Webster Financial Corp

NYSE:WBS

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to the Webster Financial Corporation’s Third Quarter 2018 Earnings Call. I will now introduce Webster’s Director of Investor Relations, Terry Mangan. Please go ahead sir.

[Terry Mangan, Director of Investor Relations]

Thank you, Michelle. Welcome to Webster. 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 conditions, results of operations, and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from these in the forward-looking statements is contained in Webster Financial’s public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the third quarter of 2018.

I’ll now introduce John Ciulla, President and CEO of Webster.

[John Ciulla, President and Chief Executive Officer]

Thanks, Terry. Good morning, everyone. Welcome to Webster’s third quarter 2018 earnings call. CFO, Glenn MacInnes and I will review business and financial performance for the quarter. HSA Bank President, Chad Wilkins, will then join us for Q&A.

I’ll begin on Slide two. I’m really proud of the team’s performance this quarter, continued execution on Webster’s strategic priorities to aggressively grow HSA Bank, expand commercial banking and transform Community Banking resulted in a record level of quarterly net income.

Our strategic management framework continues to ensure a disciplined approach to capital allocation where capital and resources flow to those businesses that have the highest potential to generate economic profit overtime for the benefit of our stakeholders.

Leveraging the combination of our management framework and our differentiated business model has resulted in another quarter of strong financial performance. Earnings per share of a $1.06 in the third quarter represent a new quarterly record. Adjusting for discrete tax benefit specific to the quarter and a final accrual for FDIC insurance premiums related to prior periods, our EPS for Q3 was $0.98. Performance was driven by pre provision net revenue growth of 18% from a year ago. Loan growth and a higher net interest margin along with an increased level of commercial loan and HSA fees led to our 36th consecutive quarter of year-over-year revenue growth. We’ve now posted three consecutive quarters of year-over-year revenue growth in excess of 10%.

In Q3, total revenue of over $300 million was more than 13% better than a year ago and more than 3% better than last quarter. Adjusted expenses increased less than 9% year-over-year resulting in the sixth consecutive quarter of positive operating leverage. Our efficiency ratio remained below 58% and it’s been below 60% for five consecutive quarters.

Webster’s transformed balance sheet has played a crucial role in our success. Our loan portfolio yield is 100 basis points higher than in the third quarter of 2015 which is just prior to when the Fed began raising short term interest rates. The yield on our commercial portfolio has improved a 142 basis points over that period. On the other side of the balance sheet, our cost of deposits have increased only 18 basis points over this period, influenced by stability and low cost transactional and HSA deposits. This dynamic has been driving our NIM improvement over the last several years.

Webster’s asset quality remains stable with net charge-offs in Q3 totaling just under $6 million.

Turning to slide three, total loan growth compared to a year ago was 5% versus [ph] commercial loan growth above 10% and consumer loans declining 3%. As I indicated the Barclays Conference in September, this performance is consistent with our strategic focus on expanding commercial banking. Consistent with the broader market, consumer balances have been affected by lower mortgage origination volumes and continued reductions in outstanding home equity balances.

Deposits grew 5.5% from a year ago funding all of our loan growth and two thirds of the year-over-year reduction and borrowings. As you can see on the slide the portfolio yield on loans grew significantly faster than our cost of deposits as compared to the prior year.

Starting on slide four, I will view the lines of businesses. Commercial banking reported another strong quarter in Q3 and the loan portfolio exceeded $10 billion for the first time. Non-interest income achieved a record quarterly level as well. Loans grew almost 11% year-over-year and approximately 4% linked quarter due to strong originations in both commercial real-estate and middle market, sponsor and specialty.

Low accrete pay-offs in the quarter also contributed to net loan growth. Commercial banking generated more than $18 million of non-interest income during the quarter driven primarily by loans indication fees and swap revenue on the increased pre-originations. Our continued investment in commercial businesses and the focused execution by our bankers have resulted in consistent growth and strong performance. Commercial banking generated $65 million of PPNR in Q3 representing growth of 14.5% from a year ago. Asset quality metrics in the commercial banking loan portfolio remains stable and at cycle lows.

Turning to slide five, HSA Bank’s Q3 performance continues to underscore the by-directional value of HSA Bank and Webster particularly in this rising rate environment. Our 2.7 million accounts comprised 5.6 billion in low cost loan duration deposits that helped fund Webster’s earning assets and an additional $1.6 billion in linked investment balances.

Total accounts were 12% higher than a year ago and footings per account are 6% higher. Combination of account growth and account seasoning resulted in year-over-year growth in total footings of $1.2 billion or 19%.

HSA Bank’s quarterly revenue of $59 million grew 28% from a year ago. The 38% year-over-year increase in net interest income was derived from the 15% increase in average deposit balances and a higher net credit rate.

Year-over-year expense growth was 13% evidencing our continued investment in this differentiating business. HSA Bank generated positive operating leverage resulting in pretax net revenue of $28 million which grew 49% from a year ago.

We continue to see positive signs from our investments in HSA Bank’s growth teams in all stages of our pipeline as we head into the important January 1 enrolment season. Progress has been greatest in the direct-to- employer channel where we have focused our sales activities over the past couple of years.

Moving to slide six, Community Banking continues to provide high quality deposits for the organization. Deposits grew by 4% year-over-year including an increase of $158 million or more than 6% in business deposits.

Business loan originations were up 29% year-over-year and we are proud to have recently been recognized by the small business administration as the top SPA lender by dollar volume for all of New England. This adds to our long history of being the number one SPA lender in Connecticut.

Total business loan balances grew 6% year-over-year while total consumer loan balances declined 3% resulting in a 2% reduction in total loan balances in the Community Bank. Total revenue for Community Banking grew 4% year-over-year, deposit growth and improved spreads drove 5% growth in net interest income.

Total non-interest income in this segment declined modestly from a year ago. Investment revenue growth was offset by decline in mortgage banking revenue from lower origination volumes. The net result was $33 million of PPNR in Q3 for Community Banking representing growth of 5% year-over-year.

I’d also like to take a moment to congratulate the team in our customer care center as Webster Bank was ranked first in the New England region for call center satisfaction in the JD Power 2018 U.S. retail banking satisfaction study, demonstrating Webster’s continued commitment to customer service and customer experience.

With that, I’ll turn the call over to Glenn.

[Glenn MacInnes]

Thanks, John. Slide seven provides highlights of Webster's average balance sheet. Average loans grew 1% linked quarter to $18.1billion and 4% year-over-year. Loan growth was led by C&I which increased $174 million or 2.7% from June 30th.

Year-over-year C&I increased $693 million or 12%. Loan originations for the quarter totaled $1.4 billion and fundings were $1.1 billion, with commercial accounting for $1.2 billion of the originations and $776 million of the fundings.

Loan payoffs totaled $713 million, which were down from $905 million in Q2. As John highlighted, the linked quarter declining consumer loans reflects lower origination volume and residential portfolio coupled with continued pay downs in the home equity portfolio.

Average deposits increased $502 million or 2.3% from Q2. This was led by a seasonal increase of $359 million in public funds and CD growth of $203 million, versus prior year average deposits increased $970 million or 4.6% with HSA Bank representing over $700 million of the increase.

Deposit growth exceeded loan fundings for both the linked quarter and year-over-year resulting in a reduction of borrowings. Our borrowings as a ratio improved 8.2% compared to 9.9% at June 30th and 10% a year ago.

Our loan-to-deposit ratio remains favorable at 83%. Our ability to fully fund loan growth through multiple deposit channels continues to position us well for growth while providing a competitive funding advantage.

In common equity, tier 1 and tangible common equity ratios remained strong supported by our earnings growth.

Slide eight summarizes our Q3 income statement and drivers of our record quarterly earnings Revenue of $303 million increased 3.2% to a quarterly record. On a year-over-year basis, this total revenue grew 13.5% led by an increase of $29 million in net interest income.

Non-interest expense decreased $1.7 million linked quarter. The quarter includes an additional $2.9 million in FDIC expense for periods prior to 2018. Reported PPNR of $124 million in Q3 increased 9.7% linked quarter and 18% from prior year.

Loan loss provision for the quarter was $10.5 million and continues to reflect loan growth and stable credit quality. The effective tax rate of 12.1% in Q3 includes $8.5 million of a one-time discrete benefit, related to tax planning strategies in connection with tax reform. The overall result is a record level of net income available to common shareholders.

The efficiency ratio which excludes incremental deposit insurance remained below 58% for the second consecutive quarter.

Slide nine provides additional detail on our 18% year-over-year pre-provisioned net revenue increase. Net interest income grew by $29 million or 15%. $20.8 million is due to rate and $8.8 million due to volume. The rate benefit is a result of a 57 basis point improvement in loan yield and a 12 basis point increase in deposit cost.

When measured against the 76 basis point increase in average Fed funds rate, this resulted in a long beta of 75% and a deposit beta of 16%. The combined result is a 31 basis point increase in year-over-year net interest margin.

The increase in non-interest income reflects higher commercial activity and HSA fees, and the increase in non-interest expense includes incremental FDIC expense, higher compensation and benefits and technology expense.

Slide 10 provides additional detail on net interest income, which had a linked quarter increase of $5.4 million. Our performance continues to benefit from a significant amount of the loans resetting 30 days or less.

At September 30, $7.1 billion of loans are indexed to one month LIBOR and $2.6 billion are indexed to Pride [ph]. Combined, this represents 53% of our total loan portfolio, another 19% of our loans reset at least once before final maturity. Combined 72% of our loans are priced on a floating or periodic basis.

For the quarter, the yield on interest-earning assets increased seven basis points, while the cost of interest-bearing liabilities increased four basis points. This results in four basis point improvement in NIM to 3.61%.

Slide 11 highlights non-interest income which increased $4 million from Q2. As anticipated, we had a higher level of commercial fees this quarter. On a year-over-year basis, non-interest income increased $6.4 million. This was led by commercial fees and account growth at HSA Bank. Mortgage banking revenue declined $1.1 million from prior year due to lower origination volume.

Slide 12 highlights a non-interest expense trend. On a linked quarter basis expenses decreased $1.7 million. Adjusted for the incremental deposit insurance and facilities optimization costs, involves Q2 and Q3, the linked quarter expense increase was $4 million and this was primarily driven by higher medical costs.

Year-over-year expense increased $17 million; this was driven by $2.9 million of incremental FDIC expense, an increase of $3 million in medical cost, $2.5 million from annual merit and $1.8 million from strategic hires.

Slide 13 highlights our key asset quality metrics. We continue to have a positive near-term view of asset quality. The net charge-off ratio was 13 basis points and is 15 basis points year-to-date. The allowance for loan and lease loss is now $212 million as a provision again exceeded net charge-off in support of loan growth. The allowance represents 116 basis points of total loans.

Slide 14 provider outlook for Q4 compared to Q3. We expect average loan growth to be in a range of 1% to 2% once again led by commercial loans. We expect average interest-earning assets to grow around 1%. We expect NIM to be up 4 basis points to 6 basis points, driven by expected increase in average one month LIBOR and Prime.

Given our earnings assets and NIM expectations, we expect net interest income to increase between $6 million and $8 million. Non-interest income is likely to be down between $3million and $4 million as a result of strong Q3 commercial activity.

We expect our efficiency ratio to continue to be in a range over the last two quarters. Our provision will be driven by loan growth, portfolio mix, net charge-offs and our portfolio quality. We expect our tax rate on a non-FTE basis to be approximately 20%, while actually we expect our average diluted share count to be similar to Q3’s level.

With that, I’ll turn things back over to John.

[John Ciulla, President and Chief Executive Officer]

Thank you very much Glenn. I’ll conclude by complementing our Webster and HSA Bankers on another solid quarter. And I’d like to thank our shareholders for the confidence they have placed in us as we pursue our vision to rank among the highest performing regional banks in the country.

With that, we’ll open it up for questions.

[Operator]

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

[Steven Alexopoulos]

Hey good morning everybody.

[John Ciulla, President and Chief Executive Officer]

Hey Steve.

[Glenn MacInnes]

Hi, Steve.

[Steven Alexopoulos]

I wanted to start on deposits. The only real pressure point on deposit cost for you guys are time deposits. And with the loan to deposit ratio at only 83%, what’s the thought here behind such as aggressive growth and CDs?

[John Ciulla, President and Chief Executive Officer]

Yes, Steve, I mean I wouldn’t characterize it as aggressive growth and CDs as we’ve said and we spoke about this a lot in the last few quarters, we know that we have the benefit of HSA so that we don’t have to be overly aggressive in chasing deposits, however we don’t want to be disappointed because behind OCD clients and behind many of our consumer, our clients are mortgages and other products that are profitable for us. So it’s important for us to look at our deposit rates by region, by business line and make sure that we’re being competitive enough to maintain our deposit. So, customer preferences are changing, CDs are obviously increasing with us and with our competitive set, but we’re going to be competitive, but I think we are not going to be ridiculous in terms of the race will pursue.

[Glenn MacInnes]

And Steve, I would add to this, it’s Glenn that we’ve seen now for the second quarter a migration and somewhat slower than the third quarter of savings to CDs, so the last quarter was more pronounced but we’ve seen a migration of customers moving from a savings product with 20 basis points, 25 basis points to be like a 10 month or 12 month CD rate, and so it’s also keeping our current customers.

[Steven Alexopoulos]

Yes, okay. And Glenn, could you walk us through the expected change in deposit cost in 4Q that underlies the NIM guidance for up another 46 [ph]?

[Glenn MacInnes]

So we see – we see we are up six basis points, I think going into the fourth quarter we be up 3 to 4 basis points on deposit cost.

[Steven Alexopoulos]

Okay, 3 or 4.

[Glenn MacInnes]

I think what’s encouraging to us as we look at this through the cycle and you know you’ve done some work on this, but if I look at it from the third quarter of 2015 and third quarter of 2018, our deposit betas you can say 10.5%. If you do the same for the asset side, third quarter of 2015 to the third quarter of 2018 our asset beta on loan beta is about 47% and we continue to keep that mix.

[Steven Alexopoulos]

Right. Okay, and then shifting gears to loans, with loan growth trending in the 5% range, is it reasonable you could move back into the planning horizon range which is 7% to 8% as we think about next year or is mid-single digit the new norm?

[Glenn MacInnes]

Well I mean I think it’s mix, right Steve. So we think and I’ve said over and over again that that’s sort of 10% bogey on commercial loan growth is the sweet spot for our ability to outperform we think the market, but also not after I give on credit quality and so it really comes down to what we do on the consumer side, you know launching some consumer products due to loan refinance, personal loans but really on the mortgage side, we think, we do have some opportunity, you know we’re down like the market is down, but we are down a little bit more in the market on mortgage, and right now, we’re looking at our pricing, we’re looking at turn times, we’re looking at digitization of the process, we’re looking at revisiting our correspondent channel. So I think it’s really going to be dependent on what we can do in terms of growing the consumer loan balances to get back up to that 7% or 8%.

[Steven Alexopoulos]

Okay, that’s helpful. And just the last one, I have to ask Chad a question. I know the annual enrollment for health plans is now underway and I know it’s early, but any indicator so far to tell you how the enrollment season is going, and what it could mean for HSA account growth? Thanks.

[Chad Wilkins, HSA Bank-President]

Yes, thanks Steve. The first thing I’d say is when we talk about new account production for one one that we have to remember that 80% of our accounts come from existing employers and 20% from new, also about half our production comes from direct sales activity and another half comes from partnered production which is -- less we have less visibility to. So in the segments and channels where we have the most influence and focus we are seeing positive signs and believe that we’re headed for a strong one one. We have better new account production as compared to the first quarter of this year and we are expecting better production than we had in the first quarter of this year.

And some signs that I threw out there are -- proposal activity has been up significantly especially with large employers. Our pipeline size is several times larger at this point this year than last, and both in terms of the number and size of opportunities, we have more wins last year, significantly more wins than we had last year both the number and size and we’ve had more transfer groups this year.

So really positive signs and that I mentioned from our relationship management standpoint, we have been better aligned with our large existing account so you know anticipate having higher retention and potentially improve the yields there. All of that said, there are lot of factors that infact enrollments and plans and selection, but we’re encouraged by what we are seeing at this point, Steve.

[Steven Alexopoulos]

Terrific. Thanks for all the color guys.

[Chad Wilkins, HSA Bank-President]

Thanks, Steve.

[Operator]

Thank you. Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

[Collyn Gilbert, KBW]

Thanks, good morning gentlemen. Just maybe John or Glenn, just a question on some of the trends that you are seeing within the commercial book. Glenn, I know you had indicated I missed it, but I can look at the transcript the pay-offs that you saw this quarter. But just curious as to what your outlook is for pay-offs within the commercial book as we look out you know in the fourth quarter and then just more broadly into next year.

[Glenn MacInnes]

Sure, Collyn. I’ve probably been really bad at predicting them and they have been lumpy. It’s funny we obviously saw really good linked quarter growth which resulted in double digit year-over-year growth, but just to put that into a framework, we actually had about $80 million less in commercial loan originations this quarter than we did last quarter, but we had $70 million fewer pay-offs this quarter than we did last quarter. So, we’ve seen pay-offs kind of – they peaked in 2Q, they trended down.

Fourth quarter is usually pretty – usually a pretty active quarter both on an origination and a pay-off perspective. So I don’t think we’re going to see a change in sort of the trajectory you are trending and it all depends particularly in some of our commercial real estate transactions where we could get a $30 million or $40 million pay down it could really shift things towards the end of the quarter. So I can’t give you a whole lot of visibility except to say that we don’t see anything in the marketplace that would indicate there would be a sudden shift in increase in pay downs or a lack of refinancing activities. So I would say it would be similar to prior quarters and this one.

[Collyn Gilbert, KBW]

Okay, that’s helpful. And then Glenn, just back to your comment on you know your thoughts that perhaps you’ve seen slowing migration from the CD – from savings to CDs or just you know that’s a pretty controlled deposit data that you are expecting for the fourth quarter, I realized obviously some of that is HSA driven, but just again, more generally kind of what you are seeing in the market you know you had indicated behaviors within your own deposit base, but what you are seeing maybe more broadly as to kind of longer term deposit pricing pressure given….

[Glenn MacInnes]

Yes, I think our – the most aggressive market for us is the Metro areas Boston, New York to some extent Boston has been very high as a market. So a lot of our promotional pricing to the extent we do it is in the Boston market. So that’s where we are seeing most of the pressure on higher cost. I think that we are very conscious of the fact that we have a competitive advantage we – say we are also very conscious of the fact that we’re in the Northeast where the typical bank has a high loan to deposit ratio. And then you couple that with the larger banks, which eventually we think -- unwinding of the QE and through the value on – from an LCR standpoint on retail deposits could be the perfect storm.

So, we continue to monitor that. We haven't seen it yet. When we look at our forecast and we go out a couple of quarters, we think that our deposit data will stay relatively constant but we're also very conscious of later in 2017 it could accelerate a little bit or 2019.

[Collyn Gilbert, KBW]

Yes. Okay, okay. Okay. That's helpful. And then just again kind of a broad question on expenses, you guys have indicated year-over-year expenses up 13%. You've articulated you're going to continue do invest in the business where necessary to keep the efficiency below 60. What would be -- what are some of the initiatives kind of on the docket for either expense growth or expense cuts? And then I guess I'd -- you know ask that same question to Chad recognizing that it been a big investment here in HSA, building up sales force, you know, how do they – how they see sort of the trajectory in the mix of expenses migrating into next year? Let me get broadly?

[Glenn MacInnes]

Let me start with that. Yes, let me start with that Collyn, I'll turn it over to Chad. Because I know they have done a lot of work out there. But generally on the core bank side it's everything from a digital banking, our mobile upgrades and replacements, its infrastructure sort of related projects like a customer hub, its containing all customer data that we can use for sorting and marketing, network segmentation, things that are ongoing as far as the security.

Also on a facility side there is investments whether it's our Stanford corporate hub site or HSA expending the HSA square footage. There still continues to be a lot of continuous improvement type of initiatives here, so that's ongoing. And then the last think I would say is our expenses sort of follow our strategic priorities and that if you look at HSA bank, you look at commercial and retail, those are in that -- that order they are lowest efficiency to highest efficiency ratio. So we're allocating capital to those or that continue to generate higher returns. But I'll turn it over to Chad because I know they have a lot of initiatives going on HSA as well.

[Chad Wilkins, HSA Bank-President]

Yes. Thanks, Glenn. I'd say that the big spiky investments that we have made in the past bringing consultants helping with our operational excellence initiatives and so on are behind us. And we've also brought in resources to help us with our continuous improvement execution. So things like automotive workflow that will be rolling out over the next couple of years will drive operating leverage for us, so that we can continue to invest in things like our investment platform which by the way we just launched guided portfolio in October here this year which allows us to offer tools to consumers to – for decision support and to rebalance their portfolios, also higher quality funds, lower-cost, higher-quality funds and also an asset-based fee associated with it.

So, really excited to have that in the market, but also launching at the beginning of year a new RIA investment platform that allows us to work with 401(k) plan advisers which is really fast growing channel for us and we expect to get a lot of business from that offering as well. So it allows an RIA to offer an HSA and manage the investments and also earn income on that offering. So we're looking to partner more effectively in that channel.

So, we're making a lot of investments across our consumer -- customer experience and capabilities. Also we'll invest in our sales team [Indiscernible] growth teams as we see a good positive ROI to continue to grow HSAs in the market.

[Collyn Gilbert, KBW]

Okay. That's helpful. I will leave it there. Thanks guys.

[John Ciulla, President and Chief Executive Officer]

Thanks Collyn.

[Operator]

Thank you. Our next question comes from the line of Mark Fitzgibbon with Sandler O'Neill. Please proceed with your question.

[Mark Fitzgibbon, Sandler O'Neill]

Hey, guys. Good morning.

[John Ciulla, President and Chief Executive Officer]

Good morning, Mark.

[Mark Fitzgibbon, Sandler O'Neill]

First question I had is for Chad, Chad that 20 basis point rate on your HSA deposits, amazing. When do you think we might see the nurture from the HSA customers' change where they might start to require higher deposit rates? And when that happens? What sort of magnitude of change would you anticipate?

[Chad Wilkins, HSA Bank-President]

Yes. I think the -- we still haven't seen any real pressure on our rates and there has been any movement across the industry because we monitor that pretty closely. And when we think about rise our pricing we're thinking about it more holistically. We look at all of the fees associated with the offering. And we have looked at reducing a better aligning some of nuisance fees and things like that that only the better -- to improve the customer experience. So we've seen more pressure on monthly fees and other fees associated with HSAs rather than the rates that we charge on the deposits.

So, in terms of what we expect next year, we'll continue to monitor the market. We'll continue to get feedback from our customers and make adjustments where we see necessary. We do forecast out where we expect to increase rates, and we've actually have performed better than what we forecast from that perspective. So don't expect any real significant changes in that short time.

[John Ciulla, President and Chief Executive Officer]

And Mark, one thing I'd had to behaviorally is that you see increases in investment balances. So, if you do have enough in your HSA account to be concerned about what your return is, you have the option of going into an investment account. We also think that has the effect of taking some pressure off of the actual rate on to deposit.

[Mark Fitzgibbon, Sandler O'Neill]

Okay. So then, Glenn on your NIM guidance for next quarter does that assumed a flat cost to funds and the HAS?

[Glenn MacInnes]

On the HSA we stay flat at 20 basis points.

[Mark Fitzgibbon, Sandler O'Neill]

Okay, great. And then, can you update us on the branch optimization plan where you are in that?

[Glenn MacInnes]

Sure. And, so I think year-over-year we've reduced our branch size including the most recent sale that you probably saw by 10. And so on just a year-over-year basis we were able to take out about, I'd say bout 40,000 square footage within our branch network, and obviously that effort continues. And so I think we look at continue to optimize and so you'll see sort of small number of square footage, always point to Harvard Square as an example was 5000 square feet where we have an opportunity to sublease that which we're doing, you'll see that kind of movement.

[John Ciulla, President and Chief Executive Officer]

Mark, the strategy going forward continues to be the same. We don't have anything right in front of us, but we're constantly reviewing our banking center footprint. We think the banking centers are critical delivery channel, even though customer preferences are changing. So overtime we may consolidate, make smaller, we may add in certain situations. One thing I will tell you is we'll likely to have fewer square feet in play year-over-year over year over year, but we think we are moving as quickly as we can to be more efficient but also not disrupt the customer experience at all and make sure that we have that channel as a vibrant channel.

[Glenn MacInnes]

Last thing I'll add Mark, if you go back and you look at our trends say back the 2010 you strip out the expansion into the Boston market, we're down from 210 to 181 branches, banking centers, 248, so down 33. So I think we've been fairly aggressive that rationalizing the network.

[Mark Fitzgibbon, Sandler O'Neill]

Okay. And then lastly, you guys and you've answered this in the past but I'm curious if your views change. You have a strong relative acquisition currency. Can you see getting back into M&A of other banks or fee-based businesses and say the next few quarters?

[John Ciulla, President and Chief Executive Officer]

Mark, the answer stays the same. As we said here each quarter obviously we always look at everything on the strategic plate, but with the progress we're making in our differentiated businesses, the organic growth that we're showing it would be highly unlikely that we would enter a whole bank acquisition transaction.

[Mark Fitzgibbon, Sandler O'Neill]

Thank you.

[Operator]

Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Please proceed with your question.

[David Chiaverini, Wedbush Securities]

Hi, thanks. Couple of questions for you. First, given the building liquidity on the balance sheet you mentioned about 83% loan to deposit ratio which is the lowest in years, good to see. And the borrowings to assets ratio, that's coming down, I guess, first, I think you've said previously that you're targeting a mid-single digit type level for borrowings to asset, is that still the case?

[Glenn MacInnes]

Mid-single, yes, I think that still the case. Part of what you see David, is you see the influx of public funds which is seasonal. And so we were able to take advantage of that by reducing repose by reducing Fed funds and further reducing some FHLB borrowings, so it's about a $300 million swing there in reduction in borrowings, but you'll see that ebb and flow.

[David Chiaverini, Wedbush Securities]

And since we're kind of approaching that targeted level, I'm assuming you're going to start building the securities portfolio more meaningfully going forward considering the strong deposit growth you're seeing in HSA. Is that a correct assumption?

[Chad Wilkins, HSA Bank-President]

So we think that the securities portfolio will remain in the range of 28% to 30% of our assets. And so the extent we grow assets you would expect that to grow but only marginally.

[David Chiaverini, Wedbush Securities]

Okay. And then sticking with the securities portfolio when I look to yield your earning over the first nine months of 2018, it's actually down versus the same period last year despite rates moving up. So the question is, why hasn't this moved up? And do you have any plans to kind of change the duration or get that yield up at all?

[Glenn MacInnes]

So, we wouldn't change the duration until such point we thought that the curve was inverting and that would extend portfolio. I think as far as the yield, the thing you have to look at is the prepayment speeds which are impacting amortization within that. And so I think as you go into fourth quarter you'd expect to see the prepayment speeds come down and it's about $1 million. So that would increase the yield on the portfolio.

[David Chiaverini, Wedbush Securities]

Okay, got it. And then shifting gears to HSA, I was intrigued by Chad's comment that the pipeline is several times larger this year heading into the enrollment season versus last year. What are the main drivers to that?

[Chad Wilkins, HSA Bank-President]

As you know, we've invested a lot in our growth [ph] team over the last few years, I mean over three years we've triple the size of sales and relationship management teams. We've also invested in a lot of resources, things like methodology, sales tools and fracing and so on so that we're not only trying to increase our capacity but our productivity as well, and so we're seeing the positive results of all those investments right now.

[David Chiaverini, Wedbush Securities]

Okay. And then the last one from me is more housekeeping, but when I look at the loan and lease related fees of 11 million, that's above the run rate of about 6 million over the past few quarters; anything unusual in there?

[John Ciulla, President and Chief Executive Officer]

The commercial trend.

[Glenn MacInnes]

Yes, I think as we highlight we had a one commercial transaction in the third quarter which was about 3.2 million. We had four transactions almost $4 million in syndication fees in the quarter which is more episodic than run rate, so that impact that fee line.

[David Chiaverini, Wedbush Securities]

Got it. Thanks very much.

[Glenn MacInnes]

You're welcome.

[Operator]

Thank you. Your next question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question.

[Matthew Breese, Piper Jaffray]

Good morning, everybody.

[John Ciulla, President and Chief Executive Officer]

Hey, Matt.

[Matthew Breese, Piper Jaffray]

I wanted to go back to the lower loan origination versus growth comments you made, and I know you address the prepayment side of this. But are you having more success capturing term sheets and maybe with that you could comment on the competitive dynamics of your markets?

[Glenn MacInnes]

Yes. I would say its really just timing. I don't think we're having more success capturing term sheets. And I would say, I'm sure you read in the paper. I think in over time in certain areas, in certain geographies and certain asset classes there's has been an increase in competition and lowering of spread, so you see more competition. I feel like we have and I've said over and over again when I think about our commercial loan growth, we have so many levers to pull with expanding middle market geographies with a bunch of really strong industry verticals, asset-based lending, equipment finance and commercial real estate that anyone quarter, anyone of those business units or geographies can contribute more or less, and so I would we're kind of sticking to netting with respect to risk appetite. We're losing a lot of deals. We're winning some deals and then our quarterly growth as I've said we target that sort of 10% annualized growth rate across that portfolio of assets; in any one quarter we can underperform or outperform that based on the deals we've won and based on the level of prepayment speed. So that I really can't tell you that things have changed much over the last let's say four quarters except obviously the competition continues to ratchet up slightly.

[Matthew Breese, Piper Jaffray]

Understood. Okay. And then maybe just going back to your Boston comments; first, maybe just get some new updated loan to deposit figures, but that secondly, we've heard more recently that larger competitors like JPMorgan, M&T they might be pushing towards that market. Given the wealth of deposits you have on a HSA front could we see a strategic shift here as it seems this already competitive markets going to get even more so?

[John Ciulla, President and Chief Executive Officer]

Yes. I think that's a good question. You've already seen us kind of modify our game plan in terms of really moving towards profitability and retention of really core customers instead of chasing deposits and loans for the sake of building deposits and loans. So, you are right. It is the most competitive part of our franchise market. It will only get more competitive when Chase arrives. We are ahead of our five-year loan plan marginally and we are about $500 million in deposits, almost three years into a five-year plan. So we're behind on our deposit acquisition, but we been I think more disciplined with respect to pricing and looking to get full relationships.

The market as a whole for us is still really strategically important and we continue to be very optimistic. For example, we just reached our full contingent of business bankers in that market. We got seven FTEs. Those banking centers are really necessary to provide coverage and momentum for those business bankers and we're seeing a pipeline build there. We're cross-selling our middle-market and corporate customers in Boston banking work which we couldn't do before we had a banking center network. But we have momentum and wealth. We have momentum in consumer finance and in mortgages as well. And you may know that we have two offices.

We have are middle-market and government bankers and business bankers in our Franklin Street, but we also have an office in the Back Bay where most of our sponsor and specialty bankers are located. So we've got billions of dollars of loans originated from that market. We have momentum and holistically that banking center footprint there which we continue to manage and try and get more efficient continues to add value to the overall market. From a consumer perspective only it will continue to be competitive. We believe that, but we think we can be competitive as long as we're patient and have the right expectations.

[Matthew Breese, Piper Jaffray]

Great. Okay. Understood. Clad, maybe one for you, just considering the rate environment, the outlook for rates, at some point over the next 12 to 18 months could we see Webster start to take some asset sensitivity off the table and what the maneuvers you might do to accomplish that?

[Chad Wilkins, HSA Bank-President]

Sure. And I think depending on where the loan end of the curve is we would consider that, and so absolutely if we see it turning that way. And I think the maneuvers that we would consider would be extending the investment portfolio from 4.9 years out. We would also consider boarding more fixed assets whether it's residential mortgages or boarding commercial real estate type assets or we could do a fixed a float swap to the extend we want to do that. So there are several levers available to us to sort of take some of the asset sensitivity off the page.

[Matthew Breese, Piper Jaffray]

Okay. So last one I just had just on the syndication fees up this quarter. I just want to get an update on that. What's the scale and scope of that business? What are loans tied to it? What's in that portfolio?

[John Ciulla, President and Chief Executive Officer]

Yes. I mean its -- so in 2012 we talked about this publicly over the last six years. We really in earnest build out a capital markets and distribution capability. We really only use the balance sheet for those underwritings and arrangements in areas where we have deep industry knowledge, expertise or strong sponsor or management relationship, so you see most of the syndications either in commercial real estate or in our sponsor and specialty group. You can probably tell from the episodic nature of those fees that we're not syndicating a handful of deals every quarter.

We use the tool to not only generate fees for us, but also allow us to participate at a higher level of higher-quality firms. So I'll give you an example, the one we did this quarter was a company that we had been the lead back for through a couple of iterations and it did got bigger and with so, we had such a good relationship with the management team that they asked us to leave that. We understand the industry very well so we actually executed our largest syndication successfully in this quarter.

I can tell you in the last six years we've successfully arranged underwritten over 80 transactions, but again we use that tool appropriately and obviously to manage our hold level. So at the end of the day we under wrote $220 million transaction and we're holding around $35 million of it and we can generate fee. So, hope that gives you some sort a sense of scale.

[Matthew Breese, Piper Jaffray]

Understood. Okay. Thank you. That's all I had.

[John Ciulla, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Eric Zwick with Boenning & Scattergood. Please proceed with your question.

[Eric Zwick, Boenning & Scattergood]

Good morning, guy.

[John Ciulla, President and Chief Executive Officer]

Good morning.

[Eric Zwick, Boenning & Scattergood]

Overall, credit quality remains strong, which I guess it's not too surprising. Just looking through the tables, the commercial non-real estate, non-accruals increased about 18 million in a quarter, not really huge concern, its actually pretty flat year-over-year. Can you provide some color to the particular industries or businesses that those borrowers were involved in that drove the 3Q increase and whether you're noticing any commonalities?

[John Ciulla, President and Chief Executive Officer]

Yes. What I will tell you is that it is two commercial credits; the industry – they are really specific to those credits and they don't represent anything from an industry perspective, the geography perspective or even in a weakness in underwriting perspective, they didn't come out of the same group. So, we don't speak to specific credits underlined there, but as you said on an absolute value it ticked up a little bit, on a relative value, still at cycle lows in terms of our total MPAs.

[Eric Zwick, Boenning & Scattergood]

Okay. And then switching gears maybe a bigger kind of picture question for Chad; one of the expectations that you previously communicated is that the number of participants that you classify as savers should grow over time, and I continue to read reports that indicate, majority of Americans do not have adequate retirement or investment savings and many are till having paycheck to paycheck despite the long expansion, kind of economic expansion period that we're in. So, with that backdrop what are the strategies that you can employ to target actual savers as oppose to spenders and how confident are you in ability to increase that share of savers versus they just growing them on an absolute basis at the same rate as total HSA participants?

[Chad Wilkins, HSA Bank-President]

Great question and its really the – heart of our focus is working with individuals to make them more aware of the ability to save long-term for healthcare, what that need is and giving them tools and resources to help them move in that direction. We haven't seen a big difference in the percentages of spender, saver and investor over the year as we continue to grow and build out the portfolio. But we have invested a lot of resources in and marketing materials and people to reach out more employer partners and our health plan partners and deliver those tools.

We build out things like the health plan calculator, so help you pick the right health plan, contributions tools, help you make great contributions, so we're – and then build to hired resources back in work with our employers to get those in front of their employees and consumers, so that they can make the right decision. So we believe there's a lot of opportunity there and we are -- when we are able to deploy those tools and communications we're seeing – we're moving the dail. And I think that's reflected in a solid footings growth over the year as compared to our account growth.

[Eric Zwick, Boenning & Scattergood]

I appreciate the color. Thanks for taking my questions today.

[Chad Wilkins, HSA Bank-President]

Thank you.

[Operator]

Thank you. Our final question comes from the line of Jared Shaw with Wells Fargo Securities. Please proceed with your question.

[Jared Shaw, Wells Fargo Securities]

Hi. Good morning.

[John Ciulla, President and Chief Executive Officer]

Good morning.

[Jared Shaw, Wells Fargo Securities]

Just looking at the – or the discussion on growing on the consumer side, how big of a push into the consumer side you really looking to make and as we look out over the next few years could we expect to see consumer being a bigger part of the balance sheet on the lending side?

[John Ciulla, President and Chief Executive Officer]

I don't -- I think you'll see us trying to meet our customer's needs by creating products that are more digital and more streamline on the consumer side, but the truth is with the growth trajectory and our strategic priorities you will not see the balance sheet shift back the other way. So, we've often talk when I arrived here we were about two thirds consumer which was mortgage and home equity, one-third commercial. We've pretty much flipped that. We're almost to a full two-thirds commercial and business banking and one-third consumer. I don't think you'll see it start to ship back, but you'll see the relative change in the balance sheet slow hopefully from higher consumer loan growth.

[Jared Shaw, Wells Fargo Securities]

Great. Thank you.

[Operator]

Thank you. There are no further questions. At this time I would like to turn the call back over to Mr. Ciulla for any closing remarks.

[John Ciulla, President and Chief Executive Officer]

Thank you all for your interest in Webster and have a great day.

[Operator]

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