Q3 2019 Earnings Call
Good morning, and welcome to websites or financial Corporation's third quarter 2019 earnings call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note this conference.
It is being recorded I will now.
And to get slips <unk> director of Investor Relations Terry back in the please go ahead Sir.
Thank you Gerry 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 walk through financial condition results of operations and business and financial performance Webster has based these forward looking statements.
Current expectations.
Actually it's about future.
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 most important thing statement.
Painted Webster financials public filings with the Securities Exchange Commission, including our form 8-K containing our earnings release for the third or.
I'll now introduce lobsters, president and CEO John fuel.
Thanks, Terry Good morning, everyone. Thank you for joining Webster's third quarter 2019 earnings call CFO , Glenn Macinnes, and I will review business and financial performance for the quarter.
I'd, just say bank President Chad Wilkins is here with us and Waterbury and will be available during Q1 I.
I'll begin my comments on slide two we're pleased with our financial performance for the quarter. Despite the challenging interest rate environment and a less certain economic outlook, our financial metrics continued to be strong Webster posted its 40 consecutive quarter of year over year revenue growth that is 10 years of sustained top line growth.
We continue to execute on our fundamental banking activities organically, adding new customers and deepening existing relationships across all business lines and geography.
Year over year average loan balances grew 8% led by commercial loan growth of 11%. Despite NIM compression strong loan growth enabled us to maintain our quarterly net interest income relatively flat to last quarter.
Loan growth was funded primarily by deposit growth total average deposits increased almost 6% year over year with HSH deposits growing 12.5%.
Earnings per share told the dollar in Q3 or a dollar one adjusted for one time expense items.
Compares to a dollar five in Q2 and 98 cents in Q3 of 2018 and that period is adjusted for discrete items you adjusted EPS growth is 3% from prior years third quarter.
Tangible book value per share continues to grow and a 16% higher than last year.
Andrew a common equity also grew by 16% and its $340 million higher than a year ago.
Total revenue in Q3 was 2.6% higher than a year ago, while adjusted expenses increased only 1.3%, resulting in the 10th consecutive quarter of positive operating leverage our efficiency ratio remained below 57%, even if we continue to invest in our businesses.
Now posted seven consecutive quarters with return on common equity above 12% and return on tangible common equity above 15%.
Our performance continues to be driven by the purposeful execution of long term strategic priorities to aggressively grow HSBC bank expand commercial banking and optimize community banking.
Credit quality remained solid with key asset quality metrics continuing to be a near cycle lows as a percentage your portfolio Nonaccruals delinquency and classified commercial loans were all flat better than a year ago, despite being relatively late in the economic cycle at present, we're not seeing any material now.
If trends or correlated behaviors across any geography product or industry sector.
Turning to slide three I'll comment briefly on our lines of business commercial banking is loan portfolio had increased 832 million over the past year for year end of period growth of 8%.
We continue to adhere to our underwriting discipline, while developing strong relationships by outperforming our clients expectations.
Segment also grew deposits by 277 million or 6.5% over the past year and our commercial banking pipeline with strong heading into Q4.
Hey, just say back continues to be a market leader and differentiator for Webster growing its pre tax net revenue by 26%. So far this year I just say back has added 737000, new accounts over the past 12 months as we deepened relationships and further penetrate the direct to employer market, we anticipate a strong and.
Roman period with respect to new account growth in Q1, 2020, as our opportunities proposals and new account pipeline are all up year over year, particularly in the large employers segment.
We also expect attrition from our third party administrator bucket of accounts, which in aggregate represented less than 9% of our total footings as a third quarter and as you may recall from our Investor day in 2017. Its wholesale channel contains our least profitable accounts, where he just say back x. I only ask a stone.
And for the assets, we don't receive interchange revenue account fees are nominal and balances are approximately 65% of that of the rest of the book.
As a result at one of our custodial clients being acquired in Q3, and another becoming a non bank custodian itself, we anticipate that the accountant assets related to these clients will have tried over the next two years importantly, HSH banks P.T. NR should not be materially impacted over the next six quarters.
Given the profitability dynamics of the accounts and the fact that transition and account closing fees helped mitigate the lost interest margin.
Community banking continues on its transformational road map to optimize distribution channels and best in digital capabilities and focus on high value consumers and small business.
This line of business continues to grow loans core deposits and full relationships across our Boston to New York retail footprint. We were again recognized at the leading SPD lender in Connecticut and in all with New England with respect to seven eight loans.
Community banking provides $4 billion I've met funding to Webster.
On slide four we highlight the solid loan and deposit growth dynamics that I mentioned earlier.
Despite increased uncertainty in the global economic outlook brought on by trade tensions slowing growth in Europe , and other markets and a host of geopolitical event risks here and abroad Webster's customers remain healthy and optimistic we continue to see solid activity across our geographic footprint and across all lines have been.
Throughout our retail wealth small business and commercial client base.
I'll now turn it over to Glenn for the financial review.
Thanks, John Slide five provides detail on our average balance sheet. The securities portfolio increased 457 million linked quarter, and 825 million year over year, largely due to balance sheet repositioning.
Growth has been primarily in fixed rate agency residential and agency commercial mortgage backed securities.
Loan growth continues to be led by commercial banking, which grew over 300 million linked quarter and 1.1 billion versus prior year business banking grew 26 million linked quarter and 96 million versus prior year.
Linked quarter consumer loan growth of 103 million reflects an increase of 140 million in residential mortgages compared to a year ago residential mortgages increased 368 million.
Partially offsetting this and in line with industry trends, we continue to see pay downs and home equity balances.
Deposit growth was 407 million linked quarter led by an increase of 234 million in money market deposit accounts as a result of seasonal strength in public funds.
Deposits grew 1.3 billion from a year ago with 56% of the growth coming from health savings accounts.
Positive growth funded.
Funded loan growth, both linked quarter and year over year.
Borrowings increased 491 million linked quarter, and 814 million from prior year funding growth in securities as part of repositioning.
The increase in borrowings from year ago includes 300 million in 10 years senior notes issued in March, which we swapped to floating.
The growth and borrowings as all short term or floating which helped reduce the banks asset sensitivity.
Our loan deposit ratio remains favorable at 84% and our capital levels remain strong.
Slide six summarizes our Q3 income statement and drivers of quarterly earnings net interest income totaled 240.5 million stable to Q2.
Our solid linked quarter, earning asset growth of 3.4% was offset by a 14 basis point reduction in net interest margin to 3.49%.
The balance sheet repositioning represented five basis points, a compression, but had almost no effect on net interest income.
Remaining nine basis points of NIM compression was in line with our expectations.
The balance sheet repositioning consisted of increased fixed rate securities funded by short term or floating rate borrowings and the purchase of 1 billion of one month LIBOR floors hedging floating rate commercial real estate loans.
As a result assets since sensitivity was reduced and future net interest income is protected if rates fall.
Versus prior year net interest income grew by 10 million or 4.4%.
Noninterest income decreased 5.9 million linked quarter and 2.4 million from prior year.
The linked quarter decline reflects a higher level of commercial activity as well as BOLI proceeds in Q2.
The decline from a year ago reflects a lower level of loan syndication fees.
Reported noninterest expense of 180 million was flat linked quarter and year over year.
While the pre provision net revenue of $131 million decline from Q2 s level, it increased 5% from prior year.
Loan loss provision for the quarter was 11 point threemillion, resulting in coverage ratio of 107 basis points and our efficiency ratio was 56.6% up modestly from Q2 and improved from a year ago and the effective tax rate was 21.3%.
Slide seven provides additional detail on year over year pre provision net revenue growth.
Net interest income grew by 10 million.
Strong loan growth drove an increase of 14 million from volume, which was partially offset by a decrease of 4 million driven by a lower rate environment.
Noninterest expense increased 1.1 million from prior year. This includes 1.7 million a business optimization expense, resulting from a review of technology assets in retail lending.
Beginning with slide eight I'll highlight the line of business results.
Commercial banking loan growth was led by commercial real estate, which grew 5% linked quarter and 14% versus prior year.
And I balances were flat linked quarter as a result of higher prepay activity, but grew 6% from prior year.
Net interest income grew 5.6 million from last year, primarily reflecting average loan growth of 1.1 billion or 11%.
Noninterest income declined 4.3 million as the prior years quarter benefited from higher syndication fees and operating expenses increased 1 million from continued investments in the business combined online ongoing loan growth was partially offset by lower fee income, which resulted in a modest increase in PPNR.
Slide nine highlights it should they just say bank, which delivered a solid quarter led by the production of 141000 new accounts.
Our 3 million accounts of 8.2 billion total footings.
Coatings were 964 million or 13% higher than prior year, while accounts were 11% higher.
Net interest income was 15% higher from a year ago, reflecting growth of 12% in average deposits and a higher net credit right.
Cost of deposits was 20 basis points as it remains flat for 11 quarters.
Noninterest income increased 6% from prior year, driven by 12% increase in interchange revenue and a modest increase in account fees.
Total revenue for the quarter grew 12% from a year ago, while expenses increased 7%, resulting in positive operating leverage and pre tax net revenue growth of 17%.
Slide 10 highlights community banking total loans grew 5% year over year with strong contributions from business banking or residential mortgages business and consumer deposits grew 9% at 5%, resulting in overall deposit growth of 6% from prior year.
Net interest income was adversely impacted by declining interest rate environment compared to last year.
Non interest income however, increased 5% led by higher mortgage banking revenue as a result total revenue was relatively flat.
Excluding 1.7 million of onetime business optimization costs expenses grew 2% from continued investments in technology.
Slide 11 highlights our key asset quality metrics nonperforming loans in the upper left at a linked quarter increase of 14 million NPL is now represent 83 basis points of total loans flat to a year ago.
9 million of the increase relates to an asset based loan where we're confident that were fully secure.
Net charge offs in the upper right were 13.8 million in the quarter linked quarter increase was driven by two loans in our regional portfolio with no correlated risk we saw a partial offset from a decrease on the consumer side.
Commercial classifies into lower left increased modestly and now represent 274 basis points of total commercial loans. This compares to a 20 quarter average of 320 basis points.
Our allowance for loan loss was 209 million with a provision of 11.3 million and a coverage ratio of 107 basis points.
Our allowance for loan loss continues to reflect stable commercial and consumer asset quality.
As you know the industry is approaching the adoption of a new accounting standards for credit losses, which will go into effect January Onest 2020.
We have made significant progress on our Cecil implementation plan in 2019 and continue to increase and expect an increase of approximately 25% to 35% above our current a triple allowance. The initial adoption will be recorded as a capital charge and will have minimal impact on capital ratios, which will remain.
In above well capitalized levels.
This estimate is based on our expectation of forecasted economic conditions and portfolio balances as of September Thirtyth 2019.
Slide 12 provides our outlook for Q4 compared to Q3.
We expect average loans to increase around 2% driven primarily by commercial and residential loans, we expect average interest earning assets grow around 2.5%.
With regard to net interest margin, assuming one additional rate cut in October we anticipate 12 to 15 basis points of NIM compression. This includes approximately three basis points as a result, the balance sheet repositioning executed in Q3.
As a result, we expect net interest income to decline three to 5 million.
While the rate environment remains choppy, we would anticipate net interest income to bottom out in Q4 and improved from that point forward. This assumes two fed cuts one in October and one in March as well as a 10 year swap rate of around 1.6% along with continued loan and deposit growth.
For additional perspective, if rates remain where they are today, we would expect NIM to decline eight to 10 basis points and net interest income to be stable the Q3.
Our goal continues to be to maximize net interest income without taking undue risk.
Reported noninterest income is likely to be one to 3 million higher and we expect our efficiency ratio to be below 57% and our provision will be driven by loan growth asset quality and mix. We expect the tax rate on a non ft basis to be approximately 21% and lastly, excluding any share buybacks, we would expire.
Back to our average diluted share count to be similar to Q3's level.
With that I'll turn things back over to John Thanks, Glenn.
Webster's third quarter results demonstrate our unwavering focus on building long term franchise value and maximizing economic profits through strong execution on everything we control, we're growing loans and deposits to maximize net interest income and fee income staying laser focused on maintaining our credit discipline deepening customer.
Relationships diligently controlling expenses and the same time investing confidently in our future. This is how Webster continues and we'll continue to deliver for its customers communities shareholders and employees.
I said often that our people make the different I'm pleased to highlight on this call that Webster's head of community Affairs and philanthropy. Kathy Lauria was recently named the Aviate foundations 2019, George Bailey Distinguished Service Award winner in the words of American banker associations, President and CEO , Rob Nichols, Kathy lorries work at Webster.
Her serves as an example for the entire industry for how bankers can and should engage with their communities. Thanks to her efforts. It's clear that Webster is making a tangible difference in the community. It serves congratulations to Kathy and to all our Webster bankers with that Sherri Im happy to open up for questions.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad. They come from me. She told will indicate your line is in the question Q.
Press Star too if you like to remove your question from the Q ever participants using speaker equipment may be necessary to pick up the handset.
For pressing the star.
Our first question is front Steven Alexopoulos with Jpmorgan. Please proceed.
Okay.
Part on the deposit side non agency deposit costs trended a bit higher again in the quarter really being pushed by savings deposits. When do you guys expect to see total deposit cost start to trend lower maybe help offset some of them pressure.
Steve That's a great question and Hello, good to talk to you.
I think we do have room as we've talked about often we think we got some latitude given the strong HSH deposit growth, but we're also very much focused on continuing to grow our relationships in the community Bank and.
Boston Spin continued to be very competitive market. We do think in Q4, we will see a material reduction in our overall core deposit rates.
Given what's going on in the market and given some of the opportunity we have across our footprint. Okay. That's helpful. And then maybe for Glenn in the past you called out NIM declining I think it was five to seven basis points without premium amortization for every rate cut given all the additional hedging now where where's that new level.
So I think as you as you look into Q4.
The guidance I gave.
While the 15 about three or that as I indicated is the is the hedging side of it.
If you took out the premium amortization, it's probably worth another basis point to a basis point behalf going into Q4.
Yes, this primarily.
The impact of lower loan rates and our outlook for for Q4 is that with one fed cut in October that you'll likely see an average fed funds rate go from 230.
In the third quarter down to 183 in the fourth quarter. So that's a 47 basis point drop and as you know Steve about 54% of our loan book is tied in one way to either one month or three month, LIBOR, which would typically follow fed funds.
Okay, but glenn relative to the five to seven range are we still in that range, even with the hedging maybe the lower end, but are we still in that range or we now below it just silicon even beyond that to 2020 at this point.
So.
On the five to seven in NIM compression yeah.
Uh huh.
Not sure I understand maybe just repeat that question then.
So in the past you talked about NIM going down five to seven basis points for every quarter. My question is are we still post.
It does yes hedging in that range or are we now below that range essentially.
So so the hedging won't.
Let me back off from it so as I get into next year and I look at the NIM compression and again, assuming tenure at 160, assuming one more fed cod.
In October one in the ended March on the 18th.
I would expect to see two to three basis points of NIM compression.
Quarter that being said I as I indicated we bottom out in net interest income in the fourth quarter and then we'd begin growing net interest income got you. Okay. That's helpful. And then on agency Bank I wanted to follow up on John's prepared comments, calling out for a healthy one Q enrollment season now than employees are going through their annual health plan.
On selection are you seeing higher adoption of high deductible plans at this point.
Yes, Hi, Steve Yeah, we're seeing it the patents on what our employers are doing order that influence the enrollments if they're using decision support tools and things like that in education their enrollment, we're seeing a definite increase and enrollments.
That said, we're having a great.
Our pipeline is very strong as we go into the ended the year and we expect to be add were well above what we saw last year and our enrollments again, 80% of our accounts come from existing employers. So.
A lot depends on your point.
How enrollment scope.
The one one.
And Steve as you know we've been spending a lot of time trying to educate.
The employees of our employer customers.
On all of the the pros of of funding their account and maximizing contributions and opening accounts. So hopefully we'll see some influence there as Chad said of that 80% of our new accounts that come from our existing customers hopefully we can influence the enrollment levels.
And then just a final one for Chad on each and say if I look at fee income growth it slowed over the past year.
Just continued downward pressure on multi account fees than you expected to remain under pressure. Thanks.
Yeah. Thanks, Steve.
We had one thing that impacted fees in the third quarter was about a 400000 dollar reduction and paper statement fees. We've had an initiative going on to eliminate paper statements.
Being offset by about a 500000 dollar reduction in the actual cost and delivering papers statements. So that's that's more of a onetime item, but the segments and the costs will continue.
We also were seeing a little bit of pressure on large employer account fees, but that's really isolated more towards existing programs that have larger balances. So we're happy to trade piece for for existing balances as we go out in computing the market on larger cabs.
Terrific. Thanks for taking my questions.
Thanks, Dave.
Our next question is from Collyn Gilbert with KBW. Please proceed.
Thanks, guys good morning.
I was hoping to get to the end to the Q and let you flush out probably 10 times, what you're dealing on the leverage side and that the hedging side before I had asked my question, but one could you just walk through this again I just want to make sure I understand what your what you're dealing here and trying to understand why what's going to drive the eni to bottom in four key like.
Yes it.
And just sorry, if you could just walk through exactly what you did this quarter what you added to the at the yield at the Securities that you added I know you'd said fixed duration I'm just kind of walk through some of that math again, if you want to lease.
Yes.
I'll break it into two pieces one of the repositioning activity that we did primarily during the third quarter.
We bought about a billion dollars in Florida, but that does protect this is your Texas on the downside.
If rates continue to drop.
Think thats prudent.
The the other activity. We did was we purchase securities and we purchased about 600.
On a on an actual base about 640 million of securities and what that does is.
It removes some of the asset sensitivity.
The combination of those two is neutral to non it to net interest income.
We have spread that we're earning on the securities Mr. funded primarily by one month FHLB.
About 50 basis points and the costs of the the floors is similar so those actions are neutral and what they do as they protect us on the downside of a freight rates rather drop.
The securities that we purchased would have a higher yield likewise, if rates were to drop we'd have a floor on primarily our commercial real estate loans, which were hedging. So that's one at one activity I talk about bottoming out in the in the fourth quarter.
You got to think about the dynamics of the rate environment and so on the second to third quarter. You saw 20 basis point reduction in average fed funds and then from the third to the fourth quarter more severe 47 basis point reduction in fed funds. If you assume that the fed does not cut again until March 18.
That would imply that its fed funds a quarter over quarter fourth quarter into first quarter would be down an average of 13 basis points. So the rate of decline is significantly less.
And then if you take that you assume a 10 year swap rate of around 160.
Thats, how you get your number so if I'm thinking of Q3 is level at 240.5 million of net interest income I'm guiding to a reduction of three to five.
That gets you into range at 235 to 237 in the fourth quarter.
What you have beginning of for the first quarter is you have less pressure from the fed you have an inflow of HSBC deposits, which helped reduce some of your borrowing costs and then you have as John indicated further reductions in advance of the fed reduction.
On your core deposit costs. So we think four to five basis points a quarter.
We could potentially get on our core retail deposits and a reduction so those that's I said a lot. So thats really the dynamics of how we're looking at it. Okay column just to just to put a finer point on our strategy you know were.
Well, let you obviously your NIM compression is the big question in the industry. You know, we're not apologetic for being asset sensitive obviously, we've got a very great high growth source of low cost funds and we've been growing loans above market rates and the kind of loans. We grow generally are our floating rate and we've been able to if you look back.
Yeah, I looked last night three years ago, we trailed our proxy peer group by 10 basis points in name and we were around 310 and now even with the compression we're still about 20 basis points above our proxy peer group and were significantly higher on an absolute value. So we feel good about where we are in our repositioning strategy is really our.
Our to try and make sure that in the downside scenario where rates start to move more aggressively towards zero, we're protected and we're protecting our income level, but we don't want to leverage and and mortgage all of the upside of what we do best in terms of deploying our organic deposits against loan growth over time so.
That's just gives it kind of the high level strategy that Glenn talked about in terms of the specific execution and all the only thing I would add to that is if you go back to our deck on page 19, you can see.
How our sensitivity to both are rising rate environment and declining rate environment.
And obviously as John pointed out we are our goal is to is to maximize net interest income without taking undue risk. So.
Prudent to take some some actions just in any event rates did continue to drop.
Gotcha, Okay, and then Glenn if rates go the other way if we've seen you know what.
If the if the tenure has bottomed here and then they go up I mean, how much risk now is to the NIM. If let's say tenure goes back up to Q or just yeah. So so again you can see that on page 19 as far as our disclosure.
We have opened up a rising rate scenario in a declining rate scenario.
Okay and so it.
If short end up or long end up 50 basis points, you still you've actually increased your upside.
You have taken a little away on the downside because we're hedging floating rate loans for the most part, but your upside as actually improve.
Okay. Okay, great. That's helpful and then I guess and I haven't done the math yet but.
So maybe perhaps as answers my second question, but with your.
Fourth quarter guide of of an efficiency under 57%, which is kind of consistent I know you don't give guidance for 2020, but let's assume you guys are always focused on operating leverage and et cetera et cetera, if that 57% efficiency holds in 2020 does that imply any material change in the expense.
Structure or or how should we think about kind of.
<unk> expense optimization potentials.
Yes, no I think we have opportunity and we've mentioned it on the calls.
I think our goal is to drive that 57.
5% efficiency ratio down over time, obviously, the interest rate environment in the short term impacts that and we've always said too that we're not going to let and artificial boundary impact our ability to invest in the commercial bank invest in technology for long term efficiencies or invest in NHL say, so I do think there are opportunities I mean, I think we.
Really nice year over year expense discipline, this year and with some this stuff we're doing in the middle in the back office, we have an opportunity I think to actually reduce expenses overtime.
Following but thats really looking right now at all our P., that's really on all I'd like to say okay.
Okay, Alright, I will leave it there thanks guys.
Sales.
Our next question is from David.
Verine with Wedbush Securities. Please proceed.
Hi, Thanks, good morning.
Good morning.
So starting out with the commentary you you said about some custodial relationships that were acquired in the quarter and how it represented 9% of total I think I heard you say, 9% of total agency accounts I was curious what percent of deposits that represents.
Us less less than that slight less not about 7.5% to 8%.
In deposits.
So.
We stay because I don't want there would be confusion on the phone. So those two custodial relationships, where the accounts are less profitable 65% of the average balance no interchange fees and nominal account fees there across two custodial customers one of which was acquired over there we're not going to mention names.
Probably no one of them was acquired in the third quarter.
And the other one has a non bank custodial license now to take on the deposits. So we expect based on contractual relationships that over the course of the next eight quarters or so that a large majority or all of those accounts and deposits will attrite. We're we're.
Working with both of those customers to make sure our customers to make sure that all the underlying customers are not impacted and smooth and the key point I wanted to make is that between the economics of those accounts and the transaction transition and account closing fees that we will receive over the course.
Of these next eight quarters.
The impact to us financially is.
Offset.
By the net interest margin, we lose on those assets going away from us is offset by those transaction in closing account fees.
Great. That's helpful and then shifting gears back to.
The balance sheet repositioning was this a onetime action in the third quarter, our or can we expect additional balance sheet repositioning going forward.
So Dave it's Glenn Good morning, it's it's those are the actions that we took during the third quarter.
Yes.
Evolving it depends on our view.
And where we think we're positioned but let me just say we want to continue to be very conscious of protecting the bank in a down rate environment, but we also don't want to hold back on a on a rising rate environment. So that's our strategy, we're operating within a band.
Of that so far.
It's hard to say I mean, it depends on your view of the rate.
Yep, Yep, well ideally I'd like to see them go up but that doesn't it doesn't always work out that way thats that should you have that said.
So shifting gears to credit quality, you mentioned that the increase in Mpls was an asset based loan.
And that you believe you're fully secured I was curious as to what industry that was that.
I believe it was a.
<unk> distribution company.
And again fully followed cash Dominion. So we think that where there's not a risk of loss. There as we look at present time and I didn't know if we talk about the episodic nature of some of these categories and asset quality. If you look year over year, you know npls are flat as a percentage of total.
Portfolio too so.
While we are always concerned when something flowed in there David.
It doesn't give us significant cause for concern.
Okay. Thanks, and then last one for me is.
On C.. So you mentioned about how the reserve could go up 25% to 35% can you comment on what the ongoing impact to eat P.S. could be given that.
Home equity lending is penalised under Cecil and you get up and running that off so that could actually be a tailwind for you but wanted to hear your thoughts there.
Yes so.
It's too hard to say right now it's going to be driven by volume you're correct in that are longer dated assets, obviously have a bigger seasonal impact.
That being said when we look at it we like things like mortgage banking, our mortgage customers have higher checking accounts.
They also purchased more banking products and services so.
It's too soon to say.
If it the implications to any particular product.
I think that's right David you know, we've thought about I'm I'm one of those its shares the concern that if we get into a significant downturn and credit crisis that there'll be a pro cyclical issue with respect to see so meaning there may be a disincentive for banks to continue to aggressively make mortgage loans and extend longer dated credit to consumers.
But I think as we look through our general models right now we don't anticipate shifting our current mix, which as you know is about two thirds commercial and a third consumer we don't think that in the short term either our EPS will be impacted or kind of our business rationale and strategy will be impacted by the results of Cecil.
Got it thanks very much.
Nice to talk to you.
Our next question is from Laurie I hadn't seen there with Compass point. Please proceed.
Hi, good morning.
Good morning, how are you great. Thank you I am just staying with credit I was hoping you could give us an uptake in terms that just where you are with respect your leverage Lombok and then also specifically within consumer where you are with lending club both in terms that.
Alan says and what you're seeing there in terms of Nonperformers in charge offs.
I'm happy to answer those questions and you know I like to answering clip credit question. So on leveraged.
If you go back to January call, when we sort of laid out and were transparent about where we were leveraged the amount of leverage loans. Both from a funded perspective and from a total exposure perspective, better leveraged at origination has not moved as a percentage of portfolio. So it's roughly 10.
For side of the commercial portfolio and 6.5% of the overall bank loan portfolio.
And the interesting dynamic there Lloyd bus. Besides the fact that I'm going to knock on wood here, we've had none of the charges. We had in a year to date 2019 were in that bucket and as you know we've had really good success over the last 10 years and even before in that category. We also don't have an increase in classified or walk.
Sure worse loans in that category, so really its data static status quo, what I will say interestingly is that in the.
Second to third quarter.
Our leverage loans didnt grow at all.
And an interesting stuff is year over year.
Our nation level in our sponsor and specialty group, where most of our leveraged loans are was actually down 52% from prior year, whereas in a deal in commercial real estate, we were up mid teens in both of those categories and again, where we take a different disciplined approach, but that's not a result at the strategic shift.
It's a result of I think we're living up to our promise to.
So stretch on price not on structure. So if you look at the net result, our originations year over year across the commercial bank are actually 14 basis points better from a weighted average risk rating and our spread is down significantly almost 70 basis points, our credit spread so.
Not going to say that will last if we have great opportunities and sponsor and specialty and we have great opportunities and leverage loans, we're going to continue to underwrite them because we have confidence in it but I think those credit trends in those credit metrics underscore. The fact that we've been disciplined in a way we view the marketplace.
Okay, Great and then what what is your charge off running charter free running right now and the sponsor and specialty back.
It's a well below our commercial I don't have that number out, but it's a I.
Well below our 21 basis point 20 quarter Rolling average and we were 28 basis points this quarter and none of the spots in specialty loans contributed to the to loss.
Okay Perfect and then just last question around that went what percentage of your back do you consider covenant Lite.
Fine.
I think back in January I gave you something like less than 3% of the leverage loans were covenant light I think it's probably low single digits, one or 2% and Lori to be quite honest with you.
And to be transparent I think thats some of the reason why our sponsor and special originations had been down because we havent been chasing the market.
As aggressively because so many of the transactions even double B transactions, you know our covenant Lite and we've been very disciplined I think in that process.
Okay. Thanks, Glenn and then on lending how can you just give us an update on how big that balances and what the charge offs are running.
Sure and its John It Oh, I'm, sorry, John I'm sorry.
Yeah, Glenn doesn't after the credit [laughter] I'm only kidding lending club is $177 million in Ics funded exposure at the end of the third quarter ER versus a 230 million dollar exposure into Q2 thousand 16.
We've been running that book down slowly and I will tell you it's economically profitable it is less than 1% of our overall loan portfolio and it is not a critical element of our strategy.
But even with higher interest coupons and higher charges, it's actually economically profitable for us. So we're not we're not emphasizing it and we're not anxious to exit but it's a it's a very very small portion of the whole.
Okay, and then just looking at your charge offs again that the 2 million or sound consumer charge off our most is coming from that lending club dock.
At portion it's a mix.
Okay, Great I can I can follow up with you offline I just wanted to I'm I just wanted to go back to or David and Steven were on H. assays I just want to make sure that that I understand that so as we look at your current balances. So you finished September with channel settings at 8.16.
<unk> billion.
As of the two custodial relationship.
That are gone with any of that reflected in that number and then maybe can you also help us specifically think about let fourth quarter is kind of look like.
In terms of deposits and in terms of HSH investments.
I realize you're obviously that once you make sure seasonally strongest that in other words, if we're if we're just thinking about how this phase then and also that the one HSH custodial relationship. It was acquired did that close in third quarter or or when anybody back to class. It call. It closed in the third quarter. So third quarter numbers don't reflect any of this.
Attrition.
We have obviously began the process of working with our customers to come up with the schedule and the process under the existing contracts to move those that's why we know the process is going to take up to eight the next eight quarters.
We don't have the final details in terms of quarter by quarter by quarter, but what we wanted to do would be very transparent about the fact that we know that more than likely the vast majority are all of these accounts and balances will have tried over two years, we wanted to be careful to let you when the market no that be economic impact HFSA entered.
The bank is is mitigated over the next six quarters. Obviously, we'll have to then replace those deposits and those accounts.
Chad may be able to give you some insights as to whether the fourth quarter will be impacted but again, we don't have the exact schedule run off and one of the reasons. We wanted to talk about it is when we do get to one Q and start to look at our organic growth rate and all the wonderful work, we're doing in the direct to employer channel, we want to be able to say absent.
These less profitable accounts a trading this would be our performance versus market. So Chad I don't know if you want to give some insight as to what you think the fourth quarter impact will be there's a chance that a small percentage of the the overall deposits could well before the end of your fourth quarter.
But we're still working that out and again it would be a very small me.
Immaterial percentage.
<unk>.
Okay and chat maybe can you just help us think about you know if if we fast forward a year here from network.
And if that's 2020, what those balances might look like just incorporating all of the changes that you're making with NHS say.
Your marketing push et cetera, So we think about footings stuff deposits and investments how should we getting at at growth for 2020, thanks, well, it's as John was saying, it's hard to Ross to estimate exactly how much of that books going to roll off in 2020, as we're working through that the the train.
In addition, with our partners right now the growth rates of that portfolio are consistent with our overall growth rates across the rest of the book.
And we continue to focus on.
Increasing those growth rates, particularly in channels that we have the most influence and I can tell you at our new account production indirect for instance is up about 15% year over year, where we're seeing actually a decline in new account growth rates and and the sodium channel. So you know we expect to be able to our game plans to replace those.
Accounts over that timeframe.
Yeah, We're I think the guidance I gave was that and Chad talked about the fact that our pipeline himself would show that we're hoping that one one and this enrollment cycle, whereas you know is the greatest a portion of of new account acquisition, we hope to exceed.
And our pipeline shows that will exceed last year's new account openings and then as these.
Underlying custodial accounts, Detroit, and we get closer to.
The January call and the April call, obviously went after the quarter, we'll be able to sort of reconcile all that for you.
Okay. Thanks, I'll leave it there.
Our next question is from Jared Shaw with Wells Fargo. Please proceed.
Hi, Good morning, this is actually team or Brazil are filling in for Gerard.
Hey, Jim or how are you today.
Thanks, not to beat a dead horse, but just getting back to the HSH. The two custodian accounts is that the 9% of a third party accounts and seven and a high percentage of total deposits or is that.
I will third party.
Those two accounts make up the lions share of that so if the question is there are some other customers in there, but you know below $50 million in total footings and deposits and around 20000 accounts not related. So if the question is is there more to come there really isn't a material amount left in in that activity.
You know that activity make money for us it was less profitable and it's not something that we wouldn't do for another client, but it's not been as you know where our focus has been and you know the lions share of our account growth overtime has come from our growth indirect to import.
I don't I I'd ask John that they that there's a chance we maybe maintain a relationship with one of those custodial partners longer term, but it will be much wouldn't be much smaller than what we have right now.
Okay. That's helpful. Thank you and then John maybe looking at the commercial pipeline.
<unk> said that it was strong heading into the fourth quarter. What's the composition of that is that primarily CRT are you going to see a rebound than traditional commercial growth.
You know two more it's been up it's been across the board at least in the pipeline and so far what we can say is commercial real estate continued to be strong not only from an origination perspective, and a pipeline perspective, but there's been a slowdown in pre pays there and you know as we as we explore that maybe just an interesting point in time, where you know buyers.
And sellers, the buyers want a higher and higher pricing and the buyers want to pay a lower price given where cap rates and everything are in that and the sellers are you know holding out for a higher price, but we don't see really any deterioration in the underlying metrics, particularly where we are and if I look at the the data points.
Our debt service coverage ratios were actually higher period over period, and our LTV is were slightly lower period over period. So I.
I just think the dynamics in our Cree with our existing sponsors and some of the great work, we're doing throughout the footprint.
It's generating from outperformance there so it looks like we're getting growth.
Throughout the commercial bank, but commercial real estate in particular seems to be really active.
Okay, Great and then just one last one from me I'm looking at the linked quarter increase in commercial classified anything to note. There is there any asset class, that's primarily driving that or is that pretty granular.
We actually had a couple of asset based transactions, there, but but it really nothing and as I say I don't want to dismiss it because we look at all risk migration, but we know that the watching worst levels, which are the club you know the criticized assets below are actually down. So we're not seeing a real flow. These were episodic and as Glenn mentioned if.
You look at our Rolling average of you know several quarters in that 3% range, we're still well below our general operating level of commercial classified and still at cycle low. So I. After we did our review this quarter I Didnt see anything in there that that concern me.
Okay. So the the ABL that popped up and nonperforming and then the increase in classified there's no like geographic.
Concentration.
No okay.
Okay.
Okay. Thank you very much.
Thanks Jackie.
That concludes our question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you so much area I appreciate everybody getting on the phone and your continued interest in Webster have a great day.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.