year growth was 7%. The portfolio yield declined 3 basis points in the quarter from the effective lower yields on originations, which declined 2 basis points linked quarter.

Business banking's deposits also grew 7% compared to a year ago and modestly compared to Q2. Transaction account balances comprised about three quarters of total deposits, and the unit's deposits exceeded to loans by over $800 million, which provides attractive funding for other lending activities.

Slide 7 presents the results of the personal banking unit in the community banking segment. Overall, consumer loan balances grew 2%, both year over year and linked quarter, the highest linked quarter growth in nine years, driven by stronger originations, primarily due to improving purchase mortgage activity. Total loan originations were up 23% linked quarter, led by residential mortgage originations that grew by over 50%.

The linked quarter decline in personal banking deposits reflects the seasonal decline, typically seen in the third quarter. The 1% decline from the year ago reflects strategic CD run-off over the past year that has helped lower deposit costs and has now tapered off.

Investment assets under administration in Webster Investment Services continue their strong growth at about 9% year over year to $2.7 billion, driven by an increase of more than 6% in year-over-year production and by market gains.

Slide 8 provides more color on our residential mortgage origination trends. Overall, resi mortgage production of $265 million was 54% higher than in Q2 and 14% lower than a year ago. The year-over-year decline was driven by a 50% reduction in mortgages originated for sale, while there was a linked quarter increase of 7%. Purchased mortgage originations totaled $187 million in Q3 and grew 89% from Q2 and 23% from a year ago. Purchased mortgages accounted for 81% of Q3 mortgage volume compared to 80% in Q2 and 55% a year ago. Consistent with our mass affluent strategy, over 80% of mortgage originations kept in the portfolio in Q3 were jumbo mortgages compared to 73% in Q2 and 67% a year ago.

In summary, on the community banking segment, we continue to make progress with our strategic roadmap designed to generate more revenue off a lower expense base as we transform the unit's model.

To that point, community banking posted year-over-year revenue growth of 2.4% against an expense decline of 3.6% for positive operating leverage of about 6%. We are not yet earning the cost of capital, but we are making good progress in that direction.

Slide 9 presents the results of Webster private bank. While the strategic shift to our new business model is virtually complete, results reflect AUM outflows related to the previously reported personnel departures triggered by that model shift. Loan growth has been solid, while the linked quarter deposit decline reflects the more transactional nature of high net worth deposits. The private bank attracted $140 million in new AUM over the past 12 months, and we expect business momentum to increase from here.

Slide 10 presents the results of HSA Bank. Deposits grew modestly in Q3, in line with seasonal expectations, and grew 19% year over year. The cost to deposits declined again linked quarter and is down 9 basis points year over year to 28 basis points. We currently expect that new accounts in the peak enrollment period in Q1 of 2015, apart from the acquisition of JPM's HSA business, will substantially exceed the 118,000 new accounts that we opened in the first quarter of 2014.

And now I will turn it over to Glenn for financial comments.

Thanks, Jim. I will begin on slide 11, which summarizes our core earnings drivers. Our average interest earning assets grew $295 million compared to second quarter, almost 90% of what was attributable to our loan portfolio. Net interest margin was 317 basis points in Q3. Combined with our loan growth, this resulted in a net interest income of $157.4 million, up over 1% from prior quarter and almost 5% from prior year.

Core noninterest income increased by $3.3 million or 7% on a linked quarter basis with the primary driver being the expected rebound in mortgage banking. Core expenses were $2.4 million higher than Q2 with the majority of the increase related to our investment in our HSA Bank platform and client-facing staff adds. Taken together, our core -- our record core pretax pre-provision earnings totaled $83.5 million and were up 4% linked quarter and over 11% from prior year. Our pretax GAAP reported income totaled $74.1 million for the quarter, and our reported net income of $50.5 million includes an effective tax rate of 31.9%.

Slide 12 compares the drivers of net interest margin to prior quarter. As highlighted, we achieved quarterly growth in average interest-earning assets of $295 million. The yield on securities decreased by 8 basis points, and interest income from the portfolio was $1.2 million lower. This resulted from higher premium amortization of $628,000, as well as lower reinvestment rates. Cash flow and securities totaled $264 million with a yield of 315 basis points.

We also sold $42 million of securities, including our last two TruPs. Security purchases totaled $389 million with an average yield of 257 basis points and a duration of 3.8 years. Average loan balances grew $262 million, and the portfolio yield of 383 basis points was flat to Q2, resulting in an increase in interest income of $3.5 million.

In summary, the lower yield on securities and the unchanged loan yield resulted in a net reduction of 2 basis points in the earning asset yield. The yield compression was more than offset by an increase in average loan balances, resulting in a $2.3 million increase in interest income.

Regarding fundings, average deposits increased $415 million, split between money market and DDA. The increase was primarily driven by seasonality in government deposits.

During the quarter, we added an average of $46 million of five-year brokered CDs and $32 million of long-term retail CDs at a cost of around 200 basis points. This further positions us for the eventual rise in short-term rates. The rate paid on deposits was flat at 29 basis points with growth in money market and DDA offsetting the 5 basis point increase in CDs.

Deposit expense was about $500,000 higher, due to an increase in average deposits. Average borrowings decreased by $159 million, while the average cost stayed at 124 basis points. The reduction in borrowings resulted in about $300,000 less in expense. So our funding cost was flat to prior quarter.

In summary, while our NIM decreased by 2 basis points to 317 basis points, net interest income increased by approximately $2.2 million to a record level.

Slide 13 provides details on core noninterest income, which increased $3.3 million or 7% versus prior quarter. As we highlight, mortgage banking revenue increased $1.3 million from Q2 and totaled $1.8 million. The increase in revenue reflects a 50% linked quarter increase in settlement volume and the favorable impact of approximately $300,000 in unrealized gains identified in Q2.

Other income increased $1.2 million, primarily from private equity investment revenue, and loan fees increased $589,000 linked quarter, primarily from loans syndication fees.

Slide 14 highlights our core noninterest expense, which was up $2.4 million from Q2 and $4 million from prior year. The linked quarter increase was a result of $1.2 million in professional services attributable to the expansion of our HSA platform and an increase in compensation and benefits of $1.1 million, due to higher incentive costs and adds to staff in commercial, business banking, audit, and compliance. Our expense discipline and continued focus on operating leverage are reflected in our efficiency ratio on the next slide.

As you see on slide 15, solid revenue growth and expense control led to positive operating leverage on a linked quarter and prior year basis. Including ongoing investments, our Q3 efficiency ratio was below 59%, 28 basis points lower linked quarter and 109 basis points lower than prior year.

Slide 16 summarizes our interest rate risk profile. Our profile to a steeper yield curve remains asset sensitive, and the results here improved modestly since last quarter. The profile is driven mostly by changes in premium amortization speeds in the investment portfolio. The asset sensitivity of our core bank is also growing with over 75% of our loan fundings in the last four quarters, floating or periodic. Our total loan portfolio is now 67% floating or periodic compared to 65% a year ago, and our deposit funding composition also continues to improve with over 85% in core accounts.

Our recently announced agreement to acquire JPMorgan Chase's HSA business will augment our asset sensitivity and enhance our funding profile by adding deposits with long average lives, low price elasticity, and a rapid rate of growth. When approved, we expect to invest about 40% of the estimated $1.3 billion of deposits and securities and use the remaining proceeds to pay down short-term borrowings. At today's rates, we would expect to earn a yield of between 250 and 275 basis points in investments with an average duration of five years. The borrowings will be paid off at a cost of 20 to 25 basis points.

Upon closing, HSA deposit balances will total about 20% of total deposits. In addition to making us less susceptible to an outflow in surge deposits, this transaction will modestly increase our asset sensitivity and net interest margin.

As you see on the lower chart, our simulation results suggest modest exposure to an increase in short-term rates. Here we assume that deposit rates react immediately to changes in market rates. Any lagging in timing of deposit rate increases would improve these results.

Turning now to slide 17, which highlights our asset quality metrics, nonperforming loans, in the upper left, declined to $140 million and were 1.03% of total loans. Our lowest level since Q4 of 2007. New non-accruals were about the same as in Q2 at a little under $24 million compared to an average of just under $36 million for the four prior quarters. Past-due loans, in the upper right, also saw a decrease in the quarter and now represent .34% of total loans. Commercial classified loans, in the bottom left, decreased $36 million or 13% from prior quarter, due to broad-based upgrades in payoffs across the middle market and business banking platforms. Our annualized net charge-off rate was at or below 25 basis points for the third quarter in a row as net charge-offs were just under $8 million in the first three quarters of this year.

Assuming recent economic trends remain intact, continuing improvement in key asset quality metrics can be expected in Q4 and beyond.

Slide 18 highlights our capital position. Tangible equity ratios improved from prior quarter and prior year, while supporting over $302 million and $1.2 billion in balance sheet growth respectively, against highlighting -- again highlighting the strength of our earnings. Tier 1 common to risk weighted assets also improved and remains well above the Basel III well-capitalized level and our internal target. We expect the HSA acquisition to impact capital ratios by 40 to 50 basis points.

Our strong capital position and solid earnings support asset growth, provide for future increases in the dividend and selective buybacks, and enable us to confidently pass the annual regulatory, severely adverse stress scenario.

In addition, this provides us with the substantial flexibility to pursue value-added acquisitions.

Before turning it back over to Jim, I will provide a few comments on our expectations for the fourth quarter. Overall, average interest-earning assets will grow in the range of 1% to 2%, and we expect average loan growth to be in the 2% range with growth expected to be led by C&I and commercial real estate. We expect to see continued pressure on net interest margin due to the rate environment. Assuming the level of the 10-year swap and its spread to mortgage rates remains in today's range, we would expect 2 to 4 basis points of compression in Q4, driven by lower securities and commercial yields.

Of course, NIM will vary with loan and security prepayment activity, and that is also dependent on the future course of interest rates. That being said, we expect net interest income to increase about $1 million over Q3, driven by loan volume with some offset in NIM compression.

Leading indicators of credit continue to signal further improvement in asset quality. Given the outlook for loan growth in Q4, we see a modest increase in the Q4 provision.

Regarding noninterest income, we expect modest improvement over Q3, driven by fee income and partially offset by lower mortgage banking settlement volume. As a result, we anticipate core noninterest income to increase in the range of 2% to 3% linked quarter. And we continue to demonstrate a disciplined approach to investing in the business and expect to operate with core operating expenses at or below a targeted level to achieve a 60% or better efficiency ratio. Our expected effective tax rate on a non-FTE basis should be around 32%. And based on current market prices and no buybacks, we expect the average diluted share count to be in the range of 90.6 million shares.

With that, I will turn things back over to Jim.

Thanks, Glenn. Our third-quarter results demonstrate continued success in growing our businesses and improving profitability in pursuit of economic profits. We are excited about the special opportunities that expansion of our HSA Bank present, and we continue to make good progress in our quest to be a high-performing regional bank.

We are now happy to take your comments and questions.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill.

First question I had for you, Jim, was, on a standalone basis, what does the HSA Bank's core profitability look like, and will that change a lot with the acquisition in there?

So actually, we roll the HSA Bank into the other segments for segment reporting, but what I will say is that HSA Bank earns well in excess of its cost of capital. And, as it grows, its unit profitability increases. So we see it contributing at a higher level. There will be investment required as we build out our platforms and as we make the transition, including to the JPM platform and the CIGNA platform. So the rate of EP growth will slow in 2015 and then amplify thereafter.

The only thing I would add, Mark -- it's Glenn -- -- is that this is a business, as we have highlighted in the past, the fee revenue from this business pretty much covers the direct expense in this business. So the spread is all earnings for both the HSA business and for the bank.

Right. Right now, the fees cover between 80% and 85%, I think, of the expenses.

So standalone today, it is a double-digit ROE business?

Yes, it is.

Okay. And then, secondly, on the expense front, you guys have done a great job of driving down costs. I wonder how much room you think might be left to drive costs lower and, if so, what areas might those cost synergies come from?

We are happy where we are with our efficiency ratio. I think we look at it from an operating leverage standpoint. So there's really two constraints as we go forward -- or two targets. One is to be below 60%, and the other is to achieve positive operating leverage.

That being said, Mark, we continue to, as you see in this quarter, a $2.4 million increase quarter-over-quarter expenses, we are not limiting the investment in the business for future revenue. So that is our model. So we don't give guidance to say 55% or 56%. We just keep operating with positive operating leverage quarter over quarter and staying below the 60%.

Bob Ramsey, FBR Capital Markets.

I wanted to talk a little bit about interest rates. I know, Glenn, in your guidance, you mentioned a couple of times the NIM outlook is based on sort of where rates are today and, as you think about some of the rate shift movements that is based on rates, obviously, rates are very dynamic in where they are today. This is not where they were two days ago, and so I am just kind of curious, when you talk about where rates are, is it with the 10 year at 2% or 2.40%?

If we are looking out, Bob, and we are looking at the 10-year swap, and we are looking at the forward curve, which implies around a 2.30% at year-end, a 2.60% at the end of 2015 and close to the 2.90% at the end of 2016, that is the curve that we are looking at, and we would look to bottom out on NIM sometime in mid to late 2015.

Okay. And over the interim, is the expectation that you will continue to see kind of the same pace of compression? I know you gave guidance for next quarter, but continue to be 2 to 4 bps, if you will, per quarter from now until that point?

I think that is probably about right. The only thing I would highlight -- and we have charts on this -- is that when we look back at where NIM has been, even prior year third quarter, NIM was at 3.23%. Going back two years, it was at 3.28%. And yet, when you look at our net interest income, it continues to grow. In this quarter, NIM being at 3.17%, compression at 2 basis points, and here we are at [1574], which is a record for the organization. My point being that we have been very successful on all lines of business in outrunning a lot of the NIM compression. And most of what you see when you are looking at the 10 year and you are following it out as far as, when do we bottom out, is going to be attributable to our investment portfolio just by the way it is structured. And, that being said, our investment portfolio is 80, 85 basis points higher than the peer group.

Yes. And then, last question and I will hop out. But sort of maybe looking at it from another angle, with rates falling, it could prompt more refi activity and help the mortgage bank. I know another bank this morning said they have seen applications surge in the last couple of days. Just curious, what, if anything, you have seen on the mortgage side in the last couple of days and how you're thinking about that business.

Our app volume right now on the mortgage side is basically flat going into Q4. On the mortgage banking side, it is actually down 20 basis points -- or 20%. So maybe the last two days, but we haven't seen that. It is early in the quarter, but that is what we are seeing right now.

If we were making the trade, we will take the higher rates.

Yes.

Understood.

David Darst, Guggenheim Securities.

So could you comment on maybe the size of the investments that you're going to be making in the HSA Bank and what the timing of the conversion is and, then, at what point do we begin to see the earnings accretion that you are expecting?

Sure. First of all, the transaction is subject to regulatory approval, and it is hard to handicap that. It takes as long as it does, but let's just say maybe we will get that done some time in the Q1 -- in Q1, you might say. At that point, the deposits would come on to our balance sheet, and then we would have a transition period over multiple quarters where JPM would continue to do processing, and then we would gradually take that on in accordance with the agreement. But we would actually have the deposits on the balance sheet at the time that the transaction closes.

So we would then be investing in the conversion to our systems. We also would be investing in converting CIGNA directly into our program as well. So over a period of several quarters, we would be making an investment of multiple millions. It is hard to put a cap on it. But you could say, even $10 million or so over 12 to 18 months for that purpose. So that is why I made the comment that the rate of EP may slow a little in 2015, and then it would amplify again in the out years.

David, the only thing I would add is, and I don't know if you heard my opening comments, but $1.3 billion, about 40% of that will be invested in securities with a yield of somewhere between 250 and 275 basis points, a duration of five years. And, in the borrowings, we would be paying off -- with the remainder, we would be paying down at 20 to 25 basis points. So that gives you an indication of how the JPM HSA business is priced.

Right. So the accretion would begin in the first year. So within a couple of quarters, it would have a positive impact, and then it would increase thereafter.

The only other color I will add is that, if you look at our pricing, we are at 28 basis points on our portfolio. We have higher balances in our portfolio. And, as you know, these businesses are tiered, right? So the higher the balance, typically the higher the rate. So there's generally lower balances with the acquisition.

Right. So our blended rate will decline.

Right.

Okay. I understand. And then, looking at your CRE originations this quarter and then the growth in the originations and asset-based lending, are you trying to manage the duration of the balance sheet and kind of avoid putting on too much various asset classes at lower rates today?

David, this is Joe. No. We are always seeking the best available transaction at the time, and then we put it to our treasury folk to price it as best it fits for the outgoing strategy of the institution. So we like to give optionality to the clients. We will go for best transaction. So whether it is a float or a fix or it is a swap, we will let the client decide on that. Probably, the interesting dynamic is that the CRE business assume more payoff activity, which we had been predicting, which had a tendency to drive up yields and spreads because that has been probably the area with the lowest spread business on the ABL side. That is just -- that is 100% of float book, and it is a great mix of direct business and great participation with our middle market folk.

So we will take any piece of good commercial business that we can get. They all have their attributes. The thing we love about CRE is usually the swap comes with it. What we love about ABL is the strong noninterest income items that come with it.

So it is really -- we give it to the guys in treasury, and they figure out how they want to leverage it.

Okay. And, Glenn, one more question. Would you -- or could you quantify the number or dollar volume of loans that are at or below floors?

It is about $1.8 billion, and I think they are out about 66 basis points.

Jarrod Shaw, Wells Fargo Securities.

Just a couple of questions. One, could you talk a little bit about the growth in trends you are seeing in the asset-based lending and equipment finance book and how that plays into the growth in overall commercial lending?

Sure, Jared. This is Joe again, and thanks for the question on asset-based lending.

I think the story in asset base is a very, very good story, and really there's two dynamics at work that is making it, I think, perform so well. I guess, the first thing you would have to -- you can't miss, take a look at the asset quality statistics.

So it kind of took the team a little bit of time to deal with the box that we were putting them in. And that box was going to be -- we just wanted higher credit quality transactions, more emphasis on creating sticky relationships with clients. And so the first thing that happened in ABL is we ceased the attrition. There was a maturation on the part of the relationship managers. And the story and what I had mentioned to David earlier -- and the really wonderful story that is really evolving here -- is the partnership under John Ciulla's leadership between asset-based lending in the middle market, the give-get is pretty impressive. We had a meeting just yesterday, and we saw this year some $30 million of originations that came from the middle market to asset-based lending. And this year, we have moved over about $50 million or $60 million from asset-based lending. And, it has matured into better transactions, within the middle market, and that is kind of new for us. So you put it all together, and this thing is really doing what we always all along thought it could do. And I have just got to mention again, it is really one of the great sources of noninterest income for our institution. And so we are real happy there.

When you get to the equipment finance business, again, that was a story of, we had to find our footing again. We did the same thing with respect to stabilizing the credit book. I mean you take a look at those statistics, they are spectacular. They have been in a net recovery position for probably a couple of years now. And understand Hannah's leadership, that group, Stan was very deliberate with respect to the RMs we brought on. We expanded the territory to get into some of the areas where the particular class of asset was more prevalent and you think of where transports are. You are not going to see transports in New England. And so you get that going. He brought new BDOs in, and the result is a sustained, steady upward climb.

So we are delighted to have it in our portfolio. And I think it tells that story of that slow, but steady, growth that we are seeing in the commercial bank in Webster overall.

Would you say that the growth in those categories is similar to the growth in the overall commercial side, or would that outpace the other commercial growth at this time?

No. I would say the other commercial side. And I am going to keep buying CRE away from this for just a second. But, on the C&I side, they are doing fine, but I think middle market segments are really -- they are really the ones that are driving. It's, basically, everybody contributing, but the rate at which the middle market group is at a slightly greater rate.

Okay. Great. Thanks.

(multiple speakers). ABL has some seasonal elements to it, and generally, Q4, there is some pay down. So the trajectory is not a straight line.

Okay. Great. Thank you. And then, just shifting gears a little bit, on the securities portfolio, probably for Glenn. When you look at the growth in HTM versus AFS, is that a shift? Are you reallocating into HTM, or is that primarily the new purchases coming in through HTM?

Yes. It is the latter. It is the new purchases coming in.

Okay. And is that more -- you are putting a little more structure in there, and you want sort of the protection in the higher rate environment? Or what is your thoughts in terms of --

It is in part the protection of the higher rate environment.

Okay. And then, finally, could you let us know what the prepayment penalty component of interest income was this quarter?

Prepayments. It was probably -- I will have to come back to you with that, Jared.

Jason O'Donnell, Merion Capital Group.

With respect to the NIM guidance of 2 to 4 basis points of compression, and then your comments about longer-term margin performance, what are you all assuming in terms of deposit costs? Does your guidance assume that deposit costs remain relatively stable or begin to tick higher due to market forces or shift to the duration strategy?

I think it is relatively stable, Jason.

Okay. That is helpful. And then just thinking about the funding strategy, how should we think about the size of the securities portfolio going forward, excluding the impact of the HSA's acquisition? Do you expect the securities book to remain flat or continue to maybe come down a little bit as it did this quarter?

It should remain relatively flat.

Okay. And then, my last question is on the -- just kind of thinking about your lending activities outside of the New England market, what is the size of the loan portfolio at this point that is situated in the greater New York City market? And can you talk a little bit about the dynamic there and whether or not you are seeing any additional growth in the multifamily space this quarter, given what is happening with rates?

Sure, Jason. A couple of things. When we think of the New York market, we capture Westchester in those analytics and, of course, it has a preponderance of asset-based lending in it, and there is also a nice CRE penetration.

So, if you think about our total book, it is at $6 billion and change book, and it is $1 billion-plus that sits in the New York -- that New York-Westchester County market. And it is an area that has been -- actually, all of our regions are growing. Probably the only one that is flattish over the last year has been the Providence, Rhode Island area. But, it is a nice grower for us. Not surprising. And it is a nice mix of assets -- CRE middle-market asset-based, even some equipment finance in that area.

And then, the second part -- I missed the second part of your question.

I was asking about multifamily lending, in particular, just if you talk a little bit about what you are seeing in the market, given the shift in rates and so on.

Yes. I mean, New York multifamily, we are not participating in. We can't get yields and spreads and return on capital that we want. But, we are broadly doing -- we are broadly doing multifamily at -- it still represents a favored asset class for us. So think of it in our CRE book at about 26%, 27% of the total book. We like it. I mean, our story on -- and Bill Wrang talks about -- our Head of Commercial Real Estate -- talks about that a lot. We still like the multifamily. You think about the Northeast, and you think about -- really, it is very difficult to get those into portfolios. There is just not a lot of geography to get to play with.

And so we continue to believe in it. We like construction. We like it when it is stabilized, and we will continue to do more. We do have to get a return on capital. I mean, that is really the basis that we see. And probably the other thing that is most important for everybody, we are always going to work with those sponsors that have track records in these respective spaces.

So I hope that answers your question on the multifamily side. It is something we like. We will continue to do in measured fashion.

Collin Gilbert, KBW.

Just three quick questions. One, Glenn, for you, on the brokered CDs and the retail CDs that you put on this quarter, you said for 200 bps, I think, if I heard you correctly, what was the duration on those?

They are five year.

Okay. And then, second question, on the pipelines, within your buckets, the linked quarter growth was really strong in your pipeline. Is that mostly typical, just what you see is going from Q2 to Q3, or are you seeing acceleration trends in general there?

Collin, Joe. I will speak -- I could speak with respect to the private bank and the commercial pipelines. You're absolutely right. It is a seasonal pop. I looked at -- I am getting prepared for this. I looked at it the last three years, and it is -- that pipeline feels about right. I want to say it is [370-ish]. That is perfect for getting us in. And probably the really good story is on the private bank side where, after the things that Jim had articulated earlier, once we stabilize the book, we are now seeing a nice pop in that pipeline. So I would say that is a good one. That is a good story there.

Okay. That's helpful. And then, just finally, Glenn, in your comments when you were talking about capital and stress testing and you had mentioned that you are in a position now where you have flexibility to pursue acquisitions, can you guys talk about that and also maybe put that in context of your ability to, as you said, consistently grow through this NIM pressure? Could we -- how do you think about acquisitions over the trajectory if we stay in this flat curve environment?

Yes. I will respond that, what we are focused on -- I know I sound like a broken record on this -- is continually improving our performance, growing revenue, having positive operating leverage, with the idea that, as the world gets tougher, people may decide that they want to take a partner. And we want to be in the best possible position when a seller chooses a buyer to be in that considered set and to be the like-minded partner that they would think about.

But, as far as how we are looking at it as a prong of the business that we need in order to generate growth, that is not how we see it at all. So we are going to continue to focus on improving ourselves, bifurcating our valuation based on the quality of our performance so our currency will have more value if the opportunity were to arise.

Okay. So no real change, then, in your position on this?

No.

Matthew Kelley, Sterne, Agee.

Joe, I was wondering if you can give us -- what was the yield on the $195 million of commercial real estate originations in the quarter? Just CRE originations, specifically.

The yield on the originations -- you know what, Matthew, I am going to have to look for that.

We have the funded yield.

3.20%. Sorry about that.

3.20%. Got you. And then, what was the origination yield on the ABL -- the $122 million there?

People with faster eyes than me are scanning quickly. And yields on the ABL were 3.75%.

And, Joe, when you drive around the metro Boston market, obviously, a lot of development. Some higher end type stuff. How would you characterize the risk rating for the Boston market today versus a year ago? And any thoughts on that -- the supply side of the market (multiple speakers) residential?

You are making a good point. We look at a couple of things. I made the comment earlier we like multifamily. We do worry when multifamily goes too high-end, when price per square foot goes up. And so when you get into some of these major markets, we are going to look askance at transactions where we don't think there is going to be wide acceptance with respect to the product.

The other area that we are a little bit concerned at -- about -- and I think you're probably getting to this -- is we are a little bit worried about proceeds as these assets flip and trade and everybody thinks they can add more value to that product. That puts pressure on a bank to augment the proceeds. So we are always careful about the DSCRs and the LTVs when we are entering into these transactions, and we try to be realistic about how we run our discounting cash flows on these.

So very, very careful in hot markets like that. You heard me make the comment earlier with respect to New York City. We are really worried about the multifamily market down there, and we are just not seeing a lot of activity that would meet our risk return criteria. I hope -- is that what you are getting at?

Yes. Absolutely. And a question for Glenn. In the guidance on fee income of up 2% to 3% core, can you just go through again what your thoughts are on mortgage banking? I mean, obviously, rate is down a lot. I think the expectation was that would improve, but talk us through the sequential change from $500,000 to $1.8 million, what drove that and then what you expect in Q4?

So $500,000 to $1.8 million, about $300,000 of which was low com from the prior quarter. So that was, as we settled, we got to realize the value of those assets. And then, it was a 50% increase in settlement volume quarter over quarter. So settlement volume went from a number of, in the second quarter, $56 million to, say, $83 million.

What we see right now going into the fourth quarter's settlement is volume dropping 20%. So that is pretty much driving the reduction quarter over quarter.

Of course, the other thing is the rate. So we have seen that about 1.43% to 1.54%, and we think that is about flat or staying about flat. So those are the key drivers there.

Got you. And then, just a question on the HSA deal. Can you remind us again core deposit intangibles and just the amortization we should be adding there?

Well, we can't remind you. We haven't publicized that or talked about that yet. We are still -- you will get more information after (multiple speakers).

Yes. So that information was not disclosed. We did indicate we have about 3% tangible book value dilution and that we have earnings accretion beginning in year one. (multiple speakers) thereafter.

(multiple speakers). After close, we will be able to share all that information.

Casey Haire, Jefferies.

Wanted to follow up on the asset sensitivity profile. Obviously, the HSA deal will improve that. I'm just curious, why wouldn't -- I mean, as of 6/30, you guys were kind of, I would say, at the lower end in terms of a parallel shift, 200 bps, and this may put you a little bit closer to the middle of the pack. I am just curious, what is holding you back, given this HSA concentration certainly is a leg up versus peers? And on the asset side, 67% loans floating, it seems like you guys are better positioned than most, yet still showing pretty conservative. I'm just curious, what is holding you back? Is it the securities book concentration or just conservative assumptions elsewhere?

I think it, in part, is the securities book, but it is driven by rates at the end of the day and the rate environment. We have, as you know, a parallel shift 200 bps. I think our asset sensitivity is almost 4%. So we have improved it over the last five quarters, and I can lay that out for you, but we definitely have taken steps that have made us more asset sensitive over the last couple of quarters.

That is 4% on NII or 4% PPNR?

PPNR.

Okay. Got you.

I think that has improved. I mean, if you go back four quarters ago, five quarters, it was actually negative, and so we were more liability sensitive or neutral at that point. So we have definitely taken steps to become more asset sensitive.

Okay. Understood. And, apologies if I missed this. Do we have a close date for the HSA deal?

No. We indicated, we do not have close. It is subject to regulatory approval. So however long that takes -- I'd made the comment that you might -- I don't want to assume anything, but let's think in terms of maybe Q1, but we are not going to predict that.

Matt Schultheis, Boenning & Scattergood Inc.

Just a quick follow-up on the HSA expenditures for conversions and what have you. How much of those expenditures are likely to be capitalized, and how much of those are to be realized as the cash flows out?

Yes. So I think that in our core platform, meaning our existing businesses, we have moved to a new platform -- expanded platform. There is probably, as Jim highlighted, $2 million, and I know probably about $1 million of what you saw in this quarter, again, for our core business, was project management, consulting help, and the conversion of the platform, as well as higher service charges as we move to the platform. We sort of run two platforms at once.

And so I think that, going forward, the bulk of that, the consulting will obviously fall away, say, 40%, 50% of that number, and the remaining will go -- will become part of our run rate.

Okay. So it is not going to just to be --

We are not buying. We are developing a software platform. We are buying a platform.

We have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Smith for any additional concluding comments.

Thank you, everybody, for being with us today. Thank you, Jesse. Good day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.