Jim Smith - Chairman & CEO John Ciulla - President Glenn Maclnnes - CFO Chad Wilkins - HSA Bank, President.

Steven Alexopoulos - JPMorgan Collyn Gilbert - KBW David Chiaverini - Wedbush Securities Mark Fitzgibbon - Sandler O'Neill Jared Shaw - Wells Fargo Securities Matthew Breese - Piper Jaffray David Rochester - Deutsche Bank.

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 provision 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 Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the third quarter 2017.

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

Thank you, Diana. Good morning, everyone. Thanks for joining Webster's third quarter 2017 earnings call. President, John Ciulla; CFO, Glenn Maclnnes; and I will review the quarter. And then, HSA Bank President, Chad Wilkins, will join us to take questions. We are pleased to report continuing strong financial performance and strategic progress.

It was also a momentous quarter in our history, as we announced one 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 will become Non-Executive Chairman and will no longer be an employee of the Company. I will also provide advisory services for a time, offering guidance to John and the board in order to ensure a seamless transition.

I will take a moment to talk about CEO succession, since it's one of the most important decisions that board ever makes, and I have 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 banker with a decidedly forwardly focus, which after his personal qualities is the attribute I admire most in him. He is 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 multiyear 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 a great recession when we turned to him to manage and reorganize the credit function, I knew then he had great potential. Thereafter John steady rise through the Commercial Bank which he led so ably produced outstanding results.

We worked 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.

In 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 has overseen the implementation of most of the related initiatives since then. So why now? Because John is ready now. He is 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 am excited foe 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 slowdown or be tentative as we make acclimate the 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 am pleased to say that Webster once again reported solid quarterly results and demonstrable strategic progress, as we continually invest in differentiated strategies that had value for customers in chosen segments, and maximize economic profit and shareholder value overtime.

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 will 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 would 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 of 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 led our 2016 strategic review, the most comprehensive review in more than a decade.

A set of clear strategic objectives was developed and what resulted in 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 strategic management framework is yielding positive results.

Record levels of net interest income, pre-provision net revenue, pre-tax 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 deposit at September 30, 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 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 remained 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 non-mortgage 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 supporting year-over-year increases in revenue and PPNR of 5% and 4% respectively, despite a competitive environment and an exceptionally strong non-interest 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 two 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 seven-tenths of 1% 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 build-out 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 relating 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 have 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 grown 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 four 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 roadmap. 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 global 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 breakeven late next year and overall activity across all business lines continues to increase. I'll now turn the floor 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 non-mortgage was offset by a decline of $75 million in commercial real estate.

The decline in commercial real estate reflects pay downs of $146 million in investor CRE. Year-over-year 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 deposits 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 borrowing to asset ratio of 10% its lowest level in over 20 years. In the fourth quarter we have two long-term repos totaling a $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 to roll off.

Our loan to deposit ratio of 83.7% at September 30 is substantially below the June 30 northeast medium of 99% and the U.S. Bank medium of 89%.

The 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 tenth consecutive quarter ending at $21.16 per share for a growth of 6.8% over prior year and a two-year CAGR of 6.8% as well.

Slide 8 summarizes our Q3 income statement and factors contributing to record reporting net income.

Key earnings drivers for the quarter include record net interest income from loan growth and NIM expansion and increased non-interest income led by client hedging revenue and lower non-interest 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 to $100 million for the first time in our history. After provision expense of $10.2 million we achieved record quarterly levels of pre-tax and after-tax net income. Slide 9 provides additional detail on net interest income which increased 11.5% from a year ago and 1.6% linked quarter.

The net interest margin increased three basis points to 330 basis points our highest level in over five years. NIM expansion was driven by floating and periodic loan yields benefiting from higher short-term, market interest rates.

As September 30, almost 52% of our $17.4 billion loan portfolio reset in 30 days or less and another 18% as at least one reset before final maturity.

Higher loan yields accounted for seven 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 is almost three quarters of this portfolio resets in less than 30 days.

The benefit to the NIM was partially offset by a negative three basis point impact in the securities portfolio. This was due to higher premium amortization as a result of higher prepayment fees and an increase in pay down yields.

The improvement in funding mix and low deposit data contributed to reductions of less than one basis point each from higher deposit and borrowing cost. Slide 10 details non-interest 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 9,00,000 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 non-interest 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 employee 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 the efficiency ratio summary on Slide 15. Slide 12 highlights our key asset quality metrics.

Non-performing loans highlighted in the upper left decreased $1 million and remained below 1% of total loans. A net decline of $1 million in commercial reflects $10 million in pay downs, charge-offs, and returns to accrual slightly exceeding the new non-accruals.

Commercial classified loans in the bottom left remained relatively stable at $3.33% of commercial loans and below our five-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 of 18 basis points annualized and continue to be below our five 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 one to three 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. Non-interest 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 an non-FDE basis to be approximately 32% less than we expect our average diluted share count to be approximately 92.5 million shares.

Jim before turning it back, I want to say what a pleasure it's been to work with you over the past six 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 should 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, value guided bankers as we built Webster into the leading regional bank we are today.

I'm more excited for a 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 8th in New York City. I'll now open it up for questions..

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Steven Alexopoulos of JPMorgan. Please go ahead..

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 in a point now where you could maintain it at around 60%?.

Yes, I think Steve, this is Glenn. We will be in that range and there will be seasonality for instance and we're gearing up for the fourth quarter in HSA. And so there will 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.

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 this just customer demand or have you changed something in the business?.

Good morning, Steve..

Good morning..

Yes, this is Chad. I think a little bit of both. The market has been strong, we are continuing to add investors, so the percentage is increasing slightly and then we also -- 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 and 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 pretty close. So we really spent a lot of time encouraging folks to save for the long haul..

Okay. That's helpful and thank you Chad.

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 change that you're now looking for a little bit of better margin in the quarter?.

I think the 10-year 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 one month and three month LIBOR rates are also up..

Okay.

So just pressure of securities portfolio essentially?.

Well you saw the amortization -- 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..

Okay, great. And John officially congrats on the CEO role and Jim best of luck. Look forward to seeing you at the Investor Day. Thanks guys..

Thank you very much, Steve..

Thanks, Steve..

Thank you. Our next question is coming from Collyn Gilbert of KBW. Please go ahead..

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

I think you add 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 three 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 that decline in 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 remain very disciplined in terms of our return on capital model.

So I would say the decline in the 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 on 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 have 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 trailed significantly and I think it's due to number of factors. There are fewer transactions in the marketplace, we have 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 mentioned on this call Bill Wrang keeps track of his what he calls his hit ratio and 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 have, the same underwriting guidelines we're about 50% of winning term sheets that we were winning -- 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're 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 that that our pipeline entry 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 is growing significantly slower rate than that..

Okay.

And then just to tie that all together, I mean some of the dynamics you're seeing is it, you mentioned, obviously, comfortable with C&I at 10%, but 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 two just given what the initaitives you've got going at the bank?.

Yes and I said this at the last Investor Conference. I think you could see a couple quarters the 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 going on the NIM. I know obiovusly gave guidances to what you're thinking in the fourth quarter and how the premium NIM would be affecting that but just also kind of longer-term I mean it seems the dynamic of gradual 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 stays where it is?.

Yes, so I can tell you the impact of a base case there and I can tell you what's includes the forward curve and then give you some context that rates were not that moved but right now what we're thinking is a December increase and a December 2018 increase and then two increases in 2019.

So a little different than the Fed's outlook which is three in 2018 and three in 2019. So ours is based off of the forward curve. So, if I were to look at that and go into 2018 I see plus one one to three NIM increase quarter-over-quarter going into 2018.

If I were to strip that out and just have rates exactly where they are today we'd be flat or we'd be up like 1 basis point quarter-over-quarter..

Okay, okay..

So a lot of it's going to depend and I highlighted that 53% of our book is short-term that the loan book and our assets -- earnings 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 what 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 into business into the fourth quarter and into the first quarter..

Yes, great, Collyn. I think it's important when we're talking about expectations for enrollements that rerirate that most of our growth about 80% comes from our existing employers about 20% from new employers.

That sets that our trends, our growth trends have been stable from new accounts from existing 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.

All of this leads us to believe that we will see growth in the same range as we're currently seeing as we head into the fourth quarter and into 2018..

Thank you. Our next question is coming from David Chiaverini of Wedbush Securities. Please go ahead..

Hi, thanks 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..

I’ll take and turn it over to Chad absolutely I mean 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 best 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 we 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..

I just say I totally agree John and we've gotten all the investment that we needed in order to advance the business and it's refreshing actually to get this question rather than why when you going to show operating leverage.

We thought consistently we are, we're 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 the increase in expenses of somewhere between $3 million and $4 million quarter-over-quarter and if you look at that it's pretty much 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 -- we're sticking to our strategic outline and investing right along the lines that we have highlighted and so there's investments occurring in HSA. There's also investments occurring in the Commercial Bank and in the regional bank as well..

Great and then a follow-up on the HSA 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, it is part of the strategy but we're very disciplined in terms of the economics around any opportunity.

So the answer is we are very much aware of what's going on in and around us in the marketplace, looking for opportunities but we also really are very confident and positive about our ability to grow the business organically..

Thank you. Our next question is coming from Mark Fitzgibbon of Sandler O'Neill. Please go ahead..

Good morning and first let me echo some of the comments that were made before Jim congrats on your retirement and thank you for all your help over the years and John best of luck in your new role..

Thanks Mark..

Thanks, Mark..

First question actually a couple on deposits if I could. Chad, HSA deposit rates have stayed surprisingly low 20 basis points what 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 the deposit rates aren't the main driver when we talked to employers it's really your capabilities to service the operations. And the consulting with the both the employers and the consumers.

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 -- most of the battle on the HSA business is on the service fees as opposed to the deposit rates these days. And what we see Mark at the total bank is that our datas are running about half of the historic data.

So the last time there was a rate increase going back to 2004, when you look at our historic data across the whole book they're running here about half that.

And so we think that there eventually be some pressure you probably say CD rates picked up a little bit, the money market deposits take up a little bit some of that's regional but down the road we could see an acceleration in that but because datas 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 elasticsity 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 approching 2% are you guys bumping into that much..

I think Mark that it's spotty and it's geographically based. When I talked to Mittan, I mean their 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 four basis points.

And what if you ask Mittan, what he will tell you is that depending on the market and the bank you may see either higher advertised rates or sometimes rates that aren't even the advertised 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, we may run into it in a single bank, we may run into somewhere but it hasn't stopped us from being able to grow deposits at a greater level in the market. We don't use the fact that we have HSA to not focus on our competitive deposit pricing in our market.

So, as Gelnn said so far so good and we haven't really seen enough broad based high rate competition to have a change in our strategies..

Okay. And then on the branch front John I wondered I know you closed eight branches this quarter but with 70% of the transactions being self-service 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 what we've said is we know that our goal is to reduce the squarefootage of our entire branch network over time.

And that probably means over the long-term more we're likely fewer banking centers than more but we have no plans in the immediate quarter to -- 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 a 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 but I think there's a realization in Hartford that there's a significant problem that needs to be solved.

We've said Jim has been so involved in this I have as chair of the CBIA this year of being so bullish on Connecticut's potential and so frustrated that we haven't sort of seemed to be able to get out of our own way. We're the only state as you know without a budget right now are operating on executive order.

We do think that there will be a positive resolution to visit the end meaning that there will be some structural change so that our problems won't come up every year as 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 will be improvement.

I think good discussions between the Republicans and the Democrats even reported last night are positive step they're trying to get something done that will make sure Hartford stays solvent and make sure that we are on better business footing going forward..

Thank you. Our next question is coming from Jared Shaw of Wells Fargo Securities. Please go aehad..

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 where you've come over that time and congratulations on a great career, and John congratulations on a well deserved promotion..

Thanks, Jared. Appreicated..

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 stocked 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 sponsored 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 a sources of significant C&I growth for us whether it's with corporations there or leveraging private equity sponsor relationships in those two markets with companies outside of those footprints.

We will 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 thanks. 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.

Now, 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 then keep you in an asset sensitive position. .

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

Are those mortgages that you put on are they 30-year? Are you replacing all of your orginated?.

They are jumbo. But they have an average life very similar to our HSA deposit right from a duration standpoint..

Great, thank you very much and congratulations again..

Thank you..

Thank you. Our next question is coming from Matthew Breese of Piper Jaffray. Please go ahead..

Just a couple of follow-ups on the forward long growth outlook I just wanted to clarify you noted 10% potential long-term growth is that more just for the commerical 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 that implies 6% to 8% on a total basis..

Right..

Got it.

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

Yes, on unsecured, on HELOC, on equity launch we've seen some runoff 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 that is really rate driven or credit metrics driven, how much that is competitive just wanted to get a sense for is it just not fitting the right buckets for you or there strategic concerns around some of the properties being and loans being presented to you?.

Yes, specifically on CRE and I'm always excited 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 four or five 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 transaction 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 start for us in commercial realestate..

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 multiyear cycle of having a HSA call it over the next five years, to what extent you think you can improve that efficiency ratio especially as we get through something investment phase..

Sorry I don't think we have specific guidance on the efficiency ratio for HSA but they did have a quarter a very good quarter John highlighted with PPNR up 28% I think you're starting to see some of the operating leverage and some of the pay off 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 multi 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 stepping up for the seasonal enrollment period in the fourth quarter.

So long way of saying I think in the first quarter your policy expense is a little bit higher because that's where we're onboarding everyone and then you start to see operating leverage as the a next couple orders go along. But as we look at this I think the second third quarter, the business is 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 and over a three-year horizon to that like mid 50s or somewhere around that..

Got it. Okay. That's all I had John, Jim congratulations to you both and best of luck..

Thank you..

Thank you..

Thank you. Our next question is coming from David Rochester of Deutsche Bank. Please go ahead..

Hey good morning guys. Glenn just on your comments there on the efficiency ratio going down that that's specifically for the HSA business does that's right down to mid-50s.

So what are you thinking just in terms of overall for the company, can you get to those 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 albeit 58% or 59%.

The guidance I gave is 60% for the fourth quarter, it depends on a lot of things, the rate environment, the deposit data all of 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 same way. And I highlighted some of the investments we're doing whether it's on that underwriting platform or the cash management platform.

So that’s where we are..

Okay.

And then just specifically in 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 and 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 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 2018 and 2019.

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 wealth and then to our partner..

Got it.

And I think Glenn just real quick on security premium comments, you saw that increase 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 CPR rate of like 13.5; it’s had an impact of 1.04 million higher amortization costs. And then going into the fourth quarter, we think it's going to be relatively flat. We think the CPRs will probably be just below 13 and the amortization will be somewhere around 11.5, so relatively flat..

Got it.

And then securities and investment rates, where are those now versus where they were in the quarter?.

For the third quarter, we had -- we purchased at a rate of around 292 and the paydowns were at 366. We're starting to see that manifest in the total portfolio yields. Q4 we think we will be purchasing around 290..

Okay. Great.

And then just one last one on the occupancy and other expense lines were down a bit this quarter, you’re expecting a bounce back or those pretty good levels going forward?.

The second quarter, the items I have highlighted were second quarter, so the impact was -- they were non-reoccurring. But the occupancy was related to the eight branch closures that we highlighted in the second quarter..

Got it, okay. So that’s the good level going forward..

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

Great, all right thanks guys. 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. Appreciate it..

Thank you very much..

Thank you..

Thank you. 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 will 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..