Webster Financial Corp (WBS) 2017 Q3 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's Third Quarter 2017 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 may 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 statement is contained in Webster's financial public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the third quarter 2017.

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

Thank you, Donna. Good morning, everyone. Thanks for joining Webster's Third Quarter 2017 Earnings Call. President, John Ciulla; CFO, Glenn MacInnes; and I will review the quarter. And then HSA Bank President, Chad Wilkins will join us to take questions.

We're pleased to report continuing strong financial performance and strategic progress. It was also a momentous quarter in our history, as we announced 1 month ago today that John Ciulla will become CEO at year-end, upon my retirement from Webster. As President and CEO, John will assume overall management responsibility for the holding company and the bank, and will be elected to the holding company board. At that time, I'll become nonexecutive Chairman, and will no longer be an employee of the company. I'll also provide advisory services for a time, offering guidance to John and the board in order to ensure a seamless transition.

I'll take a moment to talk about CEO succession, since it's one of the most important decisions a board ever makes. And I considered it my highest priority in recent years.

Given Webster's heritage, the board and I had a strong preference for an internal candidate who thrives in our culture and is a reliable steward of Webster's values, who also meets our stringent criteria for skills and experience, has a record of high performance, exhibits principled leadership and believes in our strategic management framework. John meets all of these criteria, and is a gifted strategic thinker with a decidedly forward focus, which after his personal qualities is the attribute I admire most in him. He's a strong and proven leader and the ideal choice to succeed me as CEO.

John's appointment to become Webster's third CEO, following my father and me, is the culmination of a multi-year process that not only produced the best candidate, but also prepared him well for the role. It's been rewarding for me to see John excel in increasingly responsible leadership positions. Beginning during the great recession, when we turned to him to manage and reorganize the credit function. I knew then, he had great potential. Thereafter, John's steady-rise through the Commercial Bank, which he led so ably, produced outstanding results. We work closely together, and my admiration for his contributions and appreciation for his potential continually grew. John's influence across Webster rapidly expanded, and we appointed him President in 2015. It was clear by now to the board and me that John was my natural successor, as many of you could see for yourselves.

Then early last year, John led the comprehensive review and reprioritization of Webster's strategic choices. The results of which are on regular prominent display in our investor materials. And he is overseeing the implementation of most of the related initiatives since then. So why now? Because John is ready now. He's more than ready now. And by making the succession call now and naming John our next CEO, we have cemented Webster's future leadership from a position of financial, strategic and organizational strength. John and our capable, committed leadership team, whose members enthusiastically support him, represent a strong path forward, provide stable leadership and strategic continuity, and are committed to achieve our clearly articulated high-performance goals. I'm excited for Webster's future and very proud of John and our senior team.

One last important point related to transition. There is no delicate transition of power here, no need for us to slow down or be tentative as we acclimate to new leadership. John is taking over a company that is, by choice, in an ongoing state of transformation and self improvement. A transformation in which he has been instrumental for years and which he will now lead. So this is my last earnings call. And I'm pleased to say that Webster, once again, recorded solid quarterly results and demonstrable strategic progress, as we continually invest in differentiated strategies that add value for customers and chosen segments and maximize economic profit and shareholder value over time.

We reported record revenue and net income, strong credit quality and efficiency ratio of below 60%. And we earned economic profit, as our earnings, once again, exceeded the cost of capital. I wish for John that all of his earnings calls are as positive going forward. And I know that John and our leadership team and every Webster banker are committed to making it so.

I'll now turn it over to President and CEO-elect, John Ciulla, to lead the earnings report.

Thank you very much, Jim, and thank you for those kind words. Good morning, everyone. I want to start by publicly thanking Jim and our board for the confidence they have shown in giving me the opportunity to lead Webster beginning in January. I'm very excited about the new role and look forward to working with a great executive team and our strong employee base that differentiates us every day. I'd also like to, on behalf of all of us at Webster, acknowledge the extraordinary contributions Jim has made to our bank and to the entire financial services industry over an iconic 40-year career.

Every developing executive should have the opportunity I was given to work alongside a brilliant, talented and ethical leader like Jim. While last month's announced succession is a transition in leadership, our strategy remains the same as we continue to strive for excellence in the execution of our chosen initiatives. As Jim mentioned earlier, I lead our 2016 strategic review. The most comprehensive review in more than a decade. A set of clear strategic objectives was developed. And what resulted is a refined set of priorities that we have been executing on. Namely, aggressively growing our differentiated HSA business, expanding our market leading Commercial Banking activities, optimizing and transforming our strong Community Banking franchise and further aligning our wealth businesses with the financial needs of our clients and customers.

We've made great progress against these stated strategies, all of which are designed to maximize economic profit over time, and we have further opportunity ahead of us. I'll turn now to the highlights of the quarter on Slide 2.

Webster's strategic management framework is yielding positive results. Record levels of net interest income, preprovision net revenue, pretax income and net income produced year-over-year earnings per share growth of 24%. Return on average common shareholders' equity of just under 10%, exceeded its cost for the second consecutive quarter. And the average return on tangible common shareholders' equity reached just under 13%, even as our capital positions strengthened further.

Among the highlights of the quarter were continued loan growth, and a 20 basis point increase in the net interest margin, leading to our 32nd consecutive quarter of year-over-year revenue growth. Led by HSA Bank and its $4.9 billion in deposits at September 30th, Webster's deposit beta is 8% over the past year relative to the 75 basis point increase in the average fed funds rate.

Total revenue growth of 8.2% compared to a year ago was accompanied by an increase of 3.7% in expenses for positive operating leverage of 4.5%, which drove the efficiency ratio below 60% in the third quarter. Credit trends remain stable with an annualized net charge-off rate of less than 20 basis points for the sixth consecutive quarter. I'll now turn to Slide 3.

Loans grew 5% year-over-year and 1% on a linked-quarter basis. Loan growth of $823 million over the past year has been led by commercial nonmortgage and residential. Within commercial, C&I loans grew at a robust 10% year-over-year, partially offset by lower CRE volume. All of the bank-wide loan growth over the past year was fully funded by just under $1 billion of growth in transactional and health savings account deposits.

Our strong deposit growth has enabled us to maintain a loan-to-deposit ratio under 90% for 34 consecutive quarters. Periodic and floating rate loans represent 70% of total loans, positioning us well in a rising rate environment. Turning to the line of business performance on Slide 4.

Commercial Banking produced solid performance, reporting year-over-year increases in revenue and PPNR of 5% and 4%, respectively, despite a competitive environment and an exceptionally strong noninterest income quarter reported a year ago, where we had $4 million in syndication fees versus the $700,000 in the current quarter.

Commercial loans grew 7% year-over-year and slightly less than 1% linked quarter. Yield on new fundings increased 62 basis points from the prior year, improving the commercial portfolio yield by 54 points.

As I mentioned earlier, there are 2 stories below the headline loan growth numbers in commercial. Commercial C&I loans, which encompasses middle market, sponsor and specialty banking and asset-based lending posted year-over-year and linked quarter loan growth of 10.5% and 3.1%, respectively. This better-than-market performance was partially offset by the fact that our commercial investor CRE balances declined 0.7% year-over-year and declined 4.5% linked quarter as a result of elevated levels of prepayments and our more selective approach in the current market. Deposits grew 9% year-over-year and transactional deposits as a percentage of total deposits are now 56% within the commercial bank. We continue to make progress on geographic expansion, a broadening of industry segment activities, the buildout of our capital markets capabilities and the rollout of enhanced treasury products and services.

Turning to Slide 5. We are really pleased with the progress and performance at HSA Bank, which delivered another strong financial quarter. When adjusted for the 3Q 2016 impact of the JPM acquisition, revenue grew 22% and PPNR grew 29% over the same period last year. Much of the improvement was driven by increased interest income related to the growth in deposits and improved deposit spreads. HSA Bank generated a number of new employer wins in the quarter, as our up-market strategy is paying off. Total accounts were up 17% year-over-year, as we added 125,000 new accounts.

Accounts grew 2% linked quarter, reflecting similar seasonal growth compared to the prior year. Total footings grew 21% year-over-year and now exceed $6 billion in total. Compared to last year, deposits grew 17% and investments grew 39%. Investments as a percentage of total footings ended the quarter at 19%, up from 17% a year ago, as a result of an increase in the number of investors and strong market performance.

In order to maximize the extraordinary opportunity ahead, we continue to invest heavily in key initiatives, including those related to operational excellence, customer service enhancements, product development and sales capabilities. We recently recruited several seasoned professionals to lead our sales and relationships teams, and we've undertaken an in-depth initiative to improve our competitive positioning and sales methodology.

Moving to Slide 6. Community Banking had a strong quarter with PPNR growth of 10% year-over-year. Deposits grew by 5% year-over-year, driven by growth in high-value customers and the average balance per checking account. Loan balances, overall, grew 3% with business loans and mortgage loans growing by 9% and 6% year-over-year, respectively.

Yield on new loans improved by 65 basis points, helping portfolio yields improve by 14 basis points overall. Importantly, cost of deposits grew just 4 basis points in the past year. Investment assets under administration also grew by 9% from prior year. Revenues were up 2% year-over-year, primarily driven by growth in loan and deposit balances as well as improved spreads. With tight expense management, which is in line and consistent with the optimization strategy, Community Banking delivered positive operating leverage for the quarter.

Community Banking continues to progress along its transformational road map. We continue to invest in our digital banking infrastructure, while optimizing the physical footprint. Year-over-year, we are reporting a 5% reduction in banking center square footage. Continued focus on improving digital delivery drove a 10% growth in active mobile customers, while overall, digitally active households grew by 4% from last year. Self-service transactions as a percentage of total transactions were over 70% in the quarter. Focus on high-value relationships drove growth in total premier consumer checking accounts by 12%, while business banking checking accounts average balances per account reached a record high. Our Boston expansion continues to show promise, as total attributable deposits and loans reached $400 million and $260 million, respectively. We are still on track for a breakeven late next year, and overall activity across all business lines continues to increase.

I'll now turn the call over to Glenn.

Thank you, John. Slide 7 provides highlights of Webster's average balance sheet. On a linked-quarter basis, average commercial loans grew $19 million, as $94 million of growth in commercial nonmortgage was offset by a decline of $75 million in commercial real estate. The decline in commercial real estate reflects paydowns of $146 million in investor CRE Year-over-year, our average commercial loans grew $819 million. Linked quarter, average consumer loans grew $80 million. This reflected growth of 2.7% in residential mortgages, which was partially offset by a 1.4% decline in other consumer categories.

Year-over-year, average consumer loans grew $122 million. As highlighted, total loans grew $99 million linked quarter and $941 million year-over-year. Linked quarter, average deposit growth of $597 million was broad-based led by increases of $229 million in money market and $222 million in demand deposits. The increase was driven by growth and seasonal strength in our government banking business. Average HSA deposits increased $49 million. Keeping in mind that linked quarter comparisons are not as relevant as year-over-year comparisons in this business, due to the seasonal nature of account openings.

Year-over-year, our total deposits grew $1.7 billion with HSA deposits representing $687 million of the growth. Deposit growth outpaced earning asset growth, enabling us to pay down $575 million in short-term borrowings. Over the past year, average borrowings have decreased by $800 million at a funding rate today of approximately 125 basis points. This resulted in a borrowings to asset ratio of 10%, its lowest level in over 20 years. In the fourth quarter, we have 2 long-term repos totaling $100 million, maturing at a blended rate of 288 basis points. Given our strong liquidity position and our asset sensitivity profile, we will likely let this borrowing roll off.

Our loan-to-deposit ratio of 83.7% at September 30 is substantially below the June 30, Northeast median of 99% and the U.S. Bank median of 89%. Common Equity Tier-1 and tangible common equity ratios both improved, supported by the quarter's solid earnings performance. And tangible book value per share increased for the 10th conservative quarter, ending at $21.16 per share for growth of 6.8% over prior year, and a 2-year CAGR of 6.8% as well.

Slide 8 summarizes our Q3 income statement, and factors contributing to record reporting net income. Key earning drivers for the quarter include record net interest income from loan growth and NIM expansion; an increased noninterest income, led by client hedging revenue; and lower noninterest expense, as the prior quarter included branch optimization expense, seasonally higher expense in HSA Bank and higher legal-related expense.

Taken together, quarterly PPNR increased $7 million to exceed $100 million for the first time in our history. After provision expense of $10.2 million, we achieved record quarterly levels of pretax and after-tax net income.

Slide 9 provides additional detail on interest income, which increased 11.5% from a year ago, and 1.6% linked quarter. The net interest margin increased 3 basis points to 330 basis points, our highest level in over 5 years. NIM expansion was driven by floating and periodic loan yields benefiting from higher short-term market interest rates. At September 30th, almost 52% of our $17.4 billion loan portfolio reset in 30 days or less, and another 18% has at least one reset before final maturity. Higher loan yields accounted for 7 basis points of the NIM increase. While the overall loan portfolio yield increased 10 basis points, the CRE portfolio saw an increase of 19 basis points, as almost 3/4 of this portfolio resets in less than 30 days. The benefit to the NIM was partially offset by a negative 3 basis point impact in the securities portfolio. This was due to higher premium amortization as a result of higher prepayments fees and an increase in paydown yields. The improvement in funding mix and low deposit beta contributed to reductions of less than 1 basis point each from higher deposit and borrowing costs.

Slide 10 details noninterest income, which increased $1.3 million. The main driver was an increase of $1.6 million in client hedging revenues seen in other income, which is highlighted in light blue. Mortgage banking revenue highlighted in beige, declined $900,000 from lower application volume and spreads in the quarter. Modest increases and decreases in other key categories largely offset each other in the aggregate.

Slide 11 highlights our noninterest expense trend, which had a linked quarter decrease of $2.6 million. This was led by a $2.4 million decrease in other expense, which was across multiple categories, including legal expense and sales promotion cost. Occupancy expense decreased $1.3 million, primarily related to banking center optimization expense we incurred in the second quarter.

We did have an increase of $1.8 million in compensation and benefits. This primarily reflects strategic hires in Commercial Banking and seasonally higher group medical expense, as employees reached their annual deductibles.

Our efficiency ratio improved to 59.2%, driven by revenue growth of 1.6% and an expense decline of 1.6%. This is the lowest level for the efficiency ratio since the fourth quarter of 2014. The efficiency ratio will naturally fluctuate given each quarter's revenue and expense performance, including our continued investment in key strategies. For additional detail, please refer to the efficiency ratio summary on Slide 15.

Slide 12 highlights our key asset quality metrics. Nonperforming loans highlighted in the upper left, decreased $1 million and remain below 1% of total loans. A net decline of $1 million in commercial reflects $10 million is paydowns, charge-offs and returns to accrual, slightly exceeding the new nonaccruals. Commercial classified loans in the bottom left remain relatively stable at 3.33% of commercial loans and below our 5-year average of 3.68%. And the $10.2 million provision in the top right, exceeded net charge-offs by $2.2 million. As a result, our allowance increased to $201.8 million and our loan loss coverage remained at 116 basis points.

Lastly, net charge-offs are 18 basis points annualized, and continue to be below our 5-year average of 28 basis points.

Slide 13 provides our outlook for Q4 compared to Q3. We expect average loan growth to be in the range of 1% to 2%. We expect average interest earning assets also to grow 1% to 2%. We expect NIM to be up 1 to 3 basis points. This projection incorporates a 25 basis point fed rate hike in mid-December. As a result, we expect net interest income to increase between $3 million and $5 million. Noninterest income is likely to be around third quarter's level. We expect the efficiency ratio to be around 60%. Our provision is driven in part by loan growth, portfolio mix and net charge-offs as well as our portfolio quality. Bear in mind that we've been at historically low levels of charge-offs.

We expect our tax rate on a non-FTE basis to be approximately 32%. Lastly, we expect our average diluted share count to be approximately 92.5 million shares.

Jim, before I hand it back, I want to say what a pleasure it's been to work with you over the past 6 years. We have all learned a lot from you. You have positioned us well, and I congratulate you on all you have done for Webster. Thank you.

Glenn, thank you very much. You're a terrific CFO, and I sure appreciate all your important contributions, and I value your leadership and your commitment as Webster moves forward.

So today marks my last of about 80 earnings calls as Webster's CEO, and we initiated these quarterly calls back in the late '90s. I want to tell the analysts on the call, how much I appreciate your clear and thoughtful analysis of Webster. And thank our investors for your confidence and constructive support of our differentiated strategies, and for your encouragement to invest now with an eye to the future, rather than be constrained by near-term pressures that can undermine long-term growth and value creation. I've learned from you all, and I cherish the relationships I developed with so many of you over the years.

It's been an honor for me to lead Webster, and work closely with our community-minded, values-guided bankers as we built Webster into the leading regional bank we are today. I'm more excited for our future than ever, knowing that Webster will be in exceptionally strong hands at this exciting time in our history. I look forward to seeing many of you at Webster's Investor Day event on Wednesday, November 8, in New York City.

I'll now open it up for questions.

(Operator Instructions) Our first question is coming from Steven Alexopoulos of JPMorgan.

I wanted to start on the efficiency ratio. It's nice to see this below 60% in the quarter, and I see the guidance, you're expecting it to stay around 60% in the fourth quarter. Given the investment spend, particularly around the HSA business, do you guys think you're at a point, where you could maintain it at around 60%?

Yes, I think -- Steve, it's Glenn. We'll be in that range. And there'll be seasonality for instance, and we're gearing up for the fourth quarter in HSA. And so there'll be expenses associated with collateral, call center contact volume, things like that. So you'll see some pops. We also continue to invest in the business. And so you'll see some of that as well. But I think generally, we would expect to be around that.

Okay, that's helpful. And then on HSA Bank, you guys seem to have nice momentum on the investment side. Is the just customer demand? Or have you changed something in the business?

Yes, this is Chad. I think a little bit of both. The market has been strong. We're continuing to add investors, and also the percentage is increasing slightly. And then we also are -- we improved our functionality in terms of investment sweeps over the last couple of years, and I think that our investors are taking advantage of that. The last thing I'd say is that, we love investors. I mean, it's part of what makes an HSA a competitive product. And they carry a higher balance than the rest of the portfolio with the exception of our savers and that's -- it's pretty close. So we really spend a lot of time encouraging folks to save for the long haul.

Okay, that's helpful. And my final question for Glenn. I know last quarter, you had indicated, Glenn, that you would expect pressure on the NIM in the fourth quarter and now you're looking for flat to up a bit. What changed that you're now looking for a little bit of a better margin in the quarter?

I think the tenure is up since the last time we spoke. Actually, if I look at where we were at the end of the second quarter, the 10-year swap is up slightly. And the 1-month and 3-month LIBOR rates are also up.

Okay. So just pressure off the securities portfolio essentially?

Well, you saw that the -- so you saw the amortization go up about $1.4 million Q2 to Q3. That has a negative impact. But that's -- we're thinking in the fourth quarter that's relatively stable.

Got you, okay. Great. And John, officially, congrats on the CEO role. And Jim, best of luck. Look forward to seeing you at the Investor Day.

Our next question is coming from Collyn Gilbert of KBW.

To follow-up on Steve's comments, I think that was probably one of the most emotional intro earnings calls I've heard in my -- that feels like 80 earning calls that I've been on. But Jim...

I think you have, Collyn.

I don't know, I don't know. I'm aging as well. But anyway, congratulations, Jim. And obviously, best of luck, John, in the new role. We're looking forward to the positive momentum to continue. So anyway. So just maybe if we could drill down a little bit, John, on the -- some of the movement within the loan growth buckets. So it's been -- I guess, we've seen now maybe 3 quarters or so, where the equipment finance balances have declined. Can you just talk a little bit about what's going on there? And I know you had cited the decline this quarter in CRE was elevated paydowns, but maybe just sort of frame that a little bit, and kind of what your outlook is for some of those commercial loan growth trends?

Sure, sure. I think with respect to equipment finance, a lot of the change in trends there were strategic, Collyn. We consolidated our equipment finance business internally with our Middle Market business. And some of the risk return dynamics in that business and the competitive landscape, we remained very disciplined in terms of our return on capital model. So I would say, the decline in equipment finance balances is planned rather than us being less competitive in the market against our peers. I think the real story this quarter is commercial real estate, as I mentioned. If you look at the H8 data, Webster Bank [en masse] in our commercial loans, so if you include both business banking and our commercial line of business, and you take all of our C&I and our commercial real estate loans, we've outperformed both the H8 small banks and H8 large banks in total commercial loan growth. We, in C&I, really outperformed both those benchmarks, but in commercial real estate, both year-over-year, and particularly linked quarter, we've trailed significantly. And I think it's due to a number of factors. There are fewer transactions in the marketplace. We had -- as Glenn mentioned, had a higher level of prepays this quarter. I think he quoted about $145 million, which was 50% up from the prepayments we had in the similar quarter a year ago. And we have been more selective relative to the market, I think with respect to structure and risk return dynamics. You've heard Joe Savage and others mention on this call, Bill Wrang keeps track of his -- what he calls his hit ratio in issued term sheets, both to customers and the prospects. And I think if you look at this year versus last year, with the same people, the same staff we had, the same underwriting guidelines, we're about 50% of winning term sheets that we were winning last -- 50% of the rate of wins that we had last year. And we really attribute that to the fact that the market continues to move with new entrants towards higher LTVs, higher proceeds, longer periods of interest-only, lower structured covenant packages. And so we are being more selective into what is a market that has slightly less opportunity in it. But I want to make a really important point at the end of the that, that our pipeline in CRE is up almost $100 million quarter-over-quarter. We're definitely seeing more activity going into the fourth quarter. So I think some of it is episodic as well, and we still have a lot of confidence that CRE will be a contributor to growth. And as I said, we're very, very proud of the fact that we've been able to maintain C&I growth of 10%, when the market's growing at a significantly slower rate than that.

Okay. And then just to tie that all together, I mean, some of the dynamics that you're seeing, is it -- you mentioned, obviously, comfortable with C&I at 10%. But if we think about total loan growth in general, I mean, do you think you can sort of hold it in that 8% sort of range as we look out over the next year or 2, just given what the initiatives you've got going on at the bank?

Yes, and I said this at the last investor conference. I think you could see a couple of quarters of slowness just because the H8 data suggests that there's going to be slower market growth, and we're going to remain disciplined with respect to credit execution. But if we look at the underlying levers that we're pulling and where we are, that 10% annualized loan growth, we still think is a reasonable rate over the long term. I think, given momentum into the third quarter, you could see us not hitting those same numbers a quarter out. But over the long term, I'm comfortable that we can safely grow loans in that 10% range.

Okay. Okay, that's helpful. And then just, Glenn, on the NIM. Obviously, you gave guidance as to what you're thinking in the fourth quarter and how the premier NIM would be affecting that. But just also kind of longer term, I mean it seems that as if the dynamic of gradual or higher asset yields outpacing the increase in funding costs should continue. How are you sort of seeing that NIM unfold into next year, if the rate environment stays where it is?

Yes, so I can tell you the impact of a base case scenario, and I can tell you which includes the forward curve and then give you some context if rates were not to move. But right now, what we're thinking is a December increase and a December '18 increase and then 2 increases in 2019, a little different than the fed's outlook, which is 3 in '18 and 3 in '19. So ours is based off of the forward curve. So if I were to look at that and go into '18, I see plus 1 to 3 NIM increase quarter-over-quarter going into '18. If I were to strip that out and just have rates stay exactly where they are today, we'd be flatter. We'd be up by 1 basis point quarter-over-quarter. So a lot of it's going to depend, and I highlighted that 53% of our book is short term, the loan book and our assets, earning assets. And so that's going to be based on short-term market rates, which are driven by the fed.

Okay. Okay, that's helpful. And then just one last question for Chad. Chad, going into the fourth quarter. Can you just kind of give us an update on how some of the -- your -- way your outlook is for onboarding as you move into the end of the year and just some of the dynamics you see kind of folding in the business into the fourth quarter and the first quarter?

Yes. Great, Collyn. We're -- I think it's important when we're talking about expectations for (inaudible) and enrollments that -- reiterate that most of our growth or about 80% comes from our existing employers, about 20% from new employers. So that said, our trends -- our growth trends have been stable from new accounts from exiting employers, funding rates, attrition are all trending consistently year-over-year. In addition, our new employer pipeline is up year-over-year. And in terms of the number of opportunities even more so the size of opportunities and the number of large employer wins, so we're encouraged by that view. And all of this leads us to believe that we'll see growth in the same range as we're currently seeing, as we head into the fourth quarter and into 2018.

Our next question is coming from David Chiaverini of Wedbush Securities.

I have a follow-up on the efficiency ratio. With the improvement in the quarter and the outlook of 60% in the fourth quarter, which is good to see. Do you believe you're investing enough in the HSA business continue -- to continue generating strong growth there, despite the lower efficiency ratio guidance?

Yes, I'll take it and then turn it over to Chad. Absolutely, I think you heard us clearly state in the beginning that our primary objective is to aggressively grow HSA Bank. And we understand that we're in a period of time where we need to continue to capture share, and we've been investing aggressively. And our assumptions of -- we're not balancing those investments with the efficiency ratio. We're making all investments necessary to give us the best chance at success. So I would unequivocally say, we're making all the investments without holding anything back. Chad, I don't know, if you want to put additional context on that.

All right. I'd just say, I totally agree, John. And we've gotten all the investment that we've needed in order to advance the business. And it's refreshing, actually, to get this question rather than when are you going to show operating leverage, I think we've talked consistently, we are investing in the business, one, just to improve our consistency, and we are seeing improvements in our efficiency as well, as we improve our quality. And then investing in our growth and relationship management teams in order to drive new business. So we're very optimistic about our future based on that.

And if I could just add, David. I think if you look at the guidance that I gave, it implies an increase in expenses of somewhere between $3 million and $4 million quarter-over-quarter. And if you look at that, it's pretty much a split between HSA and our commercial business, where, I would highlight in addition to the investments in HSA and the seasonal expense in HSA, there is investments occurring in the commercial side under cash management platform and enhanced commercial underwriting platform. So we're sticking to our strategic outline and investing right along the lines that we have highlighted. So there is investments occurring in HSA. There's also investments occurring in the commercial bank and the retail bank as well.

Great. And then a follow-up on HSA. So do you see any acquisition opportunities out there in the HSA market?

Sure. I'll start and then Chad, if you have any. We are, obviously, always looking to enhance not only our market share and market presence, but also looking to expand our portfolio of products. So it is part of the strategy, but we're very disciplined in terms of the economics around any new opportunity. So the answer is, we are very much aware of what's going on in and around us in the marketplace. We're looking for opportunities, but we also really are very confident and positive about our ability to grow the business organically.

Our next question is coming from Mark Fitzgibbon of Sandler O'Neill.

And first, let me echo some of the comments or maybe for, Jim, congrats on your retirement, and thank you for all your help over the years. And John, best of luck in your new role. First question -- actually, a couple on deposits, if I could. And Chad, HSA deposit rates have stayed surprisingly low at 20 basis points. What are your thoughts on if and when we might see any pressure on those?

Yes, I think the -- we haven't seen any pressure on it. And we've talked about before the fact that deposit rates aren't the main driver when we talk to employers, it's really your capability, service, the operations, and the consulting with the -- both the employers and the consumer. And so those are the primary drivers. And then we talk about pricing and rates, and we haven't seen any pressure in the market so far. And I don't expect to see a significant amount as we head into 2018, till we see some more rate increases.

Yes, if I can add some color to that. I think most of the battle on the HSA business is on the service fees as opposed to the deposit rate these days. And what we see, Mark, at the total bank is that our betas are running about half of the historic beta. So the last time, there was a rate increase going back to 2004, and you look at our historic betas across the whole book, they are running at about half that. And so we think there'll eventually be some pressure, you probably saw CD rates tick up a little bit, the money market deposits ticked up a little bit. Some of that's regional, but down the road, we could see an acceleration of that, but -- because betas are running about half. The history of HSA is, we've been in the business since 2005, so we don't have a complete cycle. So we still think there -- the elasticity is at the low end of our spectrum.

And then just following up on that, Glenn. We'd heard from another bank in Connecticut yesterday that they're seeing money market rates out there in the Connecticut market approaching 2%. Are you guys bumping into the much?

I think, Mark, that it's spotty and it's geographically-based. When I talk to Nitin -- I mean, the most recent FDIC data came out, we actually gained share. And as we mentioned, we grew deposits pretty smartly and you saw that we only increased our cost of deposits by 4 basis points. And if you ask Nitin, what he'll tell you is that depending on the market and the bank, you may see either higher advertise rates or sometimes rates that aren't even the advertise rates and they're giving specials or they're giving people in the banking centers the autonomy to be more aggressive on rate. But so far, you -- we may run into it in the single bank, we may run into it somewhere, but it hasn't stopped us from being able to grow deposits at a greater level in the market. And we don't use the fact that we have HSA to not focus on our competitive deposit pricing in our market. So as Glenn said, so far so good. And we haven't really seen enough broad-based high rate competition to have it change our strategies.

Okay. And then on the branch front, John. I wondered -- I know you closed 8 branches this quarter, but with 70% of the transactions being self-serviced in the community bank. Are you contemplating even more consolidation of branch locations?

Mark, I think over time, and you've heard Jim say this for a long time, and I think we've been pretty disciplined. We are constantly reviewing our banking center network for location, efficiency, size and number and scope. So we -- what we've said is, we know that our goal is to reduce the square footage of our entire branch network over time. And that probably means over the long term, more likely fewer banking centers than more. But we have no plan in the immediate quarter to close more banking centers.

And then last question. I'm curious, if you have any unique insight into how the budget situation in Connecticut will play out?

That's the toughest question from any of you so far. As a matter of fact, if you saw on the news last night, the legislature came up with a -- at least the framework of a bipartisan solution to the budget, which, in my view is, I don't know whether to believe that there's a lot of momentum there. But it's obviously encouraging after so many years of polarization and people not working together that I think there's a realization in Hartford that there is a significant problem that needs to be solved. We've said -- Jim has been so involved in this. I have, as chair of this -- of the CBIA this year, of being so bullish on Connecticut's potential, and so frustrated that we haven't sort of seem to be able to get out of our own way. We're the only state, as you know, without a budget right now. We're operating on executive order. We do think that there'll be a positive resolution to this at the end. Meaning, that there will be some structural change, so that our problems won't come up every year of an unfunded budget. But as we've said, we're glad that we've diversified outside of the state as well, because while we continue to grow deposits and loans in Connecticut, we're also seeing significant growth in Boston and in New York and in Philadelphia. So the specific question on what's going to happen in Connecticut is, I think we are cautiously optimistic that there'll be improvement. I think the discussions between the Republicans and the Democrats, even reported last night, are a positive step to try to get some things done that will make sure Hartford stays solvent, and make sure that we are on better business footing going forward.

Our next question is coming from Jared Shaw of Wells Fargo Securities.

I was just thinking back to my first Webster conference call, 18 years ago. And I think, Jim, you were talking about the expense for Y2K and what that would bring. So it's really amazing when you think of where we've come over that time and where you've come over that time. And congratulations on a great career. And John, congratulations on a well-deserved promotion. A lot of my questions were asked, but interested to hear how -- when you look at the C&I growth, how much of that is coming from Eastern Massachusetts? And when you look at that market, are you still hiring there? Or do you feel that you're fully staffed on the commercial side?

That's a good question. We're still seeing robust growth out of Boston, both out of our regional middle market group and out of our sponsor and specialty group, which has a core, sort of, concentration there of our sponsor and specialty businesses. We continue to hire and look for opportunities to grow staff and competencies in both those areas. So as I mentioned earlier, New York and Boston, in particular, have been sources of significant C&I growth for us, whether it's with corporations there or leveraging private equity sponsor relationships in those 2 markets with companies outside of those footprints. So we'll continue to expand, if we find the right caliber people. And if we identify industry sectors where we think we can be impactful, we'll look to hire core competencies in those areas.

Okay, great. And then when you look at the growth in the residential mortgage this quarter, I'm assuming that you're matching the duration up with the longer duration on the HSA side. Glenn, as you sort of take that forward, should we expect to see the balance sheet become maybe more interest rate neutral versus asset sensitive? Or do you feel that the HSA growth is still going to be enough to offset and keep you in an asset sensitive position?

I think we're as sensitive now, but eventually, we'll move to a more neutral position. So I think as we add more rural, eventually the timing would be to become more neutral as rates begin to rise, and then bring back the asset sensitivity.

Are those mortgages you put on, are they 30-year? Are you basically retaining all of your originated?

Yes, they are -- they're jumbo. But they have an average life that's very similar to HSA deposits from a duration standpoint.

Our next question is coming from Matthew Breese of Piper Jaffray.

Just a couple of follow-ups. On the forward loan growth outlook, I just wanted to clarify, you noted 10% potential long-term growth. Is that more just for the commercial side or for the overall loan portfolio?

It is. That was in specific response to Collyn's question about commercial. I think, Glenn guided to...

1% to 2%.

1% to 2% linked quarter loan growth. And so...

So you're going to find this, 6% to 8% on a total basis.

Got it. So 6% to 8% on a multiple year basis?

Yes.

Correct.

And on unsecured, on GLOC and home equity lines, we've seen some run-off there. But I think that's market driven.

Okay. And then the recent slowdown we've seen this quarter and for the fourth quarter. Just curious, I mean, how much of that is really rate driven or credit metrics driven? How much of that is competitive? Just wanted to get a sense for, is it just not fitting the right buckets for you? Or are there strategic concerns around some of the properties being -- and loans being presented to you?

Yes, specifically on CRE, and I'm always hesitant to sort of call out sort of what the competitive landscape and what our competitors are doing. But clearly, in commercial real estate, as I mentioned, there are new players, there are debt funds participating in the investor commercial real estate world for the first time over the last sort of, say, 4 or 5 quarters. And I think some of the banks are just being a little bit more aggressive with respect to structure, term, duration, period of interest-only. And I think we've been really sticking to our knitting in terms of our underwriting guidelines. And so that double whammy of there being lower overall market loan growth, meaning fewer transactions and opportunities, coupled with the fact that we are winning fewer of them because of terms and pricing relative to risk going away from us has driven us a slow spot for us in commercial real estate.

Got it, okay. And then just thinking of the HSA business, there were some nice improvements in efficiency as we think about top line and expense growth. As you think about the -- a multi-year cycle of having HSA, call it, over the next 5 years. To what extent do you think you can improve that efficiency ratio, essentially as we get through some of the investment phase?

Sorry, I don't think we gave specific guidance on the efficiency ratio for HSA. But they did have a quarter -- a very good quarter, as John highlighted, with the PPNR of 28%. I think you're starting to see some of the operating leverage and some of the payoff as well as the impact of the rate environment. So when you look at the spread in this business, just over prior year, it's up 22 basis points. And that's a big factor as well as the volume. So if you look at the increase in revenue, the volume of accounts is also a factor and that we get monthly service charge. So I think you're starting to see that. At the same time, as you see on the slide, the expenses are up $4.2 million. And I think if you were to break that down, about half of it continues to be investments and the other half is staffing up for the seasonal enrollment period in the fourth quarter. So long way of saying, I think in the first quarter, you'll probably see expenses a little bit higher because that's when we're onboarding everyone and then you start to see operating leverage as the next couple of quarters go along. But as we look at this, I think in second, third quarter, the business was running at 60%, a little below 60% efficiency ratio. As we begin to get operating leverage and more volume in there, you should expect that to go down, and down meaning, over a 3-year horizon to the -- likely to mid-50s or somewhere around that.

Our next question is coming from David Rochester of Deutsche Bank.

Glenn, just on your comments there on the efficiency ratio going down, that's specifically for the HSA business, is that right, down to the mid-50s?

Yes, yes.

So what are you thinking just in terms of overall for the company? Can you get to the high 50s in that case?

No, I mean, I think we're hesitant to say that because we're opportunistically investing in all these businesses as we see it. So I'm hesitant to say, they'll be at 58% or 59%. The guidance I gave is 60% for the quarter. It depends on a lot of things, the rate environment, the deposit beta. All those factors will have an influence on that number, obviously. It's a tough one to call. And I want to leave the flexibility that we want that, that we see HSA as a huge opportunity, and we're going to opportunistically continue to invest in that. We see the commercial business the same way. And I highlighted some of the investments we're doing, whether it's on the underwriting platform or the cash management platform. So that's where we are.

Okay. And then just specifically on HSA, outside of the seasonal ramp that you guys have been getting ready for, can you just give us an update on the areas in which you think you need to invest in that business over the next year or so? Is it expanding the sales force further, which I know you've done a lot of already over the past couple of years or adding functionality in the platform? Just any additional color there would be great.

Sure. I mentioned in my -- exactly what you mentioned, David, in my comments earlier, but I'll let Chad give you some more specifics.

Yes. Thanks, David. The first, I'd say, is the operational excellence where we can -- we invested heavily over the last year in bringing in some consulting help to look at all of our -- where we have opportunities to continue to drive transformational improvements in our operations. So there is some opportunities there, but all of those have positive ROIs associated with them. The sales team, we're continuing to -- continue to hire into the sales team and as we upgrade the talent. And we also -- we put the whole team through methodology training in September, and that continues on into next year. We continue to work with some folks to help with coaching to really make sure we're improving our acquisition of new accounts well into '18 and '19. So there's some investment in that area as well. And then just in our product capabilities. We continue to invest in new functionality and new product capabilities, both within our own walls and then through our partner.

Got it. And then, Glenn, just real quick on securities premier NIM comments. You said that increased this quarter. Can you just quantify that? And then what's baked into your NIM guide for next quarter?

So for the quarter, I think we're up to a CPR rate of like 13.5%. It had an impact of $1.4 million higher amortization costs. And then going into the fourth quarter, we think it's going to be relatively flat. We think that CPRs will probably be just below 13%, and the amortization will be somewhere around 11.5%. So relatively flat.

Got it. And then securities reinvestment rates, where are those now versus where they were in the quarter?

So for the third quarter, we had -- we purchased at a rate of around 2.92%, and the paydowns were at 3.66%. We're starting to see that manifest in the total portfolio yield. Q4, we think, we'll be purchasing around 2.90%.

Okay, great. And then just one last on the occupancy and other expense lines that were down a bit this quarter. Are you expecting a bounce back? Or are those pretty good levels going forward?

No, those -- the second quarter -- the items that I highlighted were second quarter. So the impact was -- they were nonreoccurring. Now the occupancy was related to the 8-branch closures that we highlighted in the second quarter.

Got it. Okay. So that's a good level going forward?

Yes, expenses bounce back a little along the lines of the seasonality in medical expense, the seasonality in HSA and any investments.

Jim, congrats on a great career. Good luck in retirement. And John, congrats to you. And obviously, looking forward to working with you even more. I appreciate it.

At this time, I would like to turn the floor back over to Mr. Smith for any additional or closing comments.

Thank you, Donna. Thank you all for being with us today. We hope we'll see you in New York on Wednesday, November 8, for Webster's Investor Day. Have a great day.

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