Q4 2019 Earnings Call
Good morning, and welcome to Webster Financial Corporation's fourth quarter 2019 earnings calls I will now introduce what's director excuse me I will now introduced Webster's director of Investor Relations very bad again. Please go ahead Sir.
Thank you Michelle welcome to Webster.
First is being recorded also this presentation includes forward looking statements within the Safe Harbor provisions of the private Securities Litigation Reform Act 1995, with respect to Websters financial condition results of operations and business and financial performance.
There has based these forward looking statements on current expectations projections 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 those going forward looking statement is contained in Webster financials public filings with the Securities Exchange Commission.
During our form 8-K containing our earnings release for the fourth quarter of 2019.
Now introduced Websters, President and CEO , John do you up.
Thanks, Terry Good morning, everyone. Thank you for joining websters fourth quarter 2019 earnings call.
CFO , Glenn Macinnes, now I will review business and financial performance for the quarter interest 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 Webster fourth quarter results demonstrate are ongoing commitment to strong execution on our strategic priorities earnings per share were 96 cents. In Q4. This compares to a dollar one in both Q3 and Q4 2018, when each period adjusted for one time items there.
<unk> resulted from reduced level of net interest income relative to each prior period, primarily driven by the full impact of three fed interest cut rates during the second half of 2019, a lower than expected LIBOR rate in Q4, and a mix shift in the loan portfolio to lower yielding high quality Cree loans.
Assuming no further fed action in 2020, our net interest income is expected to grow beginning in Q1 and continuing throughout the year. We anticipate full year 2020, net interest income will meet or exceed the 955 million generated in 2019 based upon our current bass.
Growth forecast.
All other metrics in the quarter were favorable loan growth was strong as commercial loans grew 10% from a year ago or by more than 1.1 billion total footings at HSBC Bank increased 18% from year ago for growth of almost 1.3 billion during the year disciplined expense control resulted in.
A lot linked quarter non interest expense.
And credit metrics remained remarkably strong contributing to our lowest quarterly provision in more than seven years in Q4 nonperforming loans net charge offs and classified assets were all lower as a percentage of total loans when compared to both the prior quarter and the prior year the overall portfolio weight.
The average risk rating improved as well.
Tangible book value now exceeds 2.5 billion and increased 15% from the end of 2018 tangible book value per share is also 15% higher than last year.
Glenn will dive deeper into the quarter, but I'd like to make a few comments related to full year 2019 performance I'm on slide three reported PPNR totaled almost 525 million and increased 8% from 2018. This was driven by positive operating leverage as revenue grew more than 4%.
While expenses increased only 1.5%.
Despite the lower interest rate environment, and the second half of the year. The net interest margin for full year 2019 was 3.55 per cent compared to 3.6% in 2018, the efficiency ratio for the full year improved one full point to 56.8%.
And the provision totaled 38 million and was at its lowest annual level since 2014.
Our performance resulted in a full year return on common equity of 12.8% and a return on tangible common equity of 16%.
The net result was full year EPS of $4 in six cents up 6.5% from 2018. This represents our 10th consecutive full year EPS growth, which puts us in select company within the banking industry.
Also for your common dividends of $1.53 per share increased 22% from 2018.
Slide four highlights the strength of our loan and deposit performance since the end of 2017, a little over 2.5 billion of loan growth has been accompanied by more than 2.3 billion of deposit growth our loan to deposit ratio of 86% continues to provide us with significant flexibility.
We believe that our ability to consistently generate organic loan and deposit growth year on year out it's a differentiator our five year loan and deposit growth CAGR is we're both around 8%.
Turning to slide five I'll comment briefly on our lines of business commercial banking loan portfolio has increased more than 1 billion over the past year for end of period growth of 10% and deposits were also up 8.7% in that business line HFSA back opened 744000, new accounts in 2019.
Representing its third consecutive year with production above 700000 accounts.
Community banking loans and deposits each grew by approximately 6% from a year ago with continued strength in business banking and mortgage banking.
I'll now turn it over to Glenn for the financial review.
Thanks, John I'll begin on our average balance sheet on slide six average loans grew 335 million or 1.7% linked quarter growth continues to be led by the commercial business in the quarter, we had significant growth in commercial real estate, which increased 355 million versus the third quarter and more than 800 million from a year ago.
Commercial loans now represent 64%, a total loans compared to 63% in prior year.
Consumer loan performance was led by growth in residential mortgages with some offset from continued reduction in home equity.
Versus prior year, our 1.4 billion of total loan growth was fully funded by deposit growth.
Combined low cost transactional and HSH deposits have increased more than 1 billion from last year and now represent 58% of total deposits. Their combined cost was 13 basis points in Q4, and 12 basis points and prior year.
The Q1 seasonal inflow of HSH and public funds deposits will fund loan growth every do short term borrowings.
Slide seven summarizes our Q4 income statement and drivers of quarterly earnings.
Net interest income was 9 million lower than prior quarter. This was primarily due to a 38 basis point reduction in average one month LIBOR contributing to a reduction in interest income of 18 million.
This was partially offset by lower deposit costs of 3 million, reflecting a reduction of five basis points and we also realized the benefit of 6 million from loan and security balanced growth.
Likewise net interest margin was 22 basis points lower than Q3.
The drop in loan yields reduce NIM by 23 basis points, which was primarily driven by lower LIBOR rates.
Growth in loan and Securities also compressing them another six basis points.
This was partially offset by seven basis points did a reduction in rate on deposits and borrowings.
Net interest income in Q4 was about 5 million lower than our outlook and NIM was about eight basis points. Lower this was primarily the result of lower deferred fees from prepayments the timing on deposit rate reductions, which came in two basis points higher than our forecast and the mix shifts from seeing eye to commercial real estate.
And lower than expected LIBOR rates.
Versus prior year net interest income declined 6 million 21 million other decline was due to lower rates with a partial offset of 16 million from additional volume.
Asset sensitivity has been reduced over the past year under short end down 50 basis points scenario, our PPNR would be lower by 3.8%. This compares to 4.4% at the end of Q3 and 5.4% a year ago.
Noninterest income increased 1 million linked quarter and decreased 2 million from prior year. The linked quarter increase primarily reflects a higher level of revenue from client hedging activities.
The decrease from Q4 of 2018 reflects a 4.6 million gain on sale of banking centers in that period.
Reported noninterest expense of a little under 180 million was flat linked quarter and up 5 million year over year.
Pre provision net revenue of 122 million declined 8 million from Q3, and 13 million from prior year.
Loan loss provision for the quarter was 6 million and essentially matched net charge offs.
The efficiency ratio was 58.5% the increase from Q3 and a year ago were driven by lower net interest income and partially offset by continued expense discipline.
Our effective tax rate was 22.3% up from 21.3% in Q3, the increase was due to a discreet tax expense associated with the state and local tax position recognized in Q4.
Beginning with slide eight I'll highlight the line of business results.
Commercial banking loan growth was led by Investor commercial real estate, which grew 12% linked quarter and 23% versus prior year.
I see an eye balances were flat linked quarter with fundings offset by payoffs, but grew 5% versus prior year.
Net interest income grew 1.1 million from last year, primarily reflecting average loan growth of 926 million or 9%.
It was partially offset by lower loan spreads driven by mix and a lower credit on deposits.
Noninterest income and non interest expense were essentially flat from prior year combined ongoing loan growth, resulting in a 2% increase in PPNR versus prior year.
Slide nine highlights I'd, just say bank, which delivered a solid quarter led by the production of 126000, New accounts are 3 million accounts have eight and a half billion of total footings.
Footings were 1.3 billion or 18% higher than prior year, while accounts were 9% honor.
Net interest income was 6% higher from prior year, reflecting growth of 12% in average deposits and the impact however, lower net credit rate.
The cost of deposits was 20 basis points and has remained flat for 12 quarters.
Noninterest income increased 6% from prior year, driven by an 11% increase in interchange revenue and flat account fees, primarily due to reduction in statement fees as we moved account holders to east statements.
Total revenue for the quarter grew 6% from year ago, while expenses increased 12%, resulting in flat pre tax net revenue.
January month to date deposits are up approximately 400 million from year end with new accounts tracking to last years levels.
Slide 10 highlights community banking total loans grew by over 6% year over year with growth coming equally from business banking and personal banking.
Business and consumer deposits grew 10% and 4%, resulting in overall deposit growth nearly 6% from prior year.
Net interest income was adversely impacted by the declining rate environment.
Adjusting for a 4.6 million dollar onetime gain on the sale of six banking centers in the fourth quarter 2018.
Noninterest income increased 5% year over year led by higher mortgage banking revenue.
Expenses grew by less than 1% as investments in technology and people were offset by efficiencies in other areas.
Slide 11 highlights our key asset quality metrics.
Nonperforming loans in the upper left declined 12 million from Q3 asset based lending represents a 9 million of the decrease.
Net charge offs in the upper right declined 7.7 million from Q3 and totaled 6.1 million into quarter.
Mercer classified loans in the lower left decreased modestly and now represent 260 basis points. A total commercial loans. This compares to a 20 quarter average of 317 basis points.
Our allowance for loan loss remained at 209 million with a provision of 6 million at a coverage ratio of 104 basis points.
The 6 million provision reflects the strong credit profile, which John outlined.
We're on track with our seasonal adoption, which will be recorded on our balance sheet effective January 1st.
We expect the day, one impact to increase our current allowance by approximately 30% inline with the rains disclosed last quarter.
The impact will recorded as a charge the capital Andrew will reduce common equity tier one capital between 20, and 25 basis points, but increase total risk based capital by about five basis points.
Regarding the day to impact our quarterly seasonal allowance will be based on loan growth and mix asset quality and the macroeconomic environment.
Given stable metrics, we do expect our allowance coverage ratio to remain around 30 basis points higher than Q4's level [noise].
Slide 12 provides our outlook for Q1 compared to Q4, we expect average loans to increase 1% to 2% driven primarily by commercial real estate and residential loans.
We expect average interest earning assets to grow around 1%.
We expect net interest margin to increase up to three basis points, assuming stable market rates. As a result, we expect net interest income to increase two to 4 million.
Noninterest income is likely to increase one to 3 million.
We expect our efficiency ratio to be in the range of 58%.
And our provision for loan and lease loss under Cecil will be driven by loan composition and forecasted economic conditions.
We expect the tax rate on a non ft basis to be approximately 20% to 23% and lastly, excluding any share buybacks. We expect our average diluted share count to be approximately 92 million shares.
With that I'll turn things back over to John .
Thanks Glenn.
Webster enters this new decade, and our 80 50 year from a position of strength based on our efforts and accomplishments in the decade. Just ended we will continue to focus on executing against our strategic priorities always with a long term view of maximizing economic profits and continuing to build franchise value.
We are fortunate to be guided in our strategic direction by an accomplished board of directors I'm pleased to site for of Websters Board members Leaseplan Carol Health care in Osaka, and Lorne States.
For their recent recognition among women Inc.'s 2019, most influential corporate board directors.
As always I'd like to acknowledge our 3400 values based bankers for their outstanding contributions and their unwavering commitment to our customers our communities and to each other.
And finally before we open it up for questions I'd like to take a minute to comment on the announcement. We made this morning, but consistent with our well planned multi year transition Jim Smith has announced that he will be retiring from websters board of directors effective at our April annual shareholders meeting at which time I will become chairman of the board on behalf of our board of directors and.
All Webster bankers I'd like to again acknowledge and thank Jim for his incredible contributions to Webster and the communities we serve over his distinguished 44 year career.
I'd also like to thank him personally for his guidance support and friendship during my time at Webster and particularly during the period of transition he is truly a remarkable person.
With that Michelle I'm happy to open up for questions.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q. You May proceed start to if you'd like to move your question from the Q.
I just don't see this speaker equipment, maybe necessary to pick up your hands that before passing the stark. He's one moment. Please we pull for your questions.
Our first question comes from the line a Steven Alexopoulos JP Morgan. Please proceed with your question Hey, good morning, everybody.
As Dave.
At the start first looking at the guidance on NIM the up one to three basis points. In one few 20 is a very favorable trends.
For Glenn what are you seeing that leads you to think NIM will expand in the first quarter.
Part of that Steve is the inflow of both HFSA and public funds, which will allow us to pay down some FHLB borrowings.
So that'll help them and then we also have CD.
Maturities and promotional savings repricing, which will also favorable favorite be favorable both net interest income and.
Okay, and then once we get beyond the first quarter, Glenn how you're thinking about NIM for the rest of 2020.
It's sort of flattish.
For the next couple of quarters.
Okay.
Yeah.
And then thank you for Chad on HSBC Bank can you talk about how the enrollment season when for each assays and how you're feeling about one Q2 0 account and deposit growth.
Based on what you're so you saw.
Yes, Steve, it's John and I'll, let Chad obviously provide some color.
Obviously, we stay the same thing at this time of year, which should it's too early to make have affirmed call, but the guidance will provide is kinda today in January .
We're tracking a really almost on top of the ranges we had last year, both in inflow of deposits and new account openings. So if you think of those numbers, that's about $400 million in new deposits and in the ballpark of 250000 accounts. So we're tracking kind of where we were last year and obviously, we'll be able to give you a.
Much better indication at the next earnings call them, when the enrollment period reps.
Yeah, the only thing I'd add John is that we continue to see.
The strongest performance and the channels, where we at most influence on growth activities and we're going to have the debonair study coming out between now and this quarter and we'll have full results to report on when we get there as well.
And one comment I'll make a Steve maybe to anticipate other questions on the call to there was no impact in Q4 of any of the account movements that we talked about in Q3. So we didnt receive any compensation from some of those accounts, leaving and none of those accounts left during the quarter. So fourth quarter was not impacted by.
The information we guided the group two in Q3, okay.
And then thank you and then final question. So if we look at full year loan to deposit growth for 2019, they were each running above the two year CAGR do you think you can continue pacing above that historic okay. Here in 2020. Thanks. So you may have noticed I said in the beginning of my remarks, which was important point I wanted to make that I thought we would meet or exceed our total.
Net interest income for the year based on our current asset growth forecasts and I think Thats a great question right now our loan growth forecast is slightly below what we did between 18 and 19. So I think were relatively confident we can keep running at that relative pace, maybe slightly below on loans and when you factor in growth in the.
Polio, we don't think that our asset growth metrics are aspirations are too aggressive.
Okay. Thanks for I sign off John Congratulations on the chairman role and best of luck to Jim Smith and retirement. Thanks for taking my questions. Thank you very much.
Thank you. Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.
Thanks, Good morning, everyone.
My first question just as around on the gross that you saw this quarter and how you guys are sort of seeing that trend in 2020, because obviously as you guys indicated the next this quarter as higher sorry, first I see an eye impacted the NIM. So number one just where did the extraordinary growth from CRT come from and then maybe.
Some commentary and that's how you see that playing out in 2020, and then also maybe just some of the dynamics within see an eye as to why that gross didn't necessarily materialized, perhaps to what you were thinking.
Sure happy to do that column. The thanks for the question Yeah. It's been interesting underlying story you know I always talk about the fact that we've got these great. This diverse source of loan growth right, both geographically and product set and in business line and I wish I could say that we could just simply pull levers and have growth in certain areas.
And so I think this quarter just happened to be a quarter of life payoffs in commercial real estate I'll provide some detail on that because I think it's also important to know that were not sort of being too aggressive in any one area.
We had extraordinary growth in our investor commercial Cree.
Book, but that was on about $375 million in new fundings that compares to $360 million in new fundings fourth quarter of last year. So really our origination levels were not materially higher the difference in the story inquiry was we had $132 million in pay off.
This Q4 as opposed to $290 million and pay offs the year before there doesn't seem to be a trend line or any dynamics that are driving that but I think it's an important point to make that we didnt have outsized Cree originations, we had significantly lower Cree pay offs and that the story is similar in Cninety.
Sponsor and specialty business for instance, which you know it's been a big driver of high yielding loan growth for us.
We had originations have something like $240 million in Q4 as opposed to around $200 million last Q4, but we had 296 almost $300 million in pay offs in that sponsor and specialty business, resulting in an actual decline.
In the second half of the year. So it's really a pay off story more than outsized originations and as you heard me talk about the net result is a slightly lower yield on the loans and a slight improvement in weighted average risk rating and credit quality in the portfolio. So I think you'll see more of that going forward you will see different mix in different.
Quarters, just depending on with our I think that disciplined.
Credit choices, where we have opportunities across our footprint.
Okay, and you have a sense of or maybe S.U.S. within the guidance that you're offering what you think pay downs will do this year I mean, do you think they'll slow.
We don't I I think if you looked at our expectations.
Dan and it's hard to predict in the various categories. I think we anticipate similar origination volumes and similar pay down metrics, obviously that could change quarter to quarter, but if we look back over history.
You know if you look at on kind of a trailing four quarter basis, you get a pretty good sense. So the short answer. Your question is we're not anticipating sort of some sort of macro change that would either lower pre pays or drive them higher.
Okay. Okay. That's helpful. Thank you and then Glenn just on the on the comment on on the timing on on pushing through some of these lower deposit costs in the first quarter on just yeah. I, just curious kind of where you where your head is in and how your pricing somebody here CD rates now and just how agree.
If you think you could be on some of those assuming I know all your guidance assumes no more fed cuts. So just kind of getting a sense of what where you think ultimately some of those deposit cost can go.
So if I look at total deposit costs for Q4, I think we're somewhere around 454 basis points. We think on average in the first quarter that could drop down to 47 basis points.
And a lot of that is is like I indicated shortening the term of Cds, which which also helps our asset sensitivity.
But it's also pulling back on some of the promotional rates that we have out there.
Okay. Okay. That's helpful. I said, just sort of for context or settlements Cds at once they see in ER and we have a savings promotion that's out there at 180 right now.
Okay.
Okay, Alright, thank you for that and then.
Got it question for you.
The and obvious question that maybe you don't necessarily on here, but so when we talk about H. I say and you know I'm. John you had indicated to kind of you're tracking similar to where you guys tracked in 2019.
I guess a simple question is why is growth not higher given all that you've done all the you know the investments you've made within the Salesforce and infrastructure.
Just curious as to why gross isn't coming on higher.
Yes column in 2019, we saw we actually saw higher growth rates and our.
New accounts with no employers, so a little bit lower with our existing employers and as you know large portion of our new accounts come from existing employer. So it's really was enrollment base the and there's a lot of factors that impact enrollments and are in health plans and consequently in H. assays.
I do believe we haven't had the opportunity to influence that to a greater extent and as we go into 2020, we've conducted a lot of pilots and programs in 2019 that were targeted at providing decision support tools and programs to our employers which showed really positive results in terms of both penetration and.
Deposit rates with customers. So we're looking to accelerate that as we go into 2020, but again a lot depends on the macro environment and how that influences involved as well.
Okay, Alright, thank you I will leave it there thanks guys.
Based on oncology.
Thank you. Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please proceed with your question.
Hey, guys. Good morning, and let me Echo what's already been set of congratulating, both John and Jim and the new roles.
Yes, it's good to hear yeah.
First question I'm curious John could you give us a little update on sort of how things are going in Boston and also help us maybe size your business. These days in Philadelphia and DC market.
Yes sure.
Boston continues to track we've made no secret that is probably the most competitive market we have with respect to.
Cost of customer acquisition in deposit pricing and that really hasn't abated much and you know you've all read that JP morgans, there as well, which continues to make that the market competitive we continued to make progress.
I think we're on track to hit our goal in terms of asset growth in loans and deposits and again, it's been probably more costly than the rest of our footprint. We are passed breakeven for a year now I think we had about $700000 in just a retail bank contribution there, which we try and track to be honest with ourselves an honor.
With you obviously, our profitability in the market overall market is pretty strong because that's really the epicenter of our sponsor and specialty business a lot of our sponsor relationships, we've got a great.
Commercial real estate book, There you know a couple of billion dollars alone. So we're happy with where the market is we continue to need to reduce square footage in our banking centers, there are big and they don't need to be that big So we're we're making some progress on that front, but all in all we think it's you know a critical market it's a fad.
It's growing market there are more cranes in that in the sky in that city. Then you could you can imagine and so we do think that our physical presence there and our retail presence there helps our wealth management and all of our commercial banking, so I would say good not over.
Performing and not underperforming kind of right on our expectations.
With respect to the other markets.
Mark in obviously, we are any retail footprint in those other markets in Philadelphia and DC. We've got good traction we've been in the Philadelphia market from a commercial real estate perspective.
For a over 10 years now we've had a lot of growth in that market. Our total loans in Philadelphia in the in the South Jersey, Philadelphia, Pennsylvania area approached $2 billion.
Excellent asset quality full relationships with middle market customers. The vast majority of those outstandings are commercial real estate and we had a b L. There. So again you've heard our philosophy, we don't look at as a loan production office, we look at it as a core market, we expect cash management and other relationships with our borrowers there and we're okay with growing.
At a modest pace, because we don't want to be the lender of last resort and I'd say DC, which is not as critical to US right now we've got asset based lending and commercial real estate, but we're talking a couple of hundred million dollars an exposure there and it hasn't been really significant growth market for us recently.
Okay, and then secondly, John the market seems to be enamored of employees. These days I guess Im curious other banks out there that you can see a combination with it would make sense to you.
You want to give you the specific names Mark no [laughter]. It's no. It's look obviously theres a lot more chatter and there are some compelling reasons I think why.
Thanks or are choosing to gain scale, we think gaining scale overtime is important.
We really haven't shifted our focus or made a significant pivot in that regard obviously as I said, there's there's a lot more discussions Ceos are talking with each other there are compelling reasons, both from a technology investment perspective higher capital scale access to data all the reasons why it's better.
No we were three times the size, we've probably spend the same amount on MLB assai as we do now so I understand the compelling rationale we would never say never but we are very much focused on continuing to grow and exploit our differentiated capabilities.
But I'll I'll leave it at that to say.
We're not focused on M&A as a primary strategic.
Goal right now, but we would never say never.
Thank you.
Thank you. Our next question comes from the line as David Chiaverini with Wedbush Securities. Please proceed with your question.
Hi, Thanks, a couple of questions for you. So first on expenses I was just curious is there anything on the tax expense front you can do to offset some of the recent NIM pressure as as we look to 2020 and the reason I ask it looks like based on the efficiency guidance of 58% looks like some of the operating leverage could reverse a little bit.
It.
David Great question I'll, let Glen provide some from Fuller context, and I think its though the appropriate question to ask you know I think we've demonstrated to the market over a sustained period of time that we have good expense discipline and expense control.
We have not been aspirationally about really aggressively reducing expenses because we've talked about how important is to continue to invest in our organic growth in our differentiated businesses, particularly in commercial and HSH and we've done that and I think it will set us well over the long term. The short answer is yes, we have opportunities and we're working on many of them.
I'm right now business process automation in the middle and back office, we've got a lot of things rolling there we have fewer people in operations. This year than we did last year and we'll continue that trend. So we think we can really start to bend the curve with the use of technology automation Middle office efficiency and so yes, we do have tools about.
Level to us.
And not all of that is layered in our forward forecast, we want to make sure that were not hurting our organic growth and our long term franchise build but we do have levers to pull with respect to expense control.
I would just so you have to keep in mind. The first quarter has a couple things you have the higher FICO costs, which somewhat offset some of the medical costs. So there's some in ins and outs there, Dave but to John's point I think we have opportunity both in the middle and back office as well as.
Optimizing as we continue to do the community that.
Great. Thanks for that and then shifting to.
The Eni and some of the NIM commentary well under the leverage strategy that you guys kind of spoke about last quarter, where you had purchased I think it was about 640 million of securities funded by FHLB borrowings do you plan to unwind that with the deposit inflows in the first quarter or Conversely, do you plan.
To add to that leverage strategy.
So I can tell you, where we're more likely not unwinding it and that if you look at our earning asset growth to John's earlier comments, you had both loan growth and proportionate security growth.
Great and then the last one from you.
No I'm sorry to have go ahead.
So and then just.
Continuing with the.
A discussion on NIM. So in your interest rate sensitivity you mentioned about how it was reduced this quarter, how low would you like to take that interest rate sensitivity.
So we'd like to move closer to neutral I think the only caveat to that is we want to preserve some of the upside as well so.
I think if you if you look at our slide deck back on page 20, you can see the progress we've made particularly in a short end down scenario on the short on on the falling rate scenario you can see the progress.
So part of adding investment securities part of the balance sheet positioning we did in the second and third quarter certainly help that.
Also the fact that we have absorbed.
Three fed cuts as well and if you look out at least as far as we're looking at.
More stability in both fed funds, one month, LIBOR, three month, LIBOR, which will sort of sort of keep that sort of constant.
And then actions we take on top of that whether it's adding more fixed rate assets in the form of residential or equipment finance.
Vestments securities portfolio or shortening as we have our borrowings in some of the CD promotions and things like that we'll have a positive impact going forward.
Thanks very much.
Thank you.
Thank you. Our next question comes from the line Jared Shaw with Wells Fargo Securities. Please proceed with your question.
Hi, good morning, everybody.
Jeremy.
I also wanted to give my congratulations to you John and Jim for Great career, and as a Connecticut resident I certainly hope Jim stays.
Fully engaged in the opportunities to help improve the financial situation fiscal situation here in the state.
Sure. Thanks for that comment and I think I can't even though Jim's now here I can tell you and rest assured that he will continue to be involved in policy around the state.
That's great to hear.
Yes, maybe just circling back on the HSC and Chad or John you know any of the any of the have you noticed any of the.
Rhetoric around.
The political environment right now in Medicare for all impacting any of the employers decisions to adopt a high deductible health care plan or is that really not flowing into their sort of internal HR discussions at this point.
It's interesting so some expect kind of what I'll tell you a speculation and others. Obviously, what we know I think on a macro level obviously the the.
Chances of.
Full Medicare for all single payer seemed to have gone down with changes in the various poles and that rhetoric seems to have gone away a little bit and we think you know as we've said we've always been confident that given our current health care system, but that wasn't a real risk in this in the short term.
There has been more discussion in various state capitals around high deductible health plans and so on and so forth. We actually don't think that that is the dialogue that's that could be driving maybe lower adaptability. As we've said all along we think that there is a bit of a compression across the industry based on a three and a half.
Now for 3.4% unemployment rate, where when companies are having to be more and more aggressive in competing for talent that they are optically trying to provide richer more full or benefits and that that may have slowed the whole industry down over the last couple of years as you've seen we're not seeing and I'll let.
I had put a finer point on it sort of the dialogue around the.
Virtuous nature or lack thereof of high deductible health plans actually impacting employers decisions not to offer them or encourage their employers to adopt them. Yeah I totally agree John that was spot on.
Okay, Great. Thanks, and then no capital management, you know I hear you said around M&A and focusing organically, but you know when you look at we look at capital you continue to build it here.
Looks like that's going to continue as we go forward outside of M&A should we expect to see Webster be more active in trying to either.
Through the dividend or through a buyback again, returning more capital.
Yeah. Good question I'll be a really transparent here again, so obviously our primary desire is to use capital to grow the balance sheet to support above market loan growth to look to try and make some.
Some some key investments or acquisitions in DHS, a space or portfolios or people in commercial banking as we continue to expand those.
And we've obviously been working diligently in those areas and looking at opportunities absent that you saw in the third quarter, we had an increase in our authorization to $200 million for stock repurchase so that if those internal strategic things don't work will then look at.
Other capital actions either another increase in the dividends you know we had a significant increase in the dividend and if none of those are available to us I think what you'll see is a us being more likely to buy back shares over the next couple of quarters.
Yes, great color. Thanks, and then just finally forgotten the whats the percentage of the loan book now tied to one month LIBOR and prime is that is that.
Change certainly have a so we have so we have about 8.3 billion tied to one month LIBOR and another say two and a half billion tied to prime.
Great. Thanks Auto book of 20 20 billion.
Great. Thanks.
Sure.
Thank you. Our next question comes from the line of Laurie Hunsicker with Compass point. Please proceed with your question.
Hi, Thanks, good morning, and more and more and then Jim I, just why not also echo what others have sat congratulations.
Just going back to HSH can you help us think about <unk> we saw.
Thank you Rob I guess, if you will in HSH or rather an increase in HST assess circuitous just had been previously running 50, 51%.
And it was 55% can you help us think about how that's kind of let going forward.
Sure. So I think a lot will depend on enrollment period as Chad highlighted and the balances that we get I think one of the factors.
That is driving that Laurie is the reduction in the credit rate.
From if you just off from year over year fourth quarter versus prior years fourth quarter.
The credit rate that we applied to the deposits is down 15 basis points.
So on a base of $6.5 billion that hasn't been as an impact.
So that's one of the that's one of the things you see driving driving at the other side of it is on the expense side as Chad pointed out they continue to invest in the front end customer experience things like that all for the the longer term view of capturing more market share.
Okay. That's helpful. And then do you all have any goals with respect to what you would like HSH PPNR to be relative to websters PPNR.
As you roll forward and again that have been tracking closer to 25% came in at 23% this quarter.
I should we be thinking about that next year. Thanks, Yeah. I mean, it's a very interesting question way, we but we've always managed it as and you've heard Jim say this before me. So this is about a five year consistent message is that we want to kind of maximize the value of HSH given its growth potential and its unique characteristics. So.
We we don't look at it as what is the optimal level of contribution or our real focus is at some point if it got to be too big a a concentration risk or other elements, we might think about other strategic alternatives, but right now in this you know if you look at it from round numbers the commercial banks contributing.
In about 50% of PPNR.
For the full year 2019, Chad's group is about 25% to 30% and then the balance and community banking, we think Thats, a really good mix and based on our forecast going forward chat will be a bigger contributor relative to a community banking, but it certainly won't get to a place where we think we need to make adjustments in in our strategy.
Okay. That's great and then can you just update us on on their relationships east side last quarter. So you had.
And at that likely departure of Q custody I'll, just say relationships from the third party administrator wholesale portfolio I think one must being acquired.
And then when it was becoming a non bank has study can you just help us think about where we are in and seeing that reflected in the balances.
Yes, and I can answer that question I think really easily and clearly so the guidance doesnt change, meaning over the next six quarters that whole activity will result in financial neutrality, given the fact that we get exit fees and some other income as those accounts leave in for Q2 thousand nine.
Teen no accounts moved and we receive none of that compensation. So there was no. There's no noise in the for Q numbers, either in balances or in the piano related to those and we believe that that will start impacting us in the first quarter. When we report to you on our our full enrollment period.
We as we said last quarter, we will provide any each quarter growth dynamics of HFSA with and without.
Those two custodial account and we'll let you know what's moved out and what portion of income has also related to exit fees and other so we'll be very a very careful and very transparent, but in Q4, there was no impact at all.
Okay, and then would you just remind us what those two relationships constitute just in terms of HSBC deposits as well as investments.
Yeah, what we.
Reported that in the last quarter.
[noise] I'm looking at Oh, I think we we had an estimate last quarter that protect our around I backed into 700 million, but I just didn't have anything specific and I didn't know if you had anything that was more tightened down.
We're just grabbing the number for you.
Okay, Okay, Great and then one other question, while you're looking at back on Oh go ahead.
Great idea accounts and by 5300 90000 accounts roughly 550 imbalances related to two accounts.
Okay, and that's 550 in deposits or internal fundings.
In deposit and deposit okay perfect Super helpful. Okay, and then just Glenshee Mark quick questions number one at your lending club balance and then number two if if you could just help us think about tax rate I think you said in your comments, 20% to 23%.
Just a slight change I think from where we were previously at 21% and I just wanted to understand that change.
Thanks.
I'm sorry, your first question I didn't I didn't get.
Oh I was just looking for the balance sounds a lending club loans. It's about 100 set its hundred 77 million last last quarter.
So no issues no changes in asset quality or performance and then the only thing I would say about our full year forecast on taxes, it's primarily driven by lower tax credits and other discrete benefits that we received in 2019.
Great. Thanks, Thanks very much.
Thank you Laurie.
Thank you. Our next question comes from the line of Matthew Breese, But Stephens Inc. Please proceed.
Good morning, everybody, Hey, Matt good morning.
Just curious I was hoping you could talk a little bit about new commercial real estate and cnine loan yields and spreads and how that compares to what's on the average balance sheet today.
Sure I'll give you a little bit of Ah of data. So if you think about just I'll give you a perspective on originated.
For Q create the average spread was 152 and so if you think about a LIBOR plus 152, when our Cree as opposed to kind of LIBOR plus mid threes in sponsored specialty that kind of gives you the delta in in spreads and what mix can do ultimately when.
And we have a mix change.
What else what else can I answer for you.
How are those spreads evolved over the past year.
I would say there about increase in this quarter there about a 25 to 30 basis points lower than they were a year ago and I think I was I look at all of the transactions that came in I think it's just a result of asset quality less are result of a competitive nature. So we had a lot of high quality.
Low LTV high debt service coverage deals.
Come in in Fourq, you and so again I don't think that tells me anything about the competitive landscape as much as it does the quality of the transactions we brought in fourth quarter.
Understood.
My last question is just around the growth outlook I'm still very strong if you go to the middle or high end, you're still looking at mid to high single digit loan growth and versus some of your peers, including in market peers, It's strikingly higher.
What do you attribute that to.
So I think we look just internally at that our momentum we have the highest 12 31 pipeline and commercial bank that we've had over the last 10 years and obviously, we had a really good fourth quarter with respect to growth and so I think we go into the year with a with a with some good momentum on our average loan balances which is.
What drives that interest income and a pretty strong pipeline.
And you know some of the areas that generally are good growth drivers fourth had slower second half the year and just where we are we think that given as I said the kolon earlier in the call given our wide portfolio of geographies and different business lines and expertise in certain industry segments.
We think that that that mid single digits. If you will on a total portfolio basis is a good number our commercial loan growth, including Investor Cree is probably going to be slightly higher than that with our consumer lending categories being slightly lower.
Okay, as we think about commercial real estate growth this quarter versus.
You know, perhaps the past two or three was there a change in where you went geography wise and if so where are you more focus this quarter than in prior periods.
Great question, Mike The Chief Risk Officer is here in the room came into four to give maybe the data that theres actually really almost no geographic disparity from prior quarters.
So it really was a question as I mentioned earlier of significantly fewer pay down so our originations in Korea, where about the same dollar size and fundings as they were a year ago. Fourq. You. It was just payments were down significantly and I took a look at the data with respect to property type geography.
Weighted average loan to value and debt service coverage and none of those metrics really change. So I would say, it's blocking and tackling business as usual no change in strategy not different dynamics, just significantly fewer pay downs.
Understood. Okay, just one more if I could sneak it in you mentioned potential portfolio opportunities and your capital management commentary and I never really consider that for you before never thought it was on the radar.
Can you just be a little bit more specific as to what you meant I'm assuming loan portfolios, but could you clarify and if so what types of asset classes and geographies are you looking for if you've looked at opportunities and past could you just give us a sense for how many.
Sure and Weve and be we've been consistent we have we have talked about it Matt and it is referring to commercial loan portfolios in particular.
So I would say, where we look for areas, where we have expertise we look for we've looked at equipment finance portfolio some secured.
Loan portfolios to kind of offset some of our sponsor in specialty enterprise reliant exposure. So we look for good yielding economically profitable portfolio acquisitions that will either you know enhance an existing specialty or an existing line of business or provide us with an inroad into.
You know something that we find attractive at the current period of time the truth as a matter is we have not in the last at least a decides they eight quarters. Besides the residential mortgage portfolio acquisition that we did up in Boston for strategic purposes, we have not successfully acquired a commercial loan portfolio over the course of the last eight quarters.
Understood. Okay. That's all I had I appreciate taking my questions. Thank you anytime thank you for the questions.
Thank you there no further questions at this time I'd like to turn the call back over to Mr. Steele for any closing remarks.
Thank you we appreciate Everybodys participation this morning and have a great day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.