Q2 2019 Earnings Call

Thank you for calling income conferencing. The next available conference specialist will be with you momentarily.

From such you may have your name.

Right.

Yes.

Yeah, I'll tell you why.

And your company.

Era eight era.

Mr. This conference is being recorded also this presentation includes forward looking statements within the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition results of operations and business and financial performance.

Webster has based these forward looking statements on currents expectations and projections about future events actual results might differ materially from those projected in the forward looking statements.

Additional information concerning risks uncertainties assumptions and other factors that could cause actual results so materially differ from those in the forward looking statements.

Is contained in Webster financials public filings with the Securities and Exchange Commission.

Including our form eight k. containing our earnings release for the second quarter of 2019.

Oh, now introduce Webster's President and C.E.O., John So you live.

Thanks, Terry Good morning, everyone. Thank you for joining Webster's second quarter 2019 earnings call.

See if Glenn Mcginnis and I will review business and financial performance for the quarter.

They just say bank President Chad Wilkins is here with us in Waterbury and will be available during q. and I.

Let me start by saying we were really pleased with our solid financial performance in two two loaning deposit growth was strong net interest income and non interest income increased expenses were efficiently managed and we created positive operating leverage for the ninth consecutive quarter.

Or capital position is strong and are consistent financial performance enabled us to recently announced a 21% increase in the common dividend.

We continue to take a long view on value creation, and we are investing in our differentiating businesses across all markets to drive strong customer relationships and to maximize economic profits overtime.

I'll begin on slide too.

We posted our fourth consecutive quarter of net income at just under $100 million.

I didn't come to common shareholders was 96.2 million after two and a half million preferred dividend expense.

Earnings per share of a dollar five in Q2 compares to a dollar six in Q1 and 92 cents into two of 2018 when that period is adjusted for 8.6 million of one time expense items.

Resulting in a 14% growth rate from prior years too too.

Tangible book value per share continues to grow and is 15% higher than last year, even as we increase the quarterly common dividend.

Loan growth in a higher net interest margin contributed to our 39th consecutive quarter of year over year revenue growth.

And a 13% increase in adjusted Preprovision net revenue.

Into two total revenue was 8% higher than last year, while adjusted expenses increased 5%, resulting in positive operating leverage efficiency ratio was 56% for the third quarter in a row.

Credit quality remains salad with no worthy linked quarter reductions in nonperforming commercial classified and past due loans.

We've now posted four consecutive quarters with return on common equity above 13% and return on tangible common equity above 16%.

Webster's financial performance is driven by discipline commitment to our purposeful execution of long term strategic priorities.

Namely to expand commercial banking aggressively grow H., I say bank and optimize and transformed community banking.

Tarnish slide three I'll make a few comments on our first half 2019 line of business performance.

Commercial backing continued to execute at a high level delivering year over year double digit loan growth, we are growing loans without sacrificing underwriting disciplined and benefiting from our differentiated execution in select industry verticals and in commercial real estate.

Commercial banking revenue in the first half of 2019 grew four per cent from prior year with all business units and all geography is contributing to our growth.

[noise] deposits were also up nicely as we continue to build franchise value by acquiring new customers and deepening existing relationships across our footprint.

H. I say banks first half P.T.N.R. improved more than 30%.

As we added in excess of 724000 new accounts.

And continue to drive higher levels of customer satisfaction through our operational excellence initiatives.

It just say back remains the leading bank administrator of helping savings accounts and surpassed 8 billion in H.S.A. footings in the quarter.

Also in the corridor, we expanded and extended are important relationship with signal.

Increasing investments in technology security marketing and other resources to advance and grow the customer experience.

Community banking is making progress optimizing distribution channels investing in digital capabilities and focusing on high value consumers and small businesses.

We again generated year over year P.P.N.R. grows up 9% from the first half of 2018.

Through modest revenue games, and continued expense discipline and process efficiencies, we continue to grow loans core deposits and full relationships across our Boston to New York retail footprint.

Slide for highlights are solid loan and deposit growth dynamics on a consolidated basis loans increased 1.2 billion or 7% from a year ago.

Deposits increased 1.3 billion or 6% over the last year with low cost health savings accounts, representing 55% of the increase.

Well I'm will provide more detail as he reviews, the balance sheet and line of business performance.

Our regional economies and the markets, we operate in remained solid and growing.

Despite macro uncertainty and the pace of global growth more challenging interest rate environment, and a handful of potential geopolitical risks.

Our customers both consumers and businesses are healthy and generally positive on the forward outlook.

We remain confident in our ability to consistently build long term franchise value and to maximize growth of economic profits overtime.

We are executing at a high level in the areas, we control growing revenue loans and core deposits through new customer acquisition and further penetration of our existing customer base.

Diligently managing credit risk.

Continually investing in our differentiated businesses with strategic focus while maintaining expense discipline and realizing efficiency gains to drive operating leverage and improve our returns.

And finally, maintaining a strong values based.

Culture at the bank.

Creating a great environment for bankers, while always taking care of our customers and investing in our communities.

I'll now turn the call over the blind for the financial review.

Thanks, John Slide five provides more detail on our average balance sheet.

The securities portfolio grew by 164 million linked quarter as follows an increase of 165 million and Q1 Euro a year, though portfolios up 330 million consistent with our balance sheet growth.

Loan growth continues to be led by the <unk> commercial categories, which were up 321 million linked quarter and 1.1 billion versus prior year.

Linked quarter consumer loan growth of 200 million reflects the 242 million mortgage portfolio purchase the close to the end of Q1.

Similar to the industry, we continue to see pay down upon equity balances over the past year.

Deposit growth was 213 million length quarter with three quarters of the growth in demand and low cost ancient say deposits.

Deposits grew 1.3 billion from a year ago was slightly more than half of the growth coming from H. and say deposits.

Borrowings increased 468 million length quarter. This includes 300 million and 10 year Senior notes issued late in Q1, which we swapped out to floating.

The remainder of the increase was the result of seasonality in public funds.

Versus prior year borrowings went down 61 million as the growth in deposits in equity exceeded growth in loans and securities.

Slide six summarizes our Q2 income statement and drivers a quarterly earnings.

Net interest income totaled 242 million and increased modestly from Q1, we had solid linked quarter, earning asset growth of 2.6%, which was offset by higher than anticipated NIMH compression as average second quarter interest rate lever levels were lower than anticipated at the time of our Q. on earnings call in mid April .

For example.

The average one month Bible rate was five basis points lower and the average 10 years swap rate was 20 basis points lower.

Versus prior year net interest income grew by 17 million or 7.5%.

Noninterest income increased in excess of 7 million versus both prior quarter can prior year.

Just exceeded our expectations due to increase the level of commercial activity and games in our Bohley portfolio.

Reported non interest expense increase 5 million links quarter and was flat compared to a year ago.

The links quarter reflects an increase of 3.9 million due to hire legal expense outside professional fees and seasonal sales and sponsorships.

Expenses were flat the prior year, which included a one time deposit insurance charge of 7.2 million.

This was primarily offset by annual <unk> and other benefit costs increases.

Preprovision net revenue of 137 million represents a new quarterly record.

And was up from 135 million in Q1.

Versus prior year, Preprovision net revenue increased 15 million or 13% on an adjusted basis.

Loan loss provision for the quarter was 11.9 million, resulting in a coverage ratio of 110 basis points.

Our efficiency ratio is 56%.

Same as in Q1, an improved from 57.8% a year ago and the effective tax rate was 21.1%.

Slideseven provides additional detail on Europa Europa Preprovision net revenue growth.

Net interest income grew by 17 million or 7.5% for a million driven by rate and 13 million driven by volume.

The rain component is the net result, but the 30 on basis point improvement and alone you and a 20 basis point increase in deposit costs.

When measured against the 70 basis point increase in average fed funds rate. This resulted in alone beta, 44% and the deposit beta 28%.

The combination, resulting in a six basis point increase in debt interest margin to 3.63%.

Starting on side <unk> I'll review the line of business results.

Commercial banking reported second quarter loan growth of 3.5% linked quarter and 10.8% year over year.

So you know I loan growth was 257 million linked quarter and 648 million from prior year commercial real estate loans grew 126 million linked quarter and 427 million for prior year.

While the loan portfolio yield decline two basis points linked quarter, primarily due to lower lie bore rates.

It increased 36 basis points from a year ago.

Did you see on the bottom right P.P.N.R. was flat compared to a year ago.

Net interest income grew 3.7 million, reflecting average loan growth of 11%, while non interest income was modestly lower.

And operating expenses increased from prior year as we continue to invest in the business.

Slide nine highlights H., you say bank, what's delivered another solid quarter led by the production of 129000 new accounts.

Over the past 12 months ancient say bank has opened 724000 new accounts.

As John noted during the quarter.

We crossed the 8 billion Mark and total footings with just under 3 million accounts. Our findings consist of 6.2 billion in low cost long duration deposits and 1.8 billion in linked investments.

We continue with strong account growth and the channels, where we had the greatest influence sales and marketing activities, including direct to employer.

Total accounts, where 11% higher than a year ago, and total footings were up 1 billion or 15%.

Then interest income was 21% higher from a year ago. The increase reflects growth a 13% average deposits in Ohio Netcredit rate.

The cost of deposits was 20 basis points fly to a year ago.

Noninterest income increased 9% from a higher from higher account fees and interchange revenue.

Each driven by growth in accounts.

Total revenue for the quarter grew 16% from a year ago.

Year over year expense growth was 10% as a result of account growth and ongoing expense discipline was targeted investments.

Combine this result in positive operating elaborate and pretax net revenue growth of 24%.

Clyde 10 highlights community banking.

Business banking and your over your loan growth six per cent.

Combined with Q1 Q1 mortgage portfolio purchase growth offset a continued decline in our home equity portfolio.

The net result was an increase of 2% in loans.

On a deposit side consumer and business deposits each grew 6% year over year.

Then interest income grew modestly year over year, while non interest income from 5%.

Driven by deposit charges and higher Swat related fee income in business banking.

Total revenue growth was 1.6% from a year ago and non interest expense group, 1%, resulting in positive operating leverage in 3.4% growth in P.P.N.R.

Slide 11 highlights R.T.S. a quality metrics.

Nonperforming loans in the upper left had a links quarter decline of 11 million and now represents 77 basis points of total loans.

Net charge offs in the upper right.

<unk> 11.6 million and a quarter.

The annualized net charge off rate is generally consistent with our 20, Puerto average of 21 basis points.

Commercial classified loans in the lower left improved to 259 basis points to total commercial loans.

This compares to a 20 quarter average of 322 basis points.

Our allows for low loss was 212 million.

With a provision of 11.9 million and a coverage ratio of 110 basis points.

Our allowance for loan loss continues to reflect stable commercial and consumer <expletive> equality.

So I 12 provides our outlook for Q3 compared to Q too.

We expect average loans to increase around 2% driven primarily by our commercial and residential portfolios.

We expect average interest earning assets to grow over 2%.

With regard to net interest margin given the right environment at this point, we anticipate seven to 10 basis points of name compression.

As a result, we expect net interest income to be stable from Q2 levels.

Reported non interest income is likely to be down as a result of boldly portfolio games included in Q2.

We expect our efficiency ratio to be below 757%.

And our provision will be driven by loan growth asset quality and mix, we expect the tax rate on a non F.T.E. basis to be approximately 21% and lastly, we expect our average diluted share account to be similar to Q. twos level.

With that I'll turn things back over to John .

Thank you very much Glenn.

Oh before we open it up for T., one and I'd like to provide additional contact with the Glenda guidance on them and net interest income trends.

Our assets sensitivity, which peaked in Q3 of 2017 continues to moderate.

And we had and will continue to take steps to manager overall interest rate sensitivity given the outlook on future rate moves.

In Q2, despite the 11 basis points overall named compression, we were able to grow net interest income modestly linked quarter as a result of our ability to safely grow loans at market leading levels.

Moreover, and importantly, <unk> to tune in compression was driven by higher premium premium amortization in the securities portfolio. The mortgage loans purchased at the end of the first quarter and the full quarterly impacted the note issuance we completed in Q1.

Our deposit costs, largely as a result of our differentiated H.S.A. business.

And a net increase in demand deposits increased only two basis points quarter over quarter, which we believe outperforms broader market trends.

And our yield on loans contracted only two basis points quarter over quarter. Despite a more significant contraction in library.

While we expect them compression in the third quarter balance sheet actions and asset growth should allow us to keep net interest income relatively flat.

Looking out further we see challenge to them in Q4, as well and our focus will again be to mitigate the impact on net interest income.

As we head into 2020 and beyond will benefit from the Q1 seasonal lift in H.S.A. deposits.

And we'll continue to refine our view and further our execution on the structure of our balance sheet. Our goal always taking the long view continues to be driving net interest income and delivering growth and economic profits.

I want to again, thank our nearly 3400 bankers for their continued effort and performance.

Together, our bankers are making a positive difference where our customers are shareholders. The communities, we serve and for each other.

With that unless I'm happy to open it up for questions.

Thank you.

If you would like to ask.

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A confirmation tunnel indicate you're nine isn't the question can you mean, if I start to if you make to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing a stocky.

Our first question comes from the line as Stephen Alex.

K P. Morgan. Please proceed with your question.

Hey, good morning, everybody.

Yeah, good morning, <unk> going well.

So far so good.

I don't want to fall first on your comments say you expanded and extended the relationship with the signal and just want to confirm are you, saying that the contract was renewed.

Steve as we always tell you we don't specifically comment on contracts was sitting there otherwise, but let me reiterate that we've enjoyed a mutually beneficial relationship with cigna for the last five years since we began partnering with them.

It's a contractual relationship and in Q2, we expanded an extended that relationship and we continue to view the relationship as a very strong one.

Okay. That's helpful.

Yeah, and then I want to shift to the margin.

Glenn does the three Q. guidance is that assume July ray caught.

It does we have a a July we have factored in in July re cut in the September breakout each 25.

Okay. So if we look at the name guidance down seven to 10 in the third quarter is that about what you expect from a 25 basis point cut or is there. Some other factor in there like Bon premium members nation or something that's so elevating the <unk> no. There is and I think it's all related because you're we're assuming also I should say a 10 year swap rate of about 2% and so in that seven to 10 range I would put the the amortization impact somewhere between two and three basis points.

Okay. So a normal response.

Cut might be you know less two to three.

Somewhere in that range.

Yeah somewhere somewhere around there.

Okay got Ya and then once your appetite Oh, you'd think about offsetting this falling Johns comments, where you guys are obviously thinking long term, but do you plan on <unk>, you know for the raining and expense growth like what what do you think about the offsets as us and them pressure builds here.

Yeah, Steve I mean, I'll take it first obviously you know, whereas we've talked about we take the long view in terms of building franchise, we pull levers and I think we've demonstrated to the market in our reduction of of our expenses over time, and our our management or the efficiency ratio, we certainly have opportunity to be careful on expenses, but we're also careful to make sure that we think we've got a couple of really differentiating businesses that will continue to invest in so I think it's a combination of balance sheet actions. It's a combination of growing our balance sheet and growing loans to offset the the NIMH compression and expense management and that's why you know we're trying to focus everyone to the net interest income line rather than the the headline NIMH number.

Okay.

And then just finally, an H.S.A. bank how much flexibility do you have to lower the deposit rates, you're paying and maybe for Chad what does the healthequity wage deal mean for your business as an opportunity stronger competitor, how do you think about that thanks.

Yeah. Thank Steve I stayed on on the right side, we haven't had pressure either way on right. So I don't expect them to move I mean, we haven't moved rage other than the come down slightly over the last couple of years.

But I'm moving to the Healthequity wage works deal I think the.

Yeah.

In general that transaction, it's big it's complicated and expensive and we've been through similar but smaller transitions and conversions over the years and if done right that can be great. If I'm wrong quite the opposite right. So the bottom line is sudden change our focus outside of putting ourselves in a position to take advantage of any disruption that might happen as they work through the transition and pen Steve if I could make kind of a higher level strategic comment you know obviously there have been a number of transactions announced in the industry as a leading players you can imagine we're in and around you know all of the activity. We are really pleased with the execution of Chatham as team in our position at the leading H. I say provider from a bank perspective as the industry, you know consolidates and moves around and we're gonna obviously continue to make the investments necessary to keep our competitive advantage and you know maintain our position as a as a key player in the marketplace.

Okay.

Terrific. Thanks for taking my questions.

Thank you. Our next question comes in line have calling guilty with KBW He's pretty big question.

Thanks for the warning guys.

<unk>.

So this great great color and <unk> certainly on the strategy, John that you're offering to sort of help to offset some of these new challenges.

And then just Glen back to to even indicated you know two to three basis points, maybe could be amortization related to demand can you just talk about some of the other drivers you know how you're seeing loan pricing in the market you know on origination yields and then you know where youre seeing deposit pricing trends go you know kind of near term and then a little bit longer term on on some of those inputs.

Yeah, I'll I'll, let go and put a finer point pecan if I can just jump in I think you know from a from a pricing perspective on the loans.

You know the yields are really coming down based on the reference trading were alive or is I think we're seeing pretty stable credit spreads. If you will so libraries impacting the loans and as we said you know one of the things in our story here is that I think you'll see a lot of our peers and other folks in the industry have deposit pricing going up higher obviously, we think no matter what the interest rate environment is having H.S.A. and having steady cost long duration growing deposits. You know, we'll we'll be an advantage. So we have seen a little bit of pressure is we talked about in the last quarter in terms of deposit pricing across the the footprint any in particular large metro areas, but I think we're seeing that consumer demand on pricing increases subside with what's going on in the broader interest rate market, which I think is kind of consistent with what we're seeing in the industry. So when you look at kind of the core and M. contraction you know the loans and deposits, we feel pretty bullish on.

Our ability to to effectively manage deposit costs and obviously, we're somewhat because we have a large floating write books susceptible to moods in in live or so that's kinda my top of the house view on on on core named contraction.

No and I'll, just maybe I can add a little we talked about the amortization two or three basis points and I think the judge point, if you look at our our our our lending both this one month whiteboard base because that would be most sensitive to a a change in rage, we have about seven and a half seven a little over seven and a half billion on that book and so that would be the biggest had one for us.

The offset would obviously be things like public funds C.D.'s, a general deposit costs and in our borrowings at H.L.B. advances would come down as well with the right. So when you factor all that didn't call and that's how you get to the range that we are.

Okay. Okay. That's helpful. And then just on a bone growth side, you know, obviously really good grotesk quarter. It looks like you're anticipating good growth next quarter in your you know certainly speaking optimistically about that.

You know and and Jon you just said you know you're seeing decent credit spreads, but can you just frame it a little bit in terms of appetite and demand for that type of growth I mean, obviously, we're sitting here with the fed the attorney to cut today see something I'm not sure what they see but different perhaps than what your performance is showing that can you just talk a little bit about what's driving that unfavorable loan growth trends.

Sure I I, probably sound like a broken record, calling you know I've had this conversation. So many times I really think it's because we've got kind of a variety of lever. So if you look across you know our sponsor and specially business, which has some industry verticals, our traditional middle market across this be expanded geography asset base landing equipment finance commercial real estate and we've got a kind of a plethora of of a business lines and geography, and we haven't been what's really nice is when I was making a comment yesterday to cross modal I look through and.

You're not seeing a disproportionate contribution in any one place as we go over time. So if you look at the leverage category. If you look at any particular industry segment. If you look at any particular geography, we really haven't had to supercharge or take additional risk in any of those geography. So I think you know the growth has been really nice and and spread across our our sectors. I'll also tell you that you know one of the things I've said on the call is that we will sacrifice on on crisis before will sacrifice on structure I believe that's true I looked at our weighted average risk ratings over the last year and they've trended down which means you know lower better risk quality lower risk ratings and our credit spreads over that same period have come down a little bit as well. So I think to me that's a little bit of quantitative evidence that we are we are where where necessary worth sacrificing on price and not on quality all of our loan.

Pipelines are up in business banking and commercial so I do feel pretty you know pretty bullish about where we are oh and one more point I want it to make that I think is important if.

If you know people go from worrying about your loan growth during good times, not being high enough to worrying that a lot of loan growth during a late cycle is dangerous.

Is that our you know we really we really have been disciplined and in this quarter. If you look at the chart the originations weren't up dramatically in fact, they were down from a year ago, but pre payments were down significantly and I think that's an important point to make because it means you know we haven't been driving outsized originations and the period. We we're just fortunate not to see a lot of pay off in the quarter.

Okay. That's how phone that just one final just again kind of kind of longer term thoughts on all of that you know you're giving guidance near term on the efficiency ratio and what you just said I'm along but I mean do do we should we assume that this can be extended you know that stable efficiency ratio.

You know high single digit long growth rate can be that's like a target in objective for you all to to maintain throughout 2020 as well.

I mean, it it is strategically right and we're we're being I think transparent about the challenges and the interest rate environment of NIMH compression, but you know our goals are to try and make sure. We're growing assets, we're getting paid for value and we're not taking too much credit risk that we can through balance sheet actions and growth in our earning assets offset some of the NIMH compression and you've noticed you know word 56% efficiency ratio, we guided towards 57, we generally give ourselves a little bit of a wiggle room, there because as you know in any one quarter. If we see a great commercial banking team or if Chad has an opportunity to supercharge sales or make an investment in h. I say, we want to keep growing are differentiated assets. What our goal is over the long term and we feel confident that kind of the continued downward migration again over the longer term on a efficiency ratio is is achievable okay great.

Oh, I'm, sorry, Mac, Oh, sorry guideline.

No I just I just to Johns point, we want to maintain the flexibility to <unk> strategically invest in our business. If you look at it and you look at it the way we're set up from a strategic standpoint. He just go through the lines of business commercial headcount as examples up 20 year over year H. I say as a 40 year over year, that's offset by reductions in the community Bank of 55 and in the Middle and back office at 25, if you think about the way. We're we're we're investing into businesses. It sorta placed through on their efficiency ratio to but we need we need the flexibility to invest into businesses.

That's great alright, thanks, very much ice.

Thank you <unk>.

Thank you know our next question comes in line F. Moxi escaping.

O'neill. He's proceed with your question.

Hi, guys. Good morning, I had a question first for Chad I guess chat I'm curious the guidance issued recently by the I.R.S. and the Treasury Department related to high deductible Health plans, you should obviously be pretty good for new business generation in the H.S.A. area I guess I'm curious how long you'd think before health plans begin to adopt a new guidance.

Yeah, that's a great question, Mark and it's something that we've been lobbying aggressively over the last couple of years ago.

Things that we focus off from a loving perspective, and it's eligibility within Medicare and Medicare advantage for H.S.A.'s.

Allowing you to say eligibility with direct primary care agreements.

And so I'm happy to see if we were successful on on this front.

This does open up our opportunity our target opportunity for both employers and consumers and I don't have a specific answer for you for how long it'll take I mean, I think it's going to be next year's it's difficult because a lot of the plants have already yeah set in motion, what they're what they're going to offer as I go through October I think as they work through next year, we'll see some changes, but it it eliminates one little the larger obstacles with regard to H.S.A.'s and really does open up our our opportunity.

Great and then Glen you referenced above three and a half million dollars and miscellaneous other income in the press release, what exactly is that.

So yeah, so that was bully benefits and I think you're probably familiar with the bank on life insurance, you've seen on our balance sheet 546 million at which we get a return per quarter about 3.6 million that is when in the event of a death benefit is accelerated.

During the quarter, we had a little over 3 million.

An accelerated benefits.

Okay, and then lastly, Ah I wondered if you could sorta update us on additional plans for branch optimization.

Sure Mark, it's it's John and by the way congratulations on the Sandler Piper transaction.

Oh and you.

Yeah, I I think you know it's it's the same we do not have anything targeted right now we constantly are working and or would all start from the premise that our consumer preferences are changing fewer transactions are happening in the bank are digitally active households continued to increase.

And our focus really is to shift expenses from the real real estate platform, obviously into technology and so for US. It's you know looking at every every quarter at our footprint, making sure. We're taking care of our customer base with an ultimate goal of not necessarily reducing the number of branches, but reducing square footage over time, we're down 3% on square footage year over year, and we'll continue that but right now we don't have any targeted consolidations.

Thank you.

Thanks Mark.

Thank you. Our next question comes in line <unk>.

Security. Please proceed with your question.

Hi, Thanks come morning got a couple of questions for you first.

And just say so looking at slide nine again this pre tax net revenue per average account at $45 a roughly so it was down about $1.50 from from the first quarter I was curious as to you know what drove that decline whether it was you know a lower net credit rate or if there was a change in economics with Cigna.

I think that while David's Glenn first off.

Interchange revenue was relatively flat I think our account fees declined.

Lower account closure fees were the key drivers of that.

And and lower paid paper statement fees, which we charge for so it was really volume driven.

That's all from higher average counts in the sector.

I'd say on a button when the lower.

Steepening fees, we actually are saving on expense on that so it's a net gain to the business.

Got it thanks for that and congrats on extending the relationship with Cigna I was curious and I figure out I'll try what's the typical length of an extension is it about five years.

Yeah, David we're not going to talk about the the typical length of the contract. So I I. Appreciate the question and just say we have a long term relationship and our expectation that it will continue to be a long term relationship.

Yeah Fair enough and then shifting gears to credit quality. There was a nice decline this quarter what drove that decline in house the outlook for credit quality.

Yeah, It's a great question and I almost want to turn around and ask it kind of has to do the same thing you know, we're really pleased with where our asset quality statistics are now we're now at a level on commercial classified status that is lower than pre financial crisis, and there really hasn't been any particular driver except for the fact that we've just seen our customers continue to be healthy grow topline watch expenses and so I think we're we're choosing so we're selecting credit pretty well, but we've grown the portfolio in the last nine or 10 years.

Pretty significantly so I think the drivers are good risk selection, we monitor the portfolio very well, but the most important part for us is that.

You know were in industries that have predictable protectable recurring cash flows we've been fortunate not to be in areas like oil and gas and energy and construction some of the more cyclical areas. So we're just pleased right now with where we are.

And you know we're at cycle lows. The outlook is interesting. We've had you know in in in the small charge offs. We've had an any risk rating migration down we havent been able to see any correlated risk or any themes in either geography industry or product.

So our outlook right now is cautiously optimistic every time another quarter goes by we think about how close we are to the end of this long cycle now a record expansion cycle in the us.

But there is nothing on our radar screen and I think we do a pretty good job of looking forward and monitoring our portfolio that that gives us particular concern we just need to stay vigilant.

Great and then.

The deposit decline in commercial banking was that related to seasonality, perhaps in the municipal business yes.

Public funds, it's all seasonality.

Dave.

Got it got it and then last one for me.

You alluded to in the fourth quarter.

The NIM compression.

Should we assume more mid single digit as opposed to high single digit given the.

Two to three basis points of amortization.

Yeah, I think we're not going to we're not going to sort of drill it down into a number theres. So many things going on it's so volatile right now and and either the macro environment or the things that we're doing I. Just think we wanted to make a statement to give you more of a sense directionally over the longer period of time.

That we you know we'll fight continued.

Compression trends, but we're not going to get more specific than that.

Understood Thanks very much.

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 good morning.

I Wonder if we could just start the other other income and noninterest income and and I think Mark was asking about this too. So included in that 13.3 million is a three and a half million dollar BOLI death benefit is that correct. That's fine that's out of the.

Yeah, So the increase of $7 million, a little over 7 million quarter over quarter and year over year half of that is fully.

And the other and what is yeah.

The other half is commercial activity primarily swap activity.

Okay, and then how I mean, how should we be thinking about that came in that line item.

Absent.

Absolutely you know, even some gains gain on sale of branches in the fourth quarter, that's really been running closer to seven to 8 million is that a good way to be thinking about that number yeah. I know I don't think that you can I don't think that you can bring to 3 million for example forward.

That's why our guidance says that you know non interest income will likely down quarter over quarter.

All things being considered a you know considered you know it depends on commercial activity depends on.

Transaction volume and things like that.

Okay, and then same question here within the expense line.

The other expense line was up 4 million I just want to make sure I heard you right. You said that 3.9 million was due to higher legal expenses, yeah. So during the quarter during the quarter, we had settlements or the total just a little over $2 million.

And so I would not push those forward either.

They somewhat offset the gain that you saw in noninterest income.

Perfect. Okay. Thanks, and then just sort of last question here, a little bit more macro when you first expand it into Boston.

You stated a goal you know by 2020 and as getting killed.

You know mark that it looks like you're pretty close to it you said he won't be a billing in five and you know it seems like you're getting there can you talk a little bit about what's next for Boston, how you're thinking about Boston and then also within the framework of some of the M&A that we've we've seen happen in the Boston market place just how you're looking at M&A Youve got a strong start currency there been some deals that have happened in your market place both in Boston and beyond that has gone off you know much clustered a buck just how you're thinking about that thanks.

Sure I'll try and hit both of those Lori you're correct. Boston is now a contribution breakeven past contribution breakeven positive just from a community bank perspective, which was obviously one of our goals and then we did set out a loan and deposit growth as.

Target for the five years again, just with respect to retail and were.

Above with respect to loans slightly below with respect to deposits as we go through your four but we're confident we're going to we're going to hit our target numbers you know our view on Boston, There's always been kind of a macro holistic view on the Boston market that it's one of the economic drivers if not the economic driver in the northeast you know outside of New York So.

As you know we've had a lot of loan activity there.

Even before we established our flagship office in 2009, and if you now look at the totality of that market we've got.

A full complement of retail business banking wealth commercial specialty lending and it's certainly a with New York Philadelphia, The three big Metro drivers of profitability and growth for the bank.

So were very very very pleased with the fact that we made that move and it's it's helped us.

Both from a direct financial contribution perspective, and it also helped the other lines of business.

From an 8% M&A perspective, we continue to take a really disciplined approach and our view is weve got two hurdles for M&A, one is financial but the other one is strategic as well. So you know if you think about us doing a whole bank acquisition to get more banking center footprint, it's unlikely for us to do you know.

A tuck in acquisition in those markets. Because you know we have a stated strategy of growing you just say expanding and becoming more commercial.

And optimizing our community bank, which we have and I think Boston could Great example of that so.

You know, we never say never obviously, we look at a lot of stuff from a strategic perspective.

But I think we're being really disciplined and thus far there hasn't been a really appealing opportunity for us in footprint.

Okay, and then just a follow up so you're 20 branches now in Boston is that correct.

No number one Uh huh.

16.

16, Okay, and and 16, Okay, I'm sorry, and.

The thought of doing any didn't know, though in addition to what's currently there.

Is is unlikely you're you're also gonna stay put at these levels is that here, yes. So.

Again, I'd hate to boxes, and I think unlikely is probably a good words, but we are thinking about the way our retail distribution look so for instance in Boston. We've got these 16 banking centers that have pretty significant square footage right. That's what they were when we took over for Citi Bank. If there was a reasonably.

Efficient way for us to have more and smaller locations you could see us trade out one big one for two small ones. If we thought that was was better. So it's really about real estate optimization at the end of the day.

Okay, Great and then just last question on Boston I know that some of the centers for very large in square footage and you all have had done some mark I think on on Subleasing have you all maximize where you want it to be on that or is that an area that we continue to.

To see come down in non interest expense or how should we think about that yeah, no I think.

I think that effort continues.

There are still some banking centers that by our standards are have too much square footage and will shrink those down to what we think these appropriate square footages. So that that effort will continue.

Great. Thanks, so much.

Thanks, Mark appreciate it.

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

Hi, good morning, guys.

Jared and good morning Hope all is well.

Yeah. That's good thanks hope all is well with you.

Just wanted to touch base on the.

The expansion markets and how the success of commercial growth is going you know in the Philly and DC markets and on the heels of that would you look at expanding that strategy to any other markets.

A great question.

And I think you know we've been very pleased with our expansion so far.

In Philadelphia.

You know, we're doing well in middle market. We have had an established commercial real estate activity there for more than 10 years, we've actually just added a new <unk> terrific a lender down there and he's already got some significant momentum.

And so what I would say is and you know this from what we've talked about we've kind of taken a deliberate longer term patient approach to these geographic expansion moves you only think about New York and getting questions. A few years ago on whether we would ever get to scale and now you know weve really got great momentum there with I think something like a half a billion dollars in an exposure and a lot of great direct customers in our New York Middle market. So.

Philadelphia has really started to ramp up in middle market with occur.

So we've taken the same approach in Providence, Boston White Plains, New York City, Philadelphia, You know, we have real estate and asset based lending in Washington, DC and again, we mute the growth expectations in order to make sure that we're not taking undue risk in those markets and that's worked.

So there has been a pause for the last couple of years and moving to the next kind of contiguous geographic market.

And I think for US it has a lot to do with the macro environment. Jared. So you know we do feel like we're closer to the end of the cycle.

Than the beginning of this expansion cycle. So I think it get while it gets more challenging and there's a lot of liquidity and there's a lot of competition in the market. It's not always the best time to go into a new market. So while we're constantly evaluating those opportunities that will allow us to get to economic profit quickly given the macro circumstances and what we've seen so far we have not moved and we do not have any near term kind of 12 month planned to open up another middle market office in a contiguous metro market.

Okay, great. Thanks, and then.

In light of the you know changing rate environment and the expectation now for lower rates should we expect to see any broader balance sheet repositioning I'm going into going into this.

So, yes, Jared hi, good morning.

We as you know peaked in asset sensitivity in the third quarter 17.

And since then and I think on page 19 of the of our earnings deck, you can see the progress that we've made against reducing some of our asset sensitivity.

Which is a goal as we as we look at the rate environment.

Obviously things like the purchase of the fixed.

Fixed rate mortgage portfolio, which was funded with short term borrowings help reduce asset sensitivity, we swapped as I indicated in my comments the senior note issuance.

Q1 to floating that shortens up borrowings during <unk>, we also purchased approximately $200 million floors to protect on the downside.

But we continue to look at ways to protect net interest income as John indicated and so there's there's a there's a host of levers that we continue to re evaluate and evaluate.

During the course of the quarter.

Great. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Casey Haire with Jefferies. Please proceed with your question.

Thanks, Good morning, guys.

Morning, guys say.

Just a couple of quick follow ups on the NIM no one and apologies if I missed this but the securities reinvestment yields and the current rate environment, what work versus the 301 existing or is that today.

So we're reinvesting it's rolling off at about three tenants coming in about 265.

Okay, So and that definitely got no no go ahead.

Oh, and then just on the on the borrowings can you give us a sense. If we do get a fed cut how what kind of beta we could expect on the borrowings.

So sure were primarily FHLB, so it's about a 90% beta.

Okay. It was right down to the market.

All right and just last one on the just on the expense front. The I know you guys are trying to expand commercial banking and there was.

A decent uptick on the expense front on tech and I guess hires.

Was that yeah. I mean, you were you guys just taking advantage of some over running on the swaps side or is that are we looking at a.

You know.

A ramp up in <unk> and commercial bank spend you know reinvestment.

No that shouldn't be a sustained increase look were always very careful to say you know if you look back at our PPNR year over year Cagar in commercial banking, we for a sustained period of time been able to grow around 10% right. Both the loans and the PPNR, but in any one given quarter or even any one given year. We're obviously, if we have the opportunity to attract talent or the opportunity to invest in our cash management platform, which is some of that technology expenses for so that we can get lower cost funding directly from our commercial banking customers, we're going to do that and we mentioned on the last couple of calls we also implemented a.

A kind of an end to end commercial loan portfolio digital system that allows us not only to be more efficient in the way, we underwrite and broken approve loans. It also allows us to more effectively monitor risk in the portfolio, which I think obviously all of you would would be happy about so what you do see right now in the cycle is a couple of million dollars and extra investment that that should not single signal at all a sustained increase in the expense base or reduction in the overall efficiency ratio of the commercial bank. It's really just investments that we can continue to lever to grow revenue overtime.

Understood. Thanks.

Thank you Tracy.

Thank you. Our next question comes from the line of Ken Jeremy with Morgan Stanley . Please proceed with your question.

Great. Thanks.

Just hanging around what are these just say good morning would they just say deposit costs. So 20 basis points, that's been pretty stable for the last year obviously.

Cues your minus like do you guys have any fiduciary duties to offer competitive rates NHS say in and if not then the other flip side is is why even offer 20 basis points at all why not just go to zero or something very very low. Thanks. So Ken So Ken good morning, it's Glenn and within that 20 basis points or a series of tiers. So the lower tier being dollar one is like a five basis points. It goes all the way up to like a 45 basis points. So that's the blended average of those rates.

Yeah, Okay. So I think 45 basis points just for like the highest account balance someone could possibly have.

Correct, yeah, Okay, well, but I guess it goes back to the same question, which is you know it.

Like I could go out and buy money market fund, it and get like 230 or so.

Currently I guess do you have any obligation to pay current rates on the debt.

Even those higher Uh huh.

There's no specific obligation does what we do is we keep our rates within kind of the middle of the pack with current competition and as we've talked about before it's not a it's really not a point of competition you know that it really tends to be more on capabilities things like investment capabilities and so on and you know we have not seen you know, we're not getting pressure on rates either up or down so I don't expect to move materially over.

You know over the near term Ken what can one of the things Weve seen overtime. Because this has been kind of an age old question is that because there is an investment option as you get big dollars. You know the average balances are still across you know the full $8 billion. The average balances across the 3 million accounts are pretty low so people don't seem to be particularly rate sensitive if they have $700 in their account, they're thinking of it more like a a 401K . or or or an H.R.A. and then once they get to a a threshold where they're starting to say hey, wait a minute I've got real dollars in here and I'm, losing they can immediately very efficiently and at low cost sweep into an investment account and.

No.

Control their own destiny with respect to the financial result, and we think thats sort of been.

The valve that has kept there from being kind of a.

No market pressure on rates from the consumer Yeah. I'd also add that you know for that was 70% that our transaction account holders that acts more like a checking account that it doesn't savings account right. So that has an impact on rates as well.

Gotcha, Okay that helps and then my second.

Actually I have a comment more than a question, but you can certainly welcome to respond with a significant contract that we're all talking about I know you've been asked a couple of times on this.

If feels like you guys just heard dancing around the issue a little bit like I know you said you expanded and extended the relationship the refused to comment on whether you actually resigned.

Cigna.

I just worry that if we all kind of later find out that the contract was not resigned but the expanded and extended related to something else I just I just worried that there could be some risk involved.

With that I cannot.

Thank you.

I can't I can't I appreciate that I appreciate the comment and obviously, where we respect the relationship we have with Cigna in terms of both sides not disclosing the terms of the agreement and I think I'm. A you know it may seem like I'm being a little cute, but the reality is we have a contractual relationship with Cigna, one that started five years ago.

When we began a partnership with them, we've extended and expanded that relationship and and I think that that's that's a that's a clear answer.

Okay. Thank you.

Thank you very much.

Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Steele <unk> for any final comments.

No. Thank you very much. Thank you for your continued interest in the Webster and I hope everyone has a terrific day.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.