Webster Financial Corp (WBS) 2015 Q3 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's third-quarter 2015 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 2015.

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

Please go ahead, Sir.

Thank you, Rob.

And good morning, everyone.

Thanks for joining us for Webster's third-quarter earnings call.

CFO Glenn MacInnes and I will review business and financial results, and then take questions along with President Joe Savage.

Beginning on slide 2, I'm pleased to mention that Webster celebrated its 80th anniversary of values-guided performance this past Friday.

Commemorative ceremonies across our footprint served to remind customers and noncustomers alike of our local roots, our core values, and our competitive differentiation as a strong, growing, caring regional bank.

Turning to slide 3, Webster produced solid third-quarter results, with net income exceeding $51 million.

Given the effect of the nonrecurring Q2 tax benefit, I'll note that pretax income was a record, rising 3% year-over-year and 4.5% linked quarter.

Our results showcase our sustained progress in executing our well-publicized growth strategies.

I call this the Webster trifecta -- consistent revenue growth, enabling us to invest meaningfully in people, markets, and technology, while keeping the efficiency ratio at or below 60%.

A common denominator across all of our business remains strong loan growth.

Robust loan originations of $1.3 billion drove higher net interest income that overcame slight net interest margin compression, and helped produce year-over-year core revenue growth of 10% -- the 24th consecutive increase.

Over those six years, quarter-over-quarter revenue growth has averaged 4.5%.

Linked quarter loan growth of $440 million drove the quarterly loan loss provision to $13 million, representing a $5 million build in the allowance for loan losses after net charge-offs of just under $8 million.

The slightly higher linked quarter provision held our reserve to loans flat at 1.14%, and comfortably within our current desired range.

All my further comments will be based on core operating earnings.

Turning to slide 4, you can see recent quarterly trends for loans and deposits.

Loan growth of $1.7 billion over the last year has been more than fully funded by an increase of $2.3 billion in transactional and health savings account deposits.

This is a strikingly positive loan funding relationship, which underscores our balance sheet strength and strong liquidity position.

The loan to deposit ratio of 87% is actually slightly lower than a year ago, despite nearly 13% loan growth.

And the borrowing to assets ratio has declined to 16%.

The true value of our low-cost funding advantage will be more fully realized when the long-awaited rise in interest rates finally gets underway.

On slide 5, that strong loan growth contributed to another quarterly record for net interest income.

All key loan segments again posted year-over-year and linked quarter growth, with all but consumer in double digits.

Turning to slide 6, in addition to record net interest income, noninterest income also set a record, rising 21% year-over-year, aided by an increase of over 50% in loan fee revenue, and reflecting in particular HSA Bank's strong fee income stream.

Noninterest expense growth also reflects the effects of the HSA acquisition, with HSA Bank accounting for $10 million of the $15 million year-over-year increase.

HSA Bank makes significant contributions to the four metrics that you see here, having more than doubled its impact in all cases, including accounting for 16% of Q3 pre-provision net revenue or PPNR.

For Webster overall, for the 10th straight quarter, we reported an efficiency ratio of 60 or better, which, in turn, produced a 7% increase in PPNR to a record $90 million.

Slide 7 shows the longer-term value of sustained revenue growth and expense discipline that have resulted in consistent PPNR growth in recent years, including year-to-date growth of 8%.

Slide 8 breaks down that year-to-date PPNR performance compared to a year ago by line of business.

Commercial banking continues with double-digit PPNR growth, while HSA Bank's near doubling of PPNR emanates from strong organic growth and from its sizable January acquisition.

Community banking PPNR is lower than prior-year, due to the revenue-damping effect of the persistent low interest rate environment.

Private banking is poised to achieve stronger performance as the model shift is complete, and the loan and AUM pipelines are filling up.

During our presentation at the Barclays Conference last month, I spelled out a number of revenue generation and efficiency investments that we've been making or planning, such as our commercial cash management system upgrade, an upgrade to our private banking platform, a major investment in compliance systems and in cyber security tools, and our investment in salesforce.com as our CRM system that will meaningfully enhance sales productivity.

Overall, we expect to increase CapEx by 40% annually over the three-year planning horizon, with over 60% going to IT and digital investment.

That's the value of the Webster trifecta I described earlier -- the ability to absorb current-period expense as we invest forward in strategies that create value for customers and maximize economic profits over time.

Line of business performance begins with slide 9. The slides speak for themselves, especially with regard to balance sheet and production metrics, so I'll be brief.

Commercial banking continues to perform extremely well, growing loans, revenue, and economic profits while executing on its strategic initiatives of geographic expansion, leveraging industry expertise through specialization, relationship focus, and local model feel.

Solid loan growth is reported in each business unit, with originations up across all geographies, as our bankers continue to win over well-established commercial businesses and excel in service to all customers.

Our commercial bankers generated a 24% increase in noninterest income year-over-year, as we continually drive revenue through cross-selling and deepening existing relationships, and through our agent team activities.

Moving to community banking, slide 10 shows that business banking achieved record originations, due to strong market activity across the footprint in C&I lending and investment CRE.

Additionally, our straight-through processing initiative to reduce our loan processing time is generating fast return times, higher volumes, and significantly lower withdrawal rates.

We plan to leverage the straight-through processing program across all consumer and business loan processing activities beginning next year.

Strategic focus on high-value relationships continues to drive year-over-year and linked quarter growth in total deposits and fee income, with average checking balances up 11% year-over-year.

Looking at the personal banking unit on slide 11, and referring also to the mortgage origination trends on slide 12, stronger consumer lending overall, and in particular, strong first mortgage loan originations, drove portfolio growth higher linked quarter and by 10% year-over-year.

Residential mortgage originations were $400 million, about 70% of which were for portfolio.

90% of mortgages for portfolio were jumbo loans, as our jumbo mortgage strategy positions mortgages as a lead product for building high-value relationships.

Overall, personal banking deposits were flat year-over-year, and seasonally lower linked quarter.

65% of net new transaction accounts opened in the quarter were high-value premier checking accounts.

Average balances per account rose 6% year-over-year, another sign that our mass affluent strategy is working.

Our response to changing customer preferences is also working, as active mobile users increased 12% year-over-year, and mobile deposits rose 32%, while transactions at banking centers declined 7%.

We continue to realign our network accordingly, and consolidated two banking centers in the quarter.

Investment assets under administration in our Webster Investment Services Brokerage unit grew less than 1% year-over-year to $2.7 billion.

Market volatility impacted new production, driving total revenues down by approximately 14% linked quarter and year-over-year.

Recurring revenues now account for a strong 41% of brokerage revenue compared to 35% a year ago.

Slide 13 presents the results of HSA Bank, which continues to generate strong growth both organically and from its January acquisition.

HSA Bank recorded its best third-quarter ever, as account openings more than tripled from a year ago to 130,000 new accounts.

This growth more than offset customary attrition and the expected rolloff of 49,000 accounts from a custodian-only arrangement in the legacy portfolio in August.

In terms of that custodial arrangement rolloff, many of you may recall that we added about $180 million and 25,000 accounts -- mostly brokerage -- from HSA administrators in the third quarter of 2012.

HSA A is what is referred to as a third-party administrator relationship where we provide custody only.

They manage the investments, and HSA Bank manage the deposits.

Given the custody-only nature of the business, HSA A had the right to move the business.

HSA A was recently acquired by a trust entity able to take on the custodial work and opted to shift from HSA Bank.

For those of you who follow Devenir's HSA industry rankings, HSA A's total assets have always been shown separately from HSA Bank, so there's no change to HSA Bank's assets in the Devenir rankings.

Net-net, the HSA A rolloff represents $48 million in deposits and 49,000 accounts, and $385 million in investment assets.

Being a relatively low margin business for us, given the custody-only aspect of the relationship, the HSA A rolloff represents an annual revenue impact of about $1.5 million.

Even with the HSA A rolloff, the 130,000 new accounts added in the third quarter resulted in a net gain of 21,000 accounts compared to June 30.

Likewise, deposits grew $26 million from June 30, apart from the HSA rolloff.

As referenced, the third quarter of each year tends to be seasonally slow.

To wit, legacy HSA Bank's Q3 linked quarter growth the last two years was also less than 1%.

Excluding the HSA A transfer -- and this is not on the slide -- legacy accounts grew 40% year-over-year, and legacy deposits grew 28%.

Strong growth reflects the importance of our multiproduct strategy, our extensive integrations with major health plans, and our success in competing in the large employer channel.

For example, in July, we onboarded our second-largest employer to date, representing approximately 45,000 accounts, following our largest onboarding ever of 60,000 accounts in June.

Overall, we remain in line with our 2015 organic account growth projection of about 25%.

As we noted during Investor Day, the market for consumer-directed healthcare is expected to grow at a 20% compounded annual growth rate for several years, which represents significant upside to this business.

Integrations with our new health partners and customers were completed in the third quarter, and the conversion of the JPMorgan Chase accounts to the HSA Bank platform has begun.

When completed, the resulting scale and anticipated future growth, coupled with declining transaction and integration costs, will push unit costs lower and increase net revenue per account.

Slide 14 summarizes results for Webster Private Bank, which is making progress implementing its strategic plan.

Loan growth continues to be strong, split between commercial loans and jumbo mortgage loans.

The linked quarter decline in Assets Under Management was due entirely to market conditions, which masked the 1% increase in net new assets.

We are encouraged by our success in adding assets in the midst of market volatility and by the significant increase in our AUM pipeline.

I'll now turn it over to Glenn for his financial comments.

Thanks, Jim.

Good morning, everyone.

I will begin on slide 15, which summarizes our core earnings drivers.

Average interest earning assets grew $521 million compared to the second quarter.

Over 95% of the growth was attributable to our loan portfolio, with growth across all asset classes.

Net interest margin at 304 basis points decreased just 1 basis point.

The decline was within our anticipated range and eased from declines seen in the first half of the year.

Our 2.4% linked quarter growth in earning assets, partially offset by the slight NIM decline, still resulted in a quarterly record net interest income of $168 million.

Core noninterest income increased by $2.1 million or 4% on a linked quarter basis to establish a new high of $61.5 million.

While core expenses were up $2.9 million, we once again demonstrated our ability to invest in our businesses while maintaining a 60% or lower efficiency ratio.

Taken together, core pre-provision net revenue totaled a record $89.6 million, up 4% linked quarter and 7% from prior-year.

Asset quality remained stable during the quarter and our loan loss provision of $13 million is reflective of quarter-over-quarter loan growth.

Pretax GAAP reported income totaled a record $76.6 million, up 5% linked quarter and 3% over prior-year.

And reported net income of $51.5 million includes an effective tax rate of 32.7%, while prior-quarter had a rate of 28.2%, which included a $3.7 million net tax benefit.

Slide 16 highlights the drivers of net interest margin versus prior-quarter.

Starting at the top, the securities portfolio was essentially flat quarter-over-quarter.

Cash flows totaled $279 million with a yield of 308 basis points, which included $14 million of called municipal bonds at 664 basis points.

Purchases totaled $361 million in the quarter at a yield of 279 basis points.

Investment portfolio interest income decreased by $300,000, due to a 5 basis point decline in yield as a result of portfolio churn.

This was more than offset by a $500,000 increase in our FHLB stock dividend shown here under Money Market and Other.

We expect the new dividend yield of LIBOR plus 300 basis points to continue.

Prepayment speeds decreased modestly from 15.8% to 15.1%, and we saw a modest increase in net premium amortization expense of $200,000 to $14.3 million.

Further down, you see our average loan balances grew $501 million or 3.4%, and the portfolio yield decreased 3 basis points.

Growth was split across the consumer and commercial business.

Combined interest income generated by our loan portfolio increased $4.9 million.

Two-thirds of our $15 billion in loans are floating rate or repriced periodically, including 85% of our C&I and commercial real estate loans, and virtually all of our home equity lines.

As previously highlighted, average interest earning assets grew $521 million or 2%.

Average deposits increased $354 million from seasonal growth in public deposits and an increase of $119 million in our HSA balances.

The rate on deposits was 26 basis points compared to 27 basis points in Q2, primarily as a result of lower CD expense.

For the quarter, combined transactional and HSA deposits now represent over 53% of total deposits compared to 46% a year ago.

Average borrowings increased $165 million in support of strong loan growth.

The average cost decreased 1 basis point to 137 basis points as the additional funding was in short-term FHLB borrowings at 26 basis points.

And one extra day in the quarter added about $800,000 in net interest income, but had no effect on NIM.

To summarize, continued strong loan growth and slight NIM compression combined to result in a $4.5 million increase in net interest income to $168 million and a net interest margin of 304 basis points.

On slide 17, we provide additional detail on core noninterest income, which increased $2.2 million or 4%.

Mortgage banking revenue, the top box, decreased by $1.1 million on settlement volume of $142 million, and a spread of 101 basis points, which compares to volume of $128 million, and a spread of 196 basis points in Q2.

Loan fees, highlighted in light blue, increased $2.6 million, as we benefited from strong commercial transaction activity in the quarter.

Other income increased $886,000, primarily driven by higher cash management and credit card and swap income, in addition to a gain on direct investments.

Wealth and investment services, highlighted in gray, decreased by $1 million.

As Jim highlighted, market volatility had an adverse impact on new production.

And deposit service fees saw an increase of $544,000, reflecting seasonal activity in community banking.

Slide 18 highlights our core noninterest expense, which was up $2.8 million from Q2.

HSA Bank represented $1.1 million of the increase.

The majority of the remaining increase reflects a credit in Q2 for the recovery of a previously reported deposit insurance expense.

Slide 19 highlights our efficiency ratio.

Despite the prolonged challenging environment, we continue to invest in our businesses to ensure future revenue growth.

Even so, we continue to operate at an efficiency ratio at or below 60%, which we have now achieved for 10 consecutive quarters.

We have modified slide 20 to show less extreme interest rate shock scenarios than we have in the past.

You can now see our PPNR sensitivity for 100 basis point increase in short-term interest rates combined with a 50 basis point increase in long-term interest rates.

Note the modest increase in our asset sensitivity since last year, but a significant change from 2013.

Given recent economic and monetary policy developments, we believe any increase in short-term interest rates in 2016 will be modest.

Consequently, we are targeting a neutral to slightly asset sensitivity interest rate risk profile.

We do, of course, retain the flexibility to make adjustments should conditions change.

Turning now to slide 21, which highlights our asset quality metrics.

Nonperforming loans, in the upper left, decreased to $159 million and were 1.04% of total loans.

You will note in the MPL reconciliation in the bottom right box only $19.3 million in new nonaccruals.

This compares to the average of about $35 million for the four prior quarters.

The $8.9 million decrease in NPLs this quarter was led by reductions of about $3 million in both commercial nonmortgage and commercial real estate loans, as well as reductions of about $1 million in both residential mortgages and consumer loans.

Past due loans, in the upper right, represent 27 basis points of total loans.

The increase of $8.9 million is primarily due to residential and small business loans.

Past due loans have nonetheless declined 10% compared to a year ago, when they represented 34 basis points of total loans.

Commercial classified loans, in the bottom left, decreased by $5 million, and have been in the low 3% range over the past year.

Our annualized net charge-off rate was 21 basis points on $7.9 million of net charge-offs in the quarter.

This represents the seventh consecutive quarter at or below 25 basis points.

Looking forward, we expect continued strong asset quality metrics with some customary variation in commercial loan portfolio, given the nature of the business.

Slide 22 highlights our capital position.

Ratios remain in excess of Basel III well-capitalized levels.

The tangible common equity ratio decreased 3 basis points from June 30 and is around our current target of 725% -- 7.25%.

The common equity Tier 1 ratio decreased by 13 basis points to 10.81%.

It was in our target range of 10%.

We continue to evaluate our capital levels and may establish lower targeted ranges in the near future.

Before turning it back over to Jim, I will provide a few comments on our current expectations for the fourth-quarter relative to Q3.

Overall, average interest-earning assets will grow approximately 1% to 2%, and we expect average loan growth to be up approximately 2% to 3%, with growth in all portfolios.

We expect less pressure on net interest margin in Q4.

Assuming the level of the 10-year swap and its spread to mortgage rates remains in today's range, we expect NIM to be within a basis point, plus or minus, of Q3.

That being said, we expect an increase of $3 million to $4 million in net interest income.

Our credit indicators remain stable, and we expect the Q4 provision to be in the range of third-quarter's level.

Regarding noninterest income, we expect to be about the same as Q3, which included strong commercial activity and could be $1 million or so lower, depending on commercial activity.

As Jim highlighted, we continue to invest in the business and anticipate reported expenses will increase quarter-over-quarter.

That being said, we will continue to demonstrate a disciplined approach to investing, and expect to operate within core expenses at a targeted efficiency ratio at 60% or lower.

Our expected effective tax rate on a non-FTE basis should be around 33%.

And we expect our average diluted share count to be in the range of 92 million shares.

So, with that I'll turn things back over to Jim.

Glenn, thank you.

On slide 23, I think the first bullet sums it up pretty well.

We are having success investing capital and resources and strategies that maximize value to customers and shareholders.

And we're making progress toward our high-performance goals.

We're looking forward to being with many of you in Milwaukee in mid-November for HSA Bank Investor Day and Teach-in.

The event begins with dinner on November 18, with guest speaker Eric Remjeske of Devenir, who will speak about health savings account industry broadly.

The next morning, Chad Wilkins and the HSA Bank team will provide a business review and facility tour of our Schlitz Park offices, which provide ample expansion capacity to accommodate HSA Bank's rapid growth.

Please contact Terry Mangan, for those of you who have not already indicated that you are attending.

Let's open it up for comments and questions.

(Operator Instructions) Bob Ramsey, FBR.

This is Martin Terskin for Bob Ramsey.

You mentioned your jumbo strategy, and I was just wondering -- could you give some color about the kind of the decrease in mortgage bank activity?

And just what you're seeing in the jumbo market right now?

So, you see, generally, our jumbo strategy is part of our mass affluent strategy in the Community Bank, where I indicated that 90% of the loans originated for portfolio in the quarter were jumbo loans, which is a trend that we have been seeing.

And we use the jumbos as the lead product to help us to develop high-value relationships.

We've had a lot of success with that, both directly in the market through our bankers and through some correspondent business that we do as well.

We also use the jumbos as a lead product in the private bank as well.

And we have found the volume there to be fairly robust and we have increased our share of that market.

Is that what you are asking?

Right, got it.

And could you give us some color around the decrease in mortgage banking activity this quarter?

Oh, the decrease in the gain on sale.

So our volumes were up, as I indicated in my comments.

But the rate was down a full 95 basis points quarter-over-quarter.

So, where we had a gain on sale of 101 basis points, prior-quarter was 196 basis points.

So it was all rate-driven.

Our settlement volume was $142 million versus prior-quarter, which was $128 million.

So, settlement volume was good.

And we might see that taper down in the fourth quarter, but it was really rate-driven for the quarter.

Got it.

Thank you.

That's very helpful.

And just switching gears a little bit, you mentioned the onboarding of large accounts within HSA Bank.

Could you give us some color around pipeline for onboarding?

Do you have any other accounts there you are looking at?

Or just some of the other opportunities that you are exploring?

Sure.

So we are anticipating a very robust enrollment season, which you know gets underway late in the fourth quarter and then very much into January.

We expect to see the growth trends continue to be very strong there.

Got it.

And then just last question and I'll hop out.

Could you talk a little bit about expense trajectory and especially how it's going to affect the HSA system integration?

And will it affect -- will the cost basically be down in the next six months?

Yes, I'll take that one.

So I think the two core expenses in HSA -- and keep in mind that we are running basically two systems -- or three systems with the SPARC system, which is our legacy system, we have EV1, which we've converted to.

And then we have the transition services agreement associated with the JPMorgan acquisition.

And as I indicated on previous calls, those costs peak or peaked in the second quarter, I'd say, $5.3 million, and they continue to come down.

As we take out the cost of the TSA, there is a marginal cost associated with bringing on that volume.

So a more stable rate, as we go into, say, the third and fourth quarter of next year, if you think a total cost of $5.3 million, is probably about $2.5 million.

So, the expenses come down as the TSA winds down, but there's some marginal cost associated with it.

Got it.

Thank you very much.

Dave Rochester, Deutsche Bank.

So you mentioned possibly lowering your targeted capital ratios.

Can you just give us some more color on your thoughts around that?

And is there anything you need to see in the market or from regulators to convince you to change that?

Not from regulators.

I mean, we are well above the regulatory guidelines.

This is an internal discussion we are having that we are having with the Board as well.

And so, where we are going with this, Dave, is probably to set up ranges as opposed to targets.

So we'll operate within a range.

And that's an ongoing discussion that we'll have with the Board during the fourth quarter.

So you know -- I'll just add to that that we've been talking about this for some time as you know, and post our stress test submissions and all, and given the results of those, that we feel we have room to look at our capital targets.

Yes.

Absolutely, makes sense.

And I appreciated the color on the JPM expenses that are coming out.

I was just wondering how much more cost savings do you think you can pull out of that occupancy line as you continue to streamline the footprint there?

As we said in the past, we are always rationalizing our distribution channels, but we're also investing in the mobile and online banking platform as well.

So, we don't give out specific guidance on that.

There's probably more opportunity as we do consolidations or shrink our footprint on physical size.

But that's just -- that's an ongoing effort here.

Jim, I don't know if you want to add to that?

I'll just say that -- so, you should look at where we have savings on occupancy expense that, to Glenn's point, we reinvest in other technology consistent with the changing customer preferences, and also look at the overall franchise and make sure that we've got the best locations across our broader franchise.

So, we may reinvest in some de novo locations possibly, but we will continue to optimize the franchise.

And then back on your comments on the CapEx, I know you've spoken about that before.

Do you think it's likely that the efficiency ratio remains at the higher end of your longer-term range of 55% to 60% over the next year or two, just as you continue to invest in the franchise?

Well, I think we put the range out there with the idea that we could operate in the range.

And that as opportunity presents itself, you know, we want to be able to continue investing.

Because one of the strengths is that we are able to invest in our future even while we are keeping that efficiency ratio at 60% or better.

And so there is a connectivity between the revenue growth expense control and the ability to reinvest, which is what I was trying to emphasize in my remarks.

So I don't want to predict.

I want to say we'll be in the range, but that we value highly our ability to invest in the future.

And there's lots of investments that need to be made to ensure we can continue the trajectory of revenue growth and the quest for economic profits.

Great.

And then just one last one on the HSA business.

Since it's been a little while since the announcement of the Anthem-CIGNA deal, what are your thoughts on how your relationship with both companies could evolve over time?

If you could give any color there, that would be great.

I'll just say we have excellent relationships with both companies.

We are excited about the changes that are taking care in healthcare -- taking place in healthcare.

And we think that we are in an excellent position to benefit from that consolidation as well as from the excellent relationships that we have with both CIGNA and Anthem.

Great.

All right, thanks, guys.

Thank you.

Thank you.

Mark Fitzgibbon, Sandler O'Neill.

Guys, on the HSA business, even if you exclude that HSA A loss of -- I think you said $48 million of deposits, it looks like deposit growth was pretty negligible.

I think you had attributed some of that to seasonality in the third quarter.

I guess I was curious what drives the seasonality in the third quarter in that business?

Sure.

So, you are exactly right.

It is seasonal.

And as I noted, we've had less than 1% growth, not just in this year but last year and the year before.

And what happens is that enrollment season is in late Q4 and then very much so in Q1.

And so you have a lot of activity then and a lot of deposit growth.

And then as you go through the year, people are continually adding to their accounts, but they are also incurring expenses as they go.

And so that kind of levels out in Q3.

It is pretty close to a match between the net investment -- net deposits and the net expenses involved.

And then toward the end of Q4, you start to have the enrollment activity, so you are likely to have a little bit more growth, and then it explodes again in Q1.

So there is a highly seasonal nature of this business.

And our results, as reported for Q3, conform to that.

And given the growth that you had in the third quarter and in the second quarter, it strikes me it's going to be hard to get to that 25% organic growth rate in that business.

What am I missing?

Well, if you look at our legacy side, I think we are saying that we are growing at 25%, ex-the HSA A, of course.

And we think we have the potential to continue to do that.

We also -- I would say that the JPM acquired platform has performed at least at expectations.

So, I don't know if we are projecting 25% at this point, but I think we are looking at more than 20%.

And Mark, keep in mind the enrollment period starts in the fourth quarter.

And so you'd typically see the pop in the first and second quarter.

Okay.

And then as it relates to the commercial loan pipeline, it looked like it was up a lot from the second quarter.

What's driving that?

Is there any particular industry or geography?

Yes, hey, Mark, this is Joe.

I think we are seeing nice growth across the platform.

And as you know and you remember from Investor Day, we've got a lot of arrows in our quiver in terms of markets that we can do business in.

So I think that's a big help.

But if I were to make a prediction at this juncture with respect to where our loan growth would be, it's going to be in the middle-market, and more specifically, it's going to be in our segment specialty businesses.

We are continuing to see nice opportunities in that marketplace.

So, the team is bullish, and our segment specialty guys and gals are particularly bullish.

Thank you.

Jared Shaw, Wells Fargo.

Just sort of following up on the commercial question.

Joe, how is the -- can you give us an update on how the newer markets of like Philly and DC are doing?

And --

Yes.

No, that's a good question and thank you for asking that.

I guess I'll start with the Philly market.

And, as you know, we've been down there for some extended period of time on the commercial real estate and the asset-based lending side.

And probably a little -- over a year ago, we hired a gentlemen that John and I knew for, gee -- I don't want to date John, but probably 30 years -- a real veteran of that market, a real P&C-strong individual.

And what John said -- I'm going to say this again about John.

John said on Investor Day that we like that market, we're going to have success in that market, but it's going to be -- as that market breathes and as we take the time, and the credits meet our profile in what we expect.

So all of that distills to, in that market, they've got three transactions at this point, quite modest, about -- I'm going to say about $30 million of outstandings.

Now the interesting thing is, as we were doing a little bit of an examination in anticipation of that question, when we look at the year-to-date data on our middle-market group, Jared, they looked at some 30 transactions, and ultimately closed on -- I said earlier three, but they closed on two deals.

And the reason that they stepped away -- which is exactly what we want -- in most cases, it had to do with not liking the pricing or the structures.

So I want you to feel good that we are going to move with all deliberate speed in that market.

Let me slide over to Washington, and that's under Peter Burke and Bill Wrang.

And Bill keeps a close hand and Peter is very active in the market.

But today we sit at about $50 million in three transactions.

So, again, Peter has had a lot of looks in a market that he knows and we know pretty well.

So, I'd probably tell you -- say more than you want to know, but I think I want to convey to you the message that we can grow at the rate we are going -- we're growing without having to put undue pressure in these new markets, making sure we get the originations with the people and the clients we want to be with.

So, modest, right?

But it's exactly what we want.

And we are very, very excited about the inroads.

I was just down in Philly just the other day.

John -- Bill Wrang was in Philly just the other day.

So, we like what we see.

Are there other markets that you think you can -- now that you've done well in these markets, that you can take it to?

Or are there other specialty industries that you feel comfortable adding --?

Jared, the market that -- interestingly, you know we used to have an ABL presence in Atlanta.

A gentlemen who used to work with us -- and us, we were having conversations -- he was a very strong professional.

And so that was an opportunity we saw to go into a market where we still had some legacy assets, with a very talented individual who had worked for Webster in the past.

So I would say that's probably about where we are now.

And but I'll remind everybody that our credit performance has done very, very well in commercial, exclusive of what particular geography we were in.

Okay, great.

Thanks.

And then shifting gears a little on the HSA side, looking at that $16.5 million of fee income this quarter from HSA, can you give a breakdown on what portion of that was interchange?

Yes, Jared, hi, it's Glenn.

It's been typically running about 50/50.

Half of it is interchange and half of it is service charges.

Okay.

And on the expense side, you were saying that the more stable run rate -- or that you could be seeing $2.5 million cost from the JPMorgan side from the $5.3 million now.

Is that correct?

Yes.

I'm saying once we're fully --

So you could be seeing about a [$3 million] quarter?

Once -- I'm saying -- I said once we are fully converted, which I would look at the second quarter of 2016, right?

We are on target.

So, the $5.3 million, which peaked in Q2, I think the costs in Q3 were about $5.1 million as we started doing the conversions, right?

And then that cost will go down to $2.7 million on a more normalized basis, which is the marginal cost associated with taking out the TSA platform.

Great.

Thank you.

Sure.

Collyn Gilbert, Keefe, Bruyette & Woods.

Would you guys just mind running through -- Jim, the HSA A sale?

And then just sort of frame the timing of that, the motivation of that.

I don't -- you lost me a little bit there.

So, if you could just kind of go through that again.

Sure.

What I was saying was that they decided that we were only providing custodial services for them.

So, primarily, we were managing the deposit accounts and they were responsible for the investments.

They are what we call a third-party administrator, so we were providing only custodial services.

And so given that it was a custody-only business, they had the right to be able to move the business.

We only have a couple of other relationships like that that are not material to our performance.

And they were recently acquired by a trust entity that could take on the custodial work, so they opted to shift out.

That's what happened.

And actually, the nature of that business was such that Devenir -- which I'm sure you are familiar with -- actually tracked them separately from us.

So the fact that they moved didn't affect our standing in the Devenir rankings.

Okay.

And this -- the timing of this was when?

When did this happen?

This happened in August.

August.

Okay, okay.

Okay.

And then just also on the HSA front, just to sort of understand that the timing of -- so you onboard these new accounts in June and July.

When -- how does the dynamic of, like, the deposit balances, when do we start to see that?

Was that the related increase in deposits as seen this quarter?

Or is there a lag affect there?

Just trying to reconcile kind of outflows versus inflows when you onboard new large accounts.

So, Collyn, I don't have it in front of me, but if you look at the Investor Day presentation we did, we provided four trends.

And you can get a sense for how the balance is billed over a time period.

I can get that to you.

But it gives you a real good sense of how the balances continue to build over four years.

I don't have that in front of me, unfortunately.

Right.

And what will happen is, that over the period of the first year, you'll have average balances that come into [1,000] or so, maybe a little more, then they gradually increase with the seasoning over time.

Okay.

Okay.

Okay, that's helpful.

And then just on the deposit side, in terms of your -- you know, Glenn, how quickly do you think you can get those CD costs down?

And I guess the question is kind of what are your new CD rates?

And -- because it seems like there's opportunity to move that a lot lower.

But just if you could talk a little bit about that

No, I think we are flattened out on CDs right now from a cost standpoint.

The average cost -- I think our average cost is about -- coming on about 40 basis points.

And what's coming off is that 35.

So there's not a lot -- that much room there.

Okay.

I guess with the 1% --

It depends obviously on tenure and everything like that, but that's about where we are right now.

On the CDs, you are talking about?

Yes.

On CDs.

Okay.

Okay.

Okay, that's helpful.

And then just quickly back to the mortgage, so the stuff that you retained, it sounds like it was jumbo product.

Can you just -- is that 15-year, 30-year fixed?

And kind of what the rate is that you are seeing on some of the stuff that you are portfolioing.

I'm sorry, Collyn.

Can you repeat that question?

Yes, just wanted the profile of the residential mortgages that you are portfolioing, the duration and the rate.

30-year at 3.75%.

Okay.

Okay.

And then one last question just on the pricing differential -- maybe this is for Joe -- that you are seeing, or just the competitive landscape differential between the Philly and DC markets, and then versus what you are seeing up in the legacy markets.

Yes.

No, Collyn.

The -- it's interesting.

We're not -- it's never -- the pricing is -- really, it's -- these borrowers know exactly what they are doing.

So do the banks.

So if we are going to price an accrete transaction in the Philly market and one in the Boston market, I can guarantee to you they are awfully close.

The gem for us in terms of what ultimately affects portfolio is, what's the business mix that's -- and that is -- and I think that's going to probably bode well for us in the fourth quarter, because we'll probably mix to higher-yielding assets in Q4.

I don't know if I was allowed to say that, Glenn.

I'm looking over at Glenn to see if I'm allowed to say that.

You're good, you're good.

Okay.

Okay, that's helpful.

And then just -- sorry, one final question on HSA.

Glenn, the million-dollar increase that you saw linked quarter on HSA expenses, what was specifically driving that?

That was primarily the investment expense that came online from EV1 and compensation associated with the conversion.

As you go through this bubble, you need more call center people and things like that.

So --.

Okay.

So when you talk about the reduction of the $5.3 million --?

Yes.

Okay.

Is that truly going to be a net reduction?

Or are you going to see those savings then be reinvested into the business?

If volumes stay where they are, that would be a reduction to our contract service line.

Okay.

So I'm using that as an example for how our marginal costs will be lower than total cost today.

Got it.

Okay.

All right.

That's all I had.

Thanks, guys.

Sure.

Thank you.

Casey Haire, Jefferies.

Glenn, follow-up on the fee guide -- down $1 million.

You did acknowledge that you guys did pretty well on the loan fees, which were up $2.5 million.

I'm just trying to understand what is the driver to get to down $1 million?

Because -- I mean, is it loan fees, resetting -- the reset there is shallow?

Or is it a stronger rebound in some of the line items that only drives that down $1 million?

So, I think that we do think there will be some commercial activity.

It's hard to handicap how much.

And some of it is what I would call episodic, in that you don't know when it's going to recur.

And again, it's hard to handicap.

Maybe Joe, you --?

Yes.

Yes, I think, Casey, Glenn nails it.

Over the course of a period of time, and we've been ramping up our agent lead activities, so that has been -- that's really working beautifully for us.

But as Glenn correctly stated, it is episodic.

Timing matters.

And we've got irons in the fire, but whether or not those things come to fruition, that's -- it can move over a couple of quarters.

So, that's, I think, what Glenn was alluding to.

Okay.

And just to clarify.

The revenue hit from HSA A rolloff -- I think you said it was [$1 million, $1.5 million].

Does that show up in spread income?

Or somewhere in fees?

Or is it a mix?

Well, it would show up mostly in fees, because most of them are investment expenses that go forward.

That's an annualized go forward number.

Okay.

And that will be -- and that, I would assume, is in deposit service fees?

Yes.

We break it out here as HSA, but on the face of the P&L, it's in deposit service fees.

Got you.

Okay.

Just following up on the capital question, potentially lowering target ratios.

Would this lead to any change in capital management?

I know you guys have been escalating dividend and opportunistic buybacks.

Just wondering if this is going to lead to any change in that policy?

No.

We don't anticipate.

I mean, to the extent we establish ranges we'll likely, given our loan growth, grow into that.

So, no -- at this point, no capital changes contemplated.

Okay, great.

And then just last for me on the borrowings, usage was up again a little bit this quarter.

Just curious, are these short-term borrowings that you are utilizing and therefore beneficial to NIM?

And why not use -- why not disuse them, given that your loan to deposit ratio has got plenty of room?

What is it, 87% today?

87%, yes.

So they are primarily short-term FHLB borrowings at somewhere around 26 basis points.

The second part of your question was, why not --?

Why use them at all?

Well, I think we are still funding our business that way.

And we have -- it's funded to loan growth quarter-over-quarter.

Yes.

No, I guess what I'm saying is like you've got plenty of room on the deposits.

Like was it -- loan to deposit 87?

Why not use the deposits to fund the loan growth?

I think we still -- you know, I think there is still some volatility in the deposits from public deposit volatility.

You saw that in the second quarter and then back into the third.

You saw it from the first to the second to the third.

And so that's part of the offset.

And we think the FHLB borrowings at 26 basis points are an effective way to fund the balance sheet.

Okay, understood.

Thank you.

Thank you.

Matthew Kelley, Piper Jaffray.

I was wondering if you could just talk a little bit more about the commercial origination loan yields?

It came in at 3.77%.

Seeing that pick up pretty substantially.

Talk a little bit more about the business mix that you experienced during 3Q that drove that, and what where the specific categories that are coming in at those higher yields?

Yes.

That's a question, Matthew.

And we probably would expect this trend to continue into the fourth quarter, but we have really the two major portfolios that kind of move the needle from an origination perspective or our commercial real estate, and those yields and spreads will come in usually a little bit lower.

You'll get swaps with that business.

And then we do our segment middle-market business.

Those will see yields and spreads that are greater.

And it's really the proportional mix of the two that drives the yields that you see.

So, we are very, very happy with the quarter that we just completed.

It had a greater preponderance of the specific middle-market segment business where we funded several-hundred-million-dollars at very strong yields.

So, there it is.

And again, I just made the comment earlier, the pipeline, which is pretty robust for the Bank, is -- it's still got a lot of segment business in it.

So, my guess is it's going to look strong again.

So it really -- it's just a mix.

And it's fine.

Some quarters, we could see heavy CRE originations.

That's great business, high-quality stuff, but it will push our yields down

I guess I would just add to that, Matt.

If you look at and you toggle back and forth, I think it's page 38 of our deck, and you go back and forth, and you look at the originations versus the portfolio -- so, as Joe highlights, he is originating this quarter at 3.77%, the portfolio is at 3.49%.

Business banking originated at 4.03%, the portfolio is at 4.39%.

Personal bank, 3.82%.

The portfolio is at 3.81%.

And then private bank, 2.98%.

The portfolio is at 3.22% but lower volume.

So that, when you take that and you combine it with the investment portfolio, right, and the purchase is at 2.79% and the portfolio is at 2.97%, and then you factor in what your assumptions are on an amortization, that's how we get to the flattened NIM, right?

And plus or minus 1 basis point.

But it's really driven, as Joe is highlighting, quarter-over-quarter by the mix of originations as well.

Yes.

Understood.

And in the commercial banking segment, are the CRE loans coming on kind of the low 3's -- 3% to 3.30%, 3.40%, and then the C&I, the middle-market stuff is 3.80% to 4% plus?

Is that basically the breakdown?

Yes, well, you are right with respect to the latter.

You are incorrect with respect to the former.

The CRE coupons will come in lower than even what you cited, but I want to remind you that that stuff will have swap economics associated with it.

And it's usually got a risk class that is a full twist better.

It's really a very strong risk class.

Typically based in multifamily DSR -- DSCR ratios at 1.44, LTV's at 60-ish.

So, we love that business when we bring it in.

So I hope that answers your question.

Yes.

There is a -- yes, there's a bifurcation there with respect to yields.

And just to be clear, I mean, you are seeing CRE yields [sub-3%] then is what you're suggesting?

That is correct.

Okay.

But they are generally -- but 85% of them are repricing.

Absolutely.

Those are swap transactions and 85% of those things are repricing.

Okay.

Got you.

So, we love that business.

Just to be clear on the loan fees that you did experience during the quarter that were strong, was that swap income in the quarter or prepayments?

Or some other type of -- what was driving that specifically?

That was an agented transaction.

Okay, got it.

And then on the pace of branch closures, can you just remind us what you closed in 2014, what you've closed year-to-date in 2015, and what the target would be for 2016?

So we understand the pace of branch closures.

And trying to figure out if that's accelerating or holding consistent.

I think we are -- I don't have those numbers in front of me, and we'll have to come back to you on that.

But I will tell you it is not accelerating.

It's decelerating from the early moves that we made where we've probably closed about 20 banking centers over the last four or five years.

We've added a couple as well.

Some of them have been consolidations.

So, to do [two in a quarter] at a pace of eight in a year, that's probably a little high, you know?

We think more about it probably would be around four or five.

And as I said earlier, we made want to be reinvesting into new locations -- the better-located, smaller electronically-outfitted offices at key points in the franchise.

So, net-net, you shouldn't expect more than three or four closures in a year.

I mean some of the things we are doing is reducing our footprint within the building.

So, if you have a 6,000 square foot building and you take 1,500 of it, and you either sell the building or you lease out the rest of it.

So we're doing those things also.

Okay.

Got it.

Right, thank you.

David Darst, Guggenheim Securities.

It's Ryan Strain on for David.

Quick question on the CapEx.

Just wondering -- you mentioned that like 60% of that spending is going to the IT and digital investment.

But I was wondering where the other 40% is going and what impact you would expect to see from that?

So, the other 40% is in infrastructure and regulatory compliance.

Okay.

Got you.

And that's things like BSA, AML, those types of things.

Infrastructure or anything from our integration layer, which we've continually invested in over the last years.

And then things -- you know, obviously, cyber security is vying for a big part of CapEx as well.

Got you.

All right, well, thanks, guys.

Sure.

Thanks, Ryan.

Thank you.

At this time, I will turn the floor back to Mr. Jim Smith for closing comments.

Thank you very much, Rob.

Thank you all for being with us today.

This concludes today's teleconference.

You may now disconnect your lines at this time, and we thank you for your participation.