Webster Financial Corp (WBS) 2016 Q3 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's third-quarter 2016 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 Financial's 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 may differ materially from those projected in those 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 the Webster Financial public filings with the Securities and Exchange Commission, including our Form 8-K containing earnings release our the third quarter of 2016.

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

Thank you, Michelle, and good morning everyone. Thanks for joining Webster's third-quarter earnings call. President John Ciulla, CFO Glenn MacInnes and I will review the quarter and then Executive Vice Chairman Joe Savage and HSA Bank head Chad Wilkins will join us to take questions.

Beginning on slide 2, Q3 was another solid quarter marked by continuing strength in loan originations, 7.5% year-over-year revenue growth and further improvement in our already strong credit metrics. Total revenue grew for the 28th straight quarter year over year. Record net interest income was driven by the 17th straight quarter of year-over-year double-digit commercial loan growth aided by a 2 basis point increase in the net interest margin.

Commercial loans have grown by 14% compounded annually over that span. Record non-interest income advanced on contributions from multiple categories including continued strength in commercial activities. Higher expenses reflect in part our continuing investment in fast-growing, high economic profit businesses which, in turn, helped pushed pre-provision net revenue to a record $90 million.

Putting our momentum into perspective, if we exclude for a moment the near-term drag from the Boston expansion, which produced net expense of $4.9 million or about $0.04 a share in the quarter, we would have achieved record net income, a sub-60% efficiency ratio, a return on average common equity of just under 9% and a return on average tangible common equity of just under 12%, a solid quarter indeed.

I want to reiterate my strategic comments from the Barclays conference last month. We've got a couple of terrific differentiated businesses with strategies that have high economic profit potential, namely HSA Bank and Commercial Banking. And the Boston expansion qualifies as having high EP potential, as well.

We are committed to investing in these businesses when the opportunity is right, meaning now, rather than trying to phase investments over the longer term in order to hit quarterly earnings targets. This will likely create some variability and period expenses but in the intermediate term will drive our efficiency ratio sustainably lower.

HSA Bank, our rapidly growing, highly differentiated health savings account business, which provides stable, long-term, low-cost funding, is a perfect example. Our commitment to aggressively grow this business has led us to increase and accelerate investments in technology, operational excellence, product development and sales in support of HSA Bank's extraordinary potential to deliver shareholder value as we expect that the 20% plus growth rate of recent years will continue over the planning horizon.

More specifically, we've doubled our salesforce in the past two years and will nearly double it again to blanket promising markets across the country. We are building out a new client services team to support the growth of our large carrier and employer partners. In January HSA Bank's dedicated customer care center will move to 24/7 service.

And we are rolling out live online chat through member and employer portals to streamline the customer experience and meet their interaction preferences. We will enhance data analytics, boost our marketing investment and accelerate the product roadmap.

We've also stepped up the pace of the Commercial Banking expansion with accelerated investment in our front-end systems, meaningful upgrades to the treasury and cash management systems and products, more robust and sophisticated operational support and recruitment of additional high-quality bankers. And the Boston expansion is another compelling strategic investment that will pressure the efficiency ratio for a few quarters but will ultimately help drive it sustainably lower.

Now nine months in and progressing well we will be calibrated the initial deposit balance and net interest income projections for two reasons: one because the fierce promotional deposit acquisition activity in the market led us in recent months to choose discretion over valor in pursuit of our deposit goals, and the other because a combination of actual versus planned deposit mix and lower for longer interest rates have resulted in lower spread income than envisioned a year ago. So while we are pleased that deposit accounts are ahead of plan the associated balances of $160 million are running behind.

On the loan side pipelines are growing nicely across multiple commercial and consumer categories as a result of cross business referrals. And while reiterating confidence that Boston will be a top performing market and will deliver over $1 billion in deposit balances and more than $0.5 billion in loans over five years as originally envisioned, our near-term view is that where we originally thought we would reduce Boston's EPS drag by $0.01 a quarter from $0.04 today it will probably be more like $0.005 a quarter from here.

Meanwhile, other than Boston we are diligently optimizing the lower EP Community Banking business and structurally rightsizing the private bank in order that both of these businesses can earn in excess of the cost of capital.

Before I turn it over to John who will go deeper on the quarter's results I want to comment on Webster's sales practices given recent industry developments. As you'd expect, we've conducted a thorough review, evaluating incentive plans and sales practices and related controls and assessing the performance and behaviors they encourage and reward. Our sales programs are intended to encourage our bankers to provide our customers with needs-based financial solutions.

Programs are not focused on product unit goals nor are they quota driven. We focus on verifiable balances and account usage when scaling incentives. We have well-established controls in place to monitor for activities that may potentially be inconsistent with our culture and philosophy and we continually enhance and strengthen these controls.

We've reviewed and tested our controls, including fraud detection tools, and look-back mechanisms which ensure we don't inadvertently incentivize bankers to open shell accounts. Our Office of the President and Voice of the Customer functions provide real-time customer feedback to our business units, to our internal customer protection counsel and directly to me. We conduct anonymous banker engagement surveys to continually assess the strength of our Living Up to You brand promise.

I take our extraordinarily high net promoter scores and real-time customer satisfaction survey responses as signs of our very healthy service sales culture in which our well-trained, values-guided bankers identify and meet our customers' financial needs. While we have identified a few areas where we can improve the programs and further fortify controls, the core conclusions are that our incentive plans are appropriately designed with our culture at the forefront and our customers' best interest in mind.

Our vigilance in monitoring both our clients and our culture keeps us well-informed with regard to banker behavior at the point-of-sale. And the integrity of our plans and our bankers is high. I'm proud of them.

I will now turn it over to John to report further on the quarter.

Thanks, Jim. Good morning everyone. I will begin on slide 3.

You can see the solid quarterly growth trends for loans and deposits over the past year with both increasing more than 9% year over year. As a result the loan to deposit ratio remains favorable at 87%.

Commercial loans again led the way with year-over-year growth of 13% and now comprise over 58% of the loan portfolio. On the deposit side, transactional and HSA accounts grew by 12% and comprise over 55% of total deposits.

On slide 4, loan growth is spread across key segments with each again posting solid year-over-year growth. Each of the four commercial segments achieved double-digit growth compared to a year ago.

On slide 5 you can see the diverse sources of our $1.6 billion in deposit growth over the past year. The three transaction account categories on the top of this slide account for 76% of the growth with each posting double-digit year-over-year increases. This provides a clear illustration of how Webster benefits from our multiple low-cost deposit funding sources.

Slide 6 shows solid growth in net interest income and non-interest income both to record levels, reflecting revenue growth in all lines of business led by double-digit total revenue growth in Commercial Banking. Non-interest expense growth reflects expenses related to the Boston expansion along with growth in investment in Commercial Banking and HSA Bank. The net result is 1% year-over-year growth in pre-provision net revenue, which excluding the Boston initiative would have been 6%.

I will now turn to the line of business performance beginning on slide 7. Commercial Banking continued to deliver strong results, reporting solid loan growth of 3% in the quarter and 14% year over year. Deposits also grew nearly 14% when compared to last year.

Strong loan and deposit growth augmented by a higher level of syndication activity in the quarter drove revenue growth to 12% year over year and PPNR growth to 13% year over year in Commercial Banking. The commercial loan portfolio yield increased 7 basis points linked quarter, reflecting favorable origination activity in the higher-yielding middle-market as well as higher LIBOR rates in the quarter. Despite a net increase in classified asset balances, asset quality in the Commercial Banking is solid as non-performing loans and charge-offs declined compared to last quarter and remain at historically low levels.

Moving to Community Banking, slide 8 reflects another strong quarter in business banking. Deposit and loan balances were up year over year, reflecting strong net new DDA growth, higher average DDA balances per account and record loan originations across all markets and channels. We continue to make progress in our previously mentioned Fast Track loan program for loans under $100,000.

In the quarter more than half of the applications received through Fast Track were decisioned within two days of application. Business banking continues to be an important net funding source for the bank as deposits significantly exceed outstanding loans in the business segment.

Slide 9 highlights steady growth in the year-over-year loan and deposit balances for personal banking. Loan originations rose linked quarter as residential mortgage originations were higher than the level seen in the prior three quarters. A slight decline in overall loan originations compared to a year ago reflects declines in home equity and unsecured lending categories.

Deposit balances experienced a normal seasonal decline while growing year over year. Growth in transaction account balances reflects progress in the mass affluent segment as Premier Checking accounts grew by over 15% year over year and total average checking balances continued to improve.

We saw improving trendlines in personal banking fees in the quarter driven by mortgage banking and investment revenue, the latter growing 7.4% linked quarter. Overall the Community Banking transformation continues to advance with the improving digital experience as reflected in the nearly 15% year-over-year increase in active mobile banking users and an increasing concentration of higher value relationships across consumers and businesses, all supported by Webster's best-in-class Net Promoter Scores in these segments.

Turning to HSA Bank on slide 10, deposits grew 15% year over year and accounts grew 20%. Adjusting the year-ago period for the anticipated attrition related to the JPM-HSA transaction deposits grew over 20% and accounts grew 27% when compared to the prior year.

In HSA we added 500 employers and 113,000 accounts during the quarter, bringing year-to-date new account production to a record 551,000. Year-over-year PPNR growth was 3.4%. However, excluding the clawback and an FTP adjustment PPNR growth would have been 19.5%.

Consistent with our overall growth strategy and Jim's earlier comments, we continued to invest in product operations and sales capabilities in HSA to maintain our momentum in pursuit of regional carriers and large employer relationships. And we expect that investment to continue through the fourth quarter and into 2017. We've deployed a material portion of our new bankers to focus on the large employer and carrier channels where we are beginning to see traction as evidenced by a strong, robust pipeline of new activities.

When compared to 2015 same period, year to date we've seen a 65% increase in the number of RFPs we've responded to, including a spike in the number of large employer requests. Additionally, our pipeline of potential new carrier partnerships is up significantly from this time last year, reflecting the strength of our brand and service reputation. Overall, we remain excited about the future of this fast growing line of business and you can see why we are investing in this unit aggressively.

Slide 11 highlights results for Webster's private bank. Growth in fee generating assets, loans, deposits, new client acquisition and average revenue per new relationship combined to drive an 8% increase in year-over-year revenue. We are onboarding higher-quality relationships, executing on larger deals and delivering to our clients the totality of our wealth platform that includes core banking, lending, asset management, trust and financial planning.

As Jim referenced earlier we continue to position our activities to ensure our private bankers are focused on servicing the wealth needs of Webster customers, namely the owners and executives of our commercial and business banking clients as well as high net worth families and individuals in our community bank. We believe having a tighter alignment with our core franchise will lead to faster growth and greater efficiency in this business line.

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

Thanks, John, and good morning everyone. Slide 12 provides the financial backdrop for the business momentum Jim and John reviewed. Included are the key highlights of the quarter's performance with comparative data for the four prior quarters.

Starting at the top, continued growth in average earning assets combined with an increase in net interest margin led to record net interest income in the quarter. The 2 basis point increase in NIM primarily reflects the benefit of higher LIBOR rates. Non-interest income came in above our original estimate as a result of stronger-than-expected commercial activity.

The expense increase quarter over quarter reflects both continued investments in our business which aligned with the strategic framework and expense related to the performance of Webster stock. Taken together we achieved record pre-provision net revenue of over $90 million.

Further down you see the provision for loan loss increased modestly, primarily as a result of our commercial loan growth. Reported pre-tax income was $76.3 million in the quarter and reported net income of $51.8 million includes an effective tax rate of 32%.

Slide 13 highlights our average balance sheet and drivers of net interest margin. Growth in average interest-earning assets was driven by higher-yielding commercial loans which benefited from higher LIBOR rates. This was partially offset by a decline in our securities portfolio.

As a result, the yield on interest-earning assets increased 1 basis point. Average deposits increased $526 million, led by an increase of $283 million in demand deposits which fully funded the growth in interest-earning assets. The strength in demand deposits reflects the seasonal increase of $182 million in our government banking business and an increase of $97 million in Commercial Banking.

Overall deposit costs were 1 basis point lower driven by a 2 basis point reduction in HSA deposits. Average borrowings decreased $329 million as a result of deposit growth. Combined, our cost of interest-bearing deposits declined 1 basis point from Q2.

The net impact was a 2 basis point increase in net interest margin. To summarize, strong loan growth along with a slightly higher loan portfolio yield and a reduction in the cost of liabilities resulted in a quarter-over-quarter increase in net interest income of $3.3 million.

Slide 14 details our non-interest income which increased $1.3 million. We've continued to see strength in Commercial Banking activity and this quarter included an increase of over $3 million in loan-related fees which you can see in the darker green color. This was primarily the result of syndication fees on transactions we led which offset a decline from prior quarters' record swap revenue included in Other income shown in gray.

Deposit service fees in dark blue increased $1 million as a result of higher transaction volume. HSA Bank fee income in light green decreased $415,000, primarily due to seasonally lower interchange volume as more clients reached a deductible threshold.

Slide 15 highlights our non-interest expense which increased $3.3 million. Compensation and benefits increased $2.9 million, about half of which is variable compensation tied to Webster's stock price increase. The remainder is split between strategic hires and seasonally higher medical costs.

Turning to slide 16, our investment in Boston held our efficiency ratio to 61.4%. Excluding Boston our efficiency ratio would have been below 60%.

Slide 17 highlights our key asset quality metrics. Non-performing loans in the upper left decreased $5 million, primarily in residential mortgages and commercial loans, and represents 77 basis points of total loans.

Past-due loans in the upper right increased by $4 million and represent 24 basis points of total loans. Commercial classified loans in the bottom left increased by $16 million, representing 3.4% of total loans and remain well below our five-year average of 4.8%.

Net charge-offs totaled $6.8 million in the quarter for an annualized net charge-off rate of 16 basis points. Loan loss coverage increased to 113 basis points in support of our loan growth and mix. In summary, our credit metrics remain strong and we maintain a positive forward view on our asset quality performance.

Slide 18 highlights our capital position. The tangible common equity ratio was 7.25% at September 30, flat to prior quarter, and our Common Equity Tier 1 ratio was 10.46%.

We continue our strategy to grow primarily with 100% risk-weighted loans. Risk-weighted assets represent 72% of total tangible assets compared to 70% a year ago.

Before turning it back to Jim I have a few comments on our outlook for Q4 compared to Q3. We expect average interest-earning assets to grow approximately 2%. We expect average loan growth to be in a range of approximately 1.5% to 2.5%.

We expect NIM to be similar to Q3. As a result, we expect net interest income to increase around $2.5 million to $3.5 million linked quarter. Of course, the projected increase is subject to overall interest rate environment.

We expect the provision to continue to be driven by loan growth and mix but generally in line with Q3's level. Non-interest income is likely to be flat to slightly down versus Q3 which included strong commercial activity. We continue to manage our non-interest expense closely while opportunistically investing in talent and initiatives as Jim emphasized in his comments.

We expect the efficiency ratio including the Boston expansion to be in the range of 62%. Our expected effective tax rate on a non-FTE basis should be around 32% and we expect our average diluted share count to be around 92 million shares.

With that I will turn things back over to Jim.

Thanks, Glenn. Our solid results reflect success investing capital and resources in strategies to maximize value to customers and shareholders. And we continue our progress toward our high-performance goals as measured by financial performance, growth in key customer segments and customer satisfaction.

I will now open it up for questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Hey, good morning everybody. I wanted to start on the HSA Bank. You guys obviously had nice growth in deposits.

When we look at the account growth adjusting for the deals that was actually stronger than at least I was looking for at 27%. Can you give some color on what drove that and talk about expectations for account growth?

Hi, Steve, it's Chad. We've seen very positive growth coming from our channel partners.

So carrier growth is up this year over last year. That's representative of more than 50% of our account growth year to date. So that's really been the driver of higher-than-expected account growth.

Do expect that to continue, Chad, at that higher pace?

Yes, our focus, Steve, is really to make sure that we are generating and improving our production through our existing carrier partners and then obviously adding new partners as we go into 2017 and beyond. So we are seeing positive trends on that front. And we are also seeing positive trends in terms of our pipeline of carrier partners that we are in negotiations with.

Obviously those take some time to develop. You have got to do your integrations and begin to drive the productivity, so that will take a little longer for the new ones to produce. But we are seeing nothing right now that would lead us to believe anything contrary to the guidance we have given of 20%-plus account growth and deposit growth as we head into 2017 and beyond.

It looks like fee income from HSA declined about 2% quarter over quarter. What drove that?

Chad, let me jump in there. Steve, it's Glenn. So when you look linked quarter we did see I think it's seasonal a drop-off in interchange revenue.

If I look at transaction volume we were at $4.6 million in the third quarter versus $5.2 million in the second quarter. So we were down on transactions about 10%. So that's what you are seeing. Interchange itself is down about 7% linked quarter.

Okay, that makes sense. Thanks.

Then if I could shift to loan growth for a minute, you guys had really nice growth in commercial real estate in the quarter. Would you consider this an unusual quarter or are you just seeing more opportunities as others pull out of the market?

Steve, it's John. I don't think it's the fact that others are pulling out of the market in terms of they're having regulatory pressure and concentration.

I just think we have so many levers and our commercial real estate activities across our Mid-Atlantic region we continue to see with our existing sponsors and our relationships high-quality transactions across property types. And so on would just say it's kind of business as usual.

Okay. Thank you, John. Maybe just one last one.

The commercial loan growth was also strong and many banks are putting up pretty weak commercial loan growth in the quarter. Can you give us a sense, how much of that is coming from share gains versus this higher utilization of your existing clients? Thanks.

Yes, it's a great question and we struggle with the definition of share gain versus transactional opportunity. What drives, I think, our out-performance in this quarter is, again, our specialty areas and we have talked about it at various conferences.

We've got a really robust industry specialty segment group. And so the universe of opportunities for us is broader. And with dealing with some of our private equity sponsors as well, most of the out-performance I would say is attributable to transaction opportunities rather than a straight share steal.

Okay. And is Boston helping it at this point on the commercial side?

Yes.

Okay, thanks for all the color.

Jared Shaw, Wells Fargo.

Hi, good morning. Just following up a little bit on the HSA, on the commentary you had mentioned that there were 113,000 new accounts this quarter but then looking at the slide it looks like that was a little bit less. Did we still see some -- is there still some net outflow from the JPMorgan transition, and if so should we expect that to be done now or is there a little bit more of a tail on that?

Yes, so Jared, it's Glenn. And we are pretty much run through the transition at this point.

Okay, so now it should all be net account growth going forward?

That's correct. That's correct. And as you know we anticipated a certain level of attrition given the early, that the deal was announced very early without a buyer, so we had fully accounted for that.

Okay. And then on the seasonality on the fee income from HSA, we should assume then, I guess, that that stays with us in fourth quarter as more and more people hit their high deductible?

Yes, that's exactly what happened. In the second half of the year people hit their deductible and their transaction volume goes down. So I think it will be relatively flattish going into Q4.

Okay thank you. And then on with 50% of the new account growth coming from the carrier channel and then with the new hiring going on for the direct sales channel, should we see as we look out over the next two years or so what do you envision the new account growth coming from the direct sales channel versus the carrier referrals?

Hi Jared, this is Chad. We'd expect to see -- I'd love to see us maintain that ratio and see more direct-to-employer sales so that we're really balancing the amount of accounts we see through partners and then in the direct channel.

So that's our goal has been to add more direct-to-employer sales reps as well as some additional resource on our carrier side so that we are growing both. But, again, we are having pretty good success driving productions through our carriers. So we are happy with that growth, as well.

Very good. Thanks. Just finally, what's -- can you give an update on the status of how the loan production offices in the Mid-Atlantic are doing and what the balances are out of those offices?

Yes, it's John. Good morning. It's continued to make steady progress and as we talked about our goal is not to be the market leader.

We don't want to make credit mistakes there. I think we've done in our Philadelphia middle-market office where, as you know, we've had commercial real estate for a long time, we did a couple more transactions in the quarter. And we are up to between $60 million and $75 million in funded loans there.

We also did another single transaction in Washington in our commercial real estate group. And the balance is there around $100 million. So, again, steady, slow progress and really adds to the overall pie with respect to how we can drive loan growth smartly and safely across our platform.

Maybe DC is about $150 million now. Let me correct that in terms of total commercial real estate outstanding.

Hey Jared, this is Joe. I just want to underscore the point that John has made, when we go into these markets, and it gets to a question Mark had asked a while back, we're really interested in establishing an appropriate foothold and we make it very, very clear to our bankers that we are in it with them for the long haul. And we think there's enough power in the existing franchises for them to grow comfortably and smartly, and then you put that together with the fact that we've known for an extended period of time.

We are just not going to take chances with respect to being the new kid on the block that gets the loans that nobody else wants. So I hope that helps.

Great. Yes, thanks for the color.

Collyn Gilbert, KBW.

Thanks, good morning everyone. Could you guys talk a little bit about the syndication business? Obviously, you had good strength this quarter.

It was good in the second quarter, as well. Just talk about how that business is evolving and where you see the potential growing from there, growing from here?

I think you used the right word, evolving. And in the 12 years I've been here we've slowly driven our capabilities in capital markets. And in the last couple of years with the acquisition of some great talent from GE Capital and other areas we really had much better access to transactions, both with owner operators and with private equity sponsors of leading deals in those industry segments we know really well.

So again to jump off where Joe left off, risk management is the primary concern here and so we've gotten comfortable with certain industries, we've gotten comfortable with sponsors, we've gotten comfortable with the talent we've acquired. And so over the last couple of years we've gone from a handful of transactions that we've led in the $50 million to $75 million range, now we are perfectly comfortable leading deals up to $200 million and successfully syndicating them which, obviously, allows us to do business with higher-quality, larger companies, allows us to drive fees and be confident that we can lay off the risk and not have outsize single point hold.

So I would say we will continue to evolve it. And like we do in most of these activities we're not going to try and triple the business next year. But we will go from a dozen transactions to hopefully 12 to 18 transactions next year across all of our business lines.

And we are, obviously, trying to look to apply our capital markets activities into commercial real estate, into the traditional middle-market and other areas, as well. So it will be a slow and steady process, but we will continue to add fees to the bottom line and continue to open up the universe of larger companies we can do business with.

Okay, that's helpful. And the growth that you saw this quarter, was it spread out among multiple transactions or did you just have a large deal that closed?

We had a couple of larger transactions. So that's the one thing that you can expect from an earnings perspective is, as you know, it can be lumpy.

So the pipeline, you work on a couple of transactions, everybody is working on two deals at once and they hit and you can have a spike of a couple million dollars in fees in the quarter. So it was really centered -- we had several transactions but the pop was really centered in two deals.

The only thing I would add to that is that John has nailed it. The pacings are just increasing a little bit. So while it will be episodic on a year-over-year basis we would expect to continue to see more frequency and success.

Okay, that's great. That's helpful. And then in terms of the bigger picture on the lending side, are there areas where you guys are pulling back because of price or risk and you are just not liking what you are seeing in the market?

Interesting question. I don't think anything that we are from a strategic perspective I will tell you we always go back to Bill Wrang in real estate. We've never been a market player in New York multifamily or other areas.

So I would say we are being more careful and selective in the multifamily space, just with some of our markets being heated. I think retail as a property type has never been one that we've aggressively gone after and it's one that I think we are even more cautious about now.

With respect to C&I businesses in general we are not in the oil and gas business. We look at contractors, which is something that we historically have been careful about putting a lot of exposure and concentrated exposure there. But other than that I don't think there are any strategic areas where we are looking to avoid.

Okay, that's helpful. And then just finally on the HSA front, can you just talk about maybe -- you guys have undergone a lot of changes in that business over the last couple of years.

Maybe, Chad, you've talked about the direct-to-employer and the carrier focus. But give us a little bit more color as to what where you see that momentum coming as we go into enrollment season, where the efforts are being placed now in terms of investment in energy and time and all those types of things.

Yes, good morning Collyn. Great question. I'd say it's across the board.

We've spent a lot of time over the last two years with the conversion to the new platform and then the integration of the acquisition. And while we've been doing that we've been making improvements along the way.

Now we've got our entire focus is on making sure that we maintain and grow our portfolio on all of our current customers and we capture more. And the focus is really to keep moving upmarket to get larger and more larger employers and health plan partnerships.

And to do that we've got to stay at the top of the industry in every aspect: operational excellence, customer service and customer experience, data analytics, targeted marketing, making sure that we've got we grow our account management and sales staff, putting in sales methodology and training and tools to make sure that when we are out there selling we put our people in the best position to win. So we are really making investments across the entire business.

And what's nice is that we have a lot of resources that we are focused on doing integrations and migrations and now 100% of our attention is on all of those activities. So it's not that anything is broken and needs to be fixed, it is that we want to make sure we are continuing to lead the market and just to even stay up with a 20% growth rate you have to continue to expand and excel in all those areas. So the good news is that that has got 100% of our attention now.

Okay, and just one final follow-up to that point. Is there a certain geography where you are seeing more success coming out of new customer acquisition on the employer -- I mean, let's talk employers, not the carriers, but on the employer side?

Yes, I think we are seeing areas that traditionally weren't strong for CDH growth are beginning to show more growth. The areas that we've traditionally been strong on, like Texas and Illinois, are great markets for us. But we are also seeing areas that were traditionally not great CDH states like in the East Coast, for one, starting to head in that direction, as well.

So we are continuously analyzing the market and where we have our people placed. And as we see opportunities to capture more growth that's where we are placing individuals both in terms of segment and then geography.

Okay, that's great. Thank you very much for the color, everyone.

If I may just add to what Chad is saying. This is Jim speaking.

HSA is such an extraordinary opportunity for us to create value through this differentiated business that as I was noting, and Chad had reinforced that, as well, that we've made the choice that because it is so attractive that we will accelerate and increase the investment in the business. And that's what's happening, because the growth potential is so extraordinary.

Okay, great. Thanks, Jim.

Bob Ramsey, FBR capital markets.

Hey, good morning. I think at the start of the call, Glenn, you were talking about a little bit slower of the reduction in drag coming out of Boston.

I just want to be sure, did I understand you correctly that all reflects the rate environment? And if that's right, I'm curious if the Fed does move in December if that changes the view materially or whether it will take more than one rate hike to really change that?

Hey, Bob, this is Jim. And it was in my comments that we indicated that the drag --

Sorry Jim.

That's okay. The drag is about $0.04 a quarter. We originally thought we would bring that down by about $0.01 a quarter.

Now we are saying it is probably going to be $0.005 a quarter. But the objectives are still solidly in place and Boston is going to be a home run for us. There is no question about that.

So there were a couple of things. One was lots of promotional activity in the market at the same time that we were trying to make our way. And at some level we said let's not go crazy just to get the balances, let's be more careful.

So while account production is actually higher than estimated and while the loan referrals are every bit of what we thought that they would be, overall deposit balances are a little bit lower and the deposit mix is a little bit different. And as a result of that, plus the fact that rates are lower than we anticipated they would be when we were originally making our projections a year or so ago, those are the factors that come into play and are making that assessment. If the rates move up a little at the end of the year we don't think that's going to make a material difference in Boston.

Got it. All right, that's helpful. Thank you.

And then maybe you could just touch a little bit on the margin guidance. I know you guys are expecting a stable margin as we go into the fourth quarter here.

I guess what is that outlook predicated on? What are the risks or opportunities around margin?

So Bob, it's Glenn. Good morning.

We do expect or anticipate a Fed rate hike December 14 up to 75 basis points. And really what's driving the margins, so we're at 310, we continue to see as the securities portfolio reprices, to give you an example of that, our purchases are coming on at say 256 with a 5.3-year duration. They are coming off still a little above 3.

So that's going to continue to put pressure on the margin, about 2 basis points in NIM. On the other hand, as we've seen live or increase both on the CRE and C&I portfolio we will claw back 2 basis points.

To give you an example, CRE, 91% of the CRE portfolio is floating or periodic. So that benefits, and it's LIBOR-based so that benefits from the increase in LIBOR that we've seen over the last couple of months.

Likewise on C&I, 84% is floating and periodic. So we claw back another basis point. So you have 2 basis points pressure from the securities portfolio and then you claw back 2 on the commercial portfolio. And so you end up, and that's broad-based, you end about 310.

Okay got it. Thanks.

Last question, I know you've talked about the commercial fees and how they were particularly strong this quarter. What is the right way to think about that line maybe on an annualized basis? You all have, obviously, had good growth over time, this quarter might have been unusually strong, but what is the right way to think about that?

Hey, Bob, it's Glenn. Again, that's a hard line to forecast. And we had terrific swap revenue, record swap revenue in the second quarter, $4.6 million, and this quarter it was more like $2 million, which is still put a good.

That was offset by some of the loan fees, the syndication fees that you saw. So it's a really hard line to predict on an annual basis. And as John indicated it's very lumpy, but I don't know, John, if you want to add something?

Yes, it is. It's almost impossible to do it by category.

I mean, I think we target, along with our PPNR and loan growth we target low double-digit growth year over year. So we make our internal forecasts and we are aspirational to get a 10% to 12% increase in total non-interest income from the various categories.

Okay, perfect. Sorry, one other question. On the tax rate I know you said 32%, is that a good rate for next year as things look today, as well?

I would say within the range of 32% to 33%.

Okay, thanks.

Casey Haire, Jefferies.

Thanks, good morning guys. I wanted to follow-up on the efficiency ratio.

Basically the Boston branch expansion sounds like we're looking at breakeven in the back half of 2018. Aside from any potential rate help, is a 62% efficiency ratio the best that we can hope for until Boston breaks even?

Casey, it's Glenn. So there are things in the quarter. We have indicated that we are investing more aggressively in the HSA business.

I wouldn't give guidance on a full-year basis, but I think going into the fourth quarter we expect it to be around 62%. I think a lot of the gains that we will get on the efficiency ratio will be on the revenue side as opposed to the expense side given our appetite for investing in strategic initiatives.

I want to add to that. It's Jim. We've reiterated the comments that we've made about investing in our businesses, which will provide us with higher revenue, better efficiency ratio over time.

So the idea of having a sustainably lower efficiency ratio was a goal. In the meantime, we've done a very good job of managing our expenses. And so the point we are making is as we invest in our highly differentiated businesses, particularly HSA Bank and Commercial Banking, that there may be some investments sooner rather than later.

And as a result of that you could get a little bit of lumpiness in the ratio but the trend is still very positive. So when you look at it over the intermediate term we are going to do better as a result of the investments that we make today by delivering a sustainably lower efficiency ratio over time. And that's what we are focused on.

Okay. Said another way, I mean like P260 used to be a house religion for you guys. Is that, until Boston breaks even is that unattainable?

Well, what we are saying is you've got Boston, you've got investment in HSA, Commercial Banking. There may be some quarters where it's under 60% and others where it may be a little bit over 60%.

Longer term we think it will be well under 60%. So instead of trying to nail a prediction on efficiency ratio quarter over quarter, what we are saying is that expense discipline is ingrained in every decision we make here at Webster but we also recognize there's an opportunity to invest.

And sometimes we want to invest now rather than trying to smooth that out over a longer period of time. So I'm not trying to avoid your question. I'm saying we will manage our expenses tightly and we will invest in our businesses as appropriate and we will deliver better performance and a better sustainable, lower efficiency ratio over time.

Got you. Okay, understood.

Just on the Boston breakeven metrics, I believe it was $0.5 billion in deposits and I can't remember the loan amount. Just where do we stand today versus --

No, it was $1 billion in deposits over five years and $0.5 billion in loans. And we have no doubt that we are going to be able to achieve those goals. We don't want to predict it, but clearly we are on track to be able to achieve that.

We originally had thought we would be somewhere between 250 and 300 at the end of 2016. We think that's going to be closer to 200 at this point.

200 deposits?

Yes, in deposits. But over the five-year horizon where we had estimated what we thought we could achieve we said $1 billion in deposits and $500 million in loans we were holding (technical difficulty)

Okay, thanks very much.

Mark Fitzgibbon, Sandler O'Neill & Partners.

Good morning. Just to follow up on the HSA stuff, I was a little surprised to see HSA deposit costs go down by about 2 basis points is quoted. Just curious what drove that?

Chad?

Good morning. We had a couple of opportunities as we looked across the portfolio.

One we were originally anticipating rates would start to go up but given the current environment that we took a hard look at all of our tiers and then some of our partner agreements. And so we adjusted in just a few minor areas within our pricing structure and that's what drove the 2% or the 2 basis point increase. And I think I don't see any changes in the near term, but as we see opportunities we make those decisions and make those changes.

Okay. And then secondly on the professional fees, Glenn, I was curious what drove that up this quarter? Was it stuff related to HSA or was it elsewhere in the organization?

No, it was elsewhere, it was spread around the organization. Some of that is more of annuity but some of it is one-time, as well. But it was in the other areas as opposed to HSA.

Thank you.

Mark I just want to say, too, that your question about the cost of the HSA deposits reinforces what's so important about those deposits is that they are stable, they are long, term and they are low-cost deposits with less elasticity than other deposit categories.

Ken Zerbe, Morgan Stanley.

Great. Thank you. Just a question about Boston and the more muted outlook on that.

Given that you are running behind in deposit growth versus your expectations previously, what gives you the confidence that you ultimately hit your five-year targets on deposit growth? And does that come with a risk that you end up, to get that deposit growth you end up pricing up deposits that Boston in general is just simply less profitable five years from now than you originally thought it would be?

So, no, we don't think deciding that we should push rate to gain deposit share. In fact, that is exactly what we are not doing. I want to be clear about that.

We could have kept our promotional rates relatively high, extended the periods. We said, no, we are not going to do that. That's not the right call.

But as we assess the market we think the potential is as great or greater than initially estimated, which is why we still have confidence that we will make the goals we originally had estimated. And not just for deposit and loan growth but for profitability, as well.

Understood. I guess the reason why I ask is that, obviously, you go into Boston and as you said promotional activity across the entire market was just much stronger than expected. It sounds like there is an embedded assumption that that competition is going to get better or easier such that the environment gets better so you don't have to pay up for deposits to gain share.

The environment, Ken, was such that, particularly when Citi deposits were in the minds of many up for grabs, that that was one of the developments that I think encouraged people to promote very heavily and we think that is going to subside and so that was an unusual period. I think, importantly, as we noted, we actually have more accounts open than we had expected that we would at this point.

We've got a great team of people in Boston that's going to develop those relationships. And in the end that's what it's all about. So for those reasons we remain highly confident we will achieve our goals.

And let me just add to that, Ken. It's Glenn. We also are just starting to get traction on things like small business banking and commercial where there's definitely some upside there.

So that's not going to impact the pricing. But small business banking, as an example, I think they just started to get a lot more traction on that. The halo effect of our expansion into Boston on the commercial John can probably highlight, but I think we are definitely getting a lot more looks at things as a result of our presence being there.

Part of it, Ken, is just timing. So business banking, we've hired out our group of business bankers and we are starting to see a big pipeline for business deposits there and it is just taken a little bit longer in our initial assumptions. We are seeing activity in government banking around the municipalities where our branches are located which will give us additional momentum.

Commercial bankers are seeing a lot more momentum. Our private banker and wealth manager there, who we really have a lot of confidence in, is starting to gain significant traction.

So I think part of this is just timing. It's why we remain confident, but we are in that blocking and tackling phase where we are fully staffed, positioned and now we just have to continue to get it done.

Got it. And then just on the customer base, if I do my mental math on this, if the balances are lower but you are getting the right number of deposit customers presumably implies lower deposits per customer obviously. Have you had enough time to really examine are you getting the right types of customers, the customers that you want them to bank with you or is it just too early yet?

One thing about Boston is that they really have the right type of customers. When we think about emphasizing mass affluent focus there's no question about that being a very, the most attractive market, no question about it for us. So that holds.

And we are assessing the quality of the deposit opportunity and we think it's as high as we originally had expected. And I think the point is already made here is that it's not simply what's happening on consumer deposit side, it is also what's happening in business deposits and what's happening on the mortgage banking side and what's happening in Webster investment services and the private bank. And the commercial bank is benefiting, as well, as is government banking.

So basically the totality of Webster is being delivered in the market. Our brand awareness is increasing every day. So when we think about what's happening over the longer term there is no doubt that we are going to be able to achieve our goals and have the quality of relationships that we had envisioned.

All right, perfect. Thank you very much.

And let me say the average balances are pretty good for these relationships, as well.

Okay, thank you.

Matthew Breese, Piper Jaffray.

Good morning, everybody. I just had one quick one. In the 4Q margin guidance, absent a rate hike what would that do to your NIM guide?

Well, we're still getting the benefit of the LIBOR increases I highlighted. So I think we'd be relatively flat going into just the fourth quarter. Maybe a half a basis point assuming if they raise (multiple speakers).

Yes, it's two weeks and it really, it doesn't, I guess, it's $300,000 at the end of the day. So it's not a big number. So it's about a half a basis point.

Got it. Okay, that's all I had. Thank you.

There are no further questions at this time. I would like to turn call back over to Mr. Jim Smith for any closing comments.

Thank you, Michelle. Thank you all for being with us today. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.