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Webster Financial Corp
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Good morning, and welcome to Webster Financial Corporation’s Second Quarter 2018 Earnings Call. I will now introduce Webster’s Director of Investor Relations, Terry Mangan. Please go ahead sir.
Thank you, Melissa. Welcome to Webster. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to Webster’s financial conditions, results of operations, and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results may differ materially from those projected in the forward-looking statements.
Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial’s public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the second quarter of 2018.
I’ll now introduce John Ciulla, President and CEO of Webster.
Thanks, Terry. Good morning, everyone. Welcome to Webster’s Second Quarter 2018 Earnings Call. CFO, Glenn MacInnes and I will review business and financial performance for the quarter. We’ll then be joined by HSA Bank President, Chad Wilkins, to take questions.
I’ll begin on Slide 2. Webster’s second quarter results reflect continued progress in executing on our strategic priorities; to aggressively grow HSA Bank, expand Commercial Banking and to optimize and transform community banking. Solid execution on these strategic priorities resulted in double-digit year-over-year pre-provision net revenue growth from all three lines of business in the quarter.
Our reported diluted earnings per share of $0.86 in Q2 reflect record levels of net interest income, total revenue, pre-provision net revenue and net income. Included in the reported earnings per share are two expense items that Glenn will speak to in more detail. Excluding these expense items, our reported EPS would have been $0.92 per share.
With the continued strong focus on generating economic profit, we’ve now earned in excess of our 9.5% cost of capital for the fifth consecutive quarter. Tangible book value per share continues to grow and at 7.3% higher than a year ago even as we increased the common dividend by 27% in Q2.
Loan growth and a 30 basis point year-over-year increase in the net interest margin led to our thirty fifth consecutive quarter of year-over-year revenue growth. We continue to derive significant benefits from funding solid growth in primarily LIBOR based commercial loans with lower cost, longer duration, HSA and transactional deposits.
Almost 60% of our deposits are in transactional and HSA deposits, which had a blended cost of 11 basis points in Q2. The same cost those deposits had in the third quarter of 2015, which is just prior to when the Fed began increasing short-term interest rates. This funding profile continues to be a differentiator for Webster.
In Q2, total revenues increased almost 12% from a year ago, while reported expenses increased less than 10% resulting in a fifth consecutive quarter of positive operating leverage. Our efficiency ratio was below 60% for the fourth consecutive quarter. Asset quality remains stable as non-performing assets and charge-offs remain in recent cycle low ranges.
Slide 3 provides a tangible depiction of Webster’s favorable loan and deposit data’s. Total loan growth compared to last year was 4.4% with commercial loans growing almost 8%. The overall portfolio yield on loans in Q2 is 59 basis points higher than a year ago as loan growth continues to be led largely by floating rate commercial loans. Deposits also grew 4.3% from a year ago funding loan growths and most of the year-over-year reduction in borrowings. The cost of deposits increased only 9 basis points over last year.
Starting on Slide 4, I’ll review the line of business performance. Commercial Banking generated quarterly revenue exceeding $100 million for the first time as loans grew 8% year -over-year and 2.6% linked quarter. Growth was led by our middle market segments included asset based lending which reported strong loan originations during the quarter contributing to the solid C&I loan growth.
Investor Cree loans are essentially flat year-over-year and grew 1.4% linked quarter, while Cree loan fundings were solid in Q2, we also saw a significant amount of pay downs and pay offs as non-bank lenders continued to be in that market with very competitive structures and pricing. The 7.1 billion or 71% of Commercial Banking’s 9.9 billion loan portfolio resetting in 30 days or less, the portfolio yield increased 40 basis points from Q1 and 91 basis points from a year ago.
Average loan growth of 5.8% year-over-year and higher deposit margins resulted in a 12% increase in net interest income from a year ago. Non-interest income grew 20% from the prior year primarily from improved swap revenue. As we continue to invest in this business, year-over-year expenses grew 15%, the net result was PPNR growth in Commercial Banking of 12%. We actively manage the commercial loan portfolio and are encouraged by the fact that asset quality metrics continue to be solid.
Turning to Slide 5, HSA Bank delivered another quarter of strong performance in Q2 underscoring the bidirectional value of HSA Bank and Webster. Our 2.7 million accounts now have total footings of $7 billion, this consists 5.5 billion in low cost long duration deposits that help fund Webster’s earning assets and 1.5 billion in linked investment balances. Total accounts were 13% higher than a year ago and footings per count of just $2,600 or 5% higher.
Combination of account growth and account seasoning results in total footings being 1.1 billion or 19% higher than a year ago. The 119,000 new accounts opened in Q2 were 19% higher than a year ago, but declined as expected from the seasonally strong level in Q1. Revenue grew 28% from a year ago in HSA this was led by net interest income growth of 38% , which was the result of 14% increase in average deposit balances and a higher net credit rate.
Coupled with year-over-year expense growth of 9% evidence of our continued investment in the business, significant positive operating leverage resulted in pre-tax net revenue growth of 62.5%. We continue to be excited about the long-term growth prospects for HSA and we’re encouraged to see the House Ways and Mean [ph] committee mark up a comprehensive package of bills last week that support the usability and expansion of HSA plans and limits.
Moving to Slide 6, Community Banking loan balances were essentially flat year-over-year, 7% growth in business banking loans was offset by 1% decline in personal banking loan. The decline in personal banking loans was driven by continued consumer deleveraging combined with slowness in residential mortgage originations. Consistent with industry trends we continue to maintain our disciplined approach to loan pricing in this very competitive residential lending market.
Deposits grew 3.3% year-over-year with growth rates about equal for personal and business deposits. Total revenue grew 3.5% year-over-year, deposit growth and improved spreads drove 6% growth in net interest income, while investments grew by 8% year-over-year. This was partially offset by lower non-interest income including $2.2million decline in mortgage banking revenue.
Non-interest expense grew only 0.9% year-over-year as we continue to transform and optimize the business. Community Banking continued to make solid progress along its transformational roadmap as positive operating leverage delivered PPNR growth of 11.6% year-over-year.
Consistent with our continued focus on network optimization, we completed the consolidation of four banking centers in April and announced a strategic sale of six additional banking centers that we expect to close in the fourth quarter. This combination will result in 6% reduction in banking center total square footage.
With that I'll turn the call over to Glenn
Thanks, John. Slide 7 provides highlights of Webster's average balance sheet. Average loans grew 0.7% linked quarter and 3.6% year-over-year. Loan originations of 1.5 billion in Q2 resulted in fundings of 1.1 billion our second best quarterly performance. Loan payoffs were elevated at 905 million which reduced overall average loan growth.
Growth was led by C&I loans which increased 197 million or 3.2 % from March 31. Year-over-year C&I loans increased 613 million or 10.6%. The fatness in consumer loans both linked quarter and year-over-year primarily reflect continued pay downs and home equity loans.
Average deposits were essentially flat late quarter driven by seasonality in government banking. Increases in HSA deposits and CDs were offset by declines in non-maturity counts versus prior year average deposits increased over 1 billion or 5% with HSA Bank representing 66% of the increase.
The 81 million linked quarter increase in borrowings reflect short-term funding. Year-over-year borrowings were reduced by 574 million as deposit growth exceeded loan funding. The loan to deposit ratio of 84% increased modestly but remains favorable relative to regional peers and the industry. Common equity tier 1intangible common equity ratios remain strong supported by Webster's earnings growth.
Slide 8 summarizes our Q2 income statement and factors resulting in record quarterly earnings. On a links quarter basis total revenue increased 3.7% to a new quarterly record. Net interest income grew 10.8 million as the net interest margin increased 13 basis points. On a year-over-year basis total revenue growth of 11.8% was led by an increase of $27 million in net interest income.
We have now posted back to back quarters of year –over-year revenue growth above 10%. Our revenue growth was largely the result of 30 basis point improvement in net interest margin along with average interest earning asset growth of 681 million.
Non-interest income declined modestly linked quarter primarily due to lower loan fees and client edging revenues. On a year-over-year basis non-interest income growth of 3.7 million was led by HSA Bank.
Non-interest expense increased 8.8 million linked quarter reflecting 7.2 million deposit insurance accrual and 1.4 million of banking center optimization cost. The deposit insurance accrual of 7.2 million and a quarter is related to FDIC insurance premiums for the periods prior to 2018. The accrual is our current estimate of the aggregate amount of premiums due for the period of Q1 2015 to Q4 2017 and is the result of a reclassification of loans under existing and modified FDIC loan category definitions.
It's important to note that the additional expense is a result of a reclassification for the purpose of setting FDIC premium levels and does not change our risk rating, classified assets or other reported credit metrics. On a go forward basis our quarterly FDIC premium expense will be in line with Q1 2018 around 6.5 million to 7 million.
Excluding the deposit insurance accrual year-over-year non-interest expense increased 8.8 million reflecting annual merit increases and strategic hires. Taken together PPNR of 113 million in Q2 increased 1.5% linked quarter and 15.2% from prior year. Excluding the deposit insurance accrual PPNR growth is 7.9% quarter-over-quarter and 22.5% year-over-year.
Our loan loss provision was 10.5 million in Q2 reflecting loan growth and stable credit quality. With an effective tax rate of 20.3%, we reported a record level of net income available to common shareholders. The efficiency ratio which excludes the deposit insurance accrual and banking center optimization costs was 57.8%. The linked quarter and year-over-year improvement in the efficiency ratio reflects positive operating leverage. We have now posted five consecutive quarters of year-over-year positive operating leverage.
Slide 9 provides additional detail on PPNR performance. The waterfall chart reflects the drivers of our 15% growth in PPNR versus prior year. Net interest income grew 27.2 million or 14%, 14.6 million due to volume and 12.6 million due to rate. The rate benefit includes 59 basis points improvement loan yield and 9 basis point increase in deposit cost. When measured against the 76 basis point increase in average Fed Funds Rate, this results in a loan data of 78% and a deposit data of 12%.
Slide 10 provides additional detail on net interest income which had a linked quarter increase of 10.8 million. Our performance benefited by the significant increases in the average one and three months LIBOR rates as we have 6.8 billion of loans tied to one month LIBOR and 1.2 billion tied to three month LIBOR. The yield on interest earning assets increased 18 basis points while the cost of interest bearing liabilities increased to only 5 basis points. The result was a 13 basis point improvement in NIM to 3.57%.
Slide 11 details non-interest income was declined modestly linked quarter as some commercial transactions are now expected to close Q3. Year-over-year growth of 3.8 million was led by growth of 3.1 million in fee income at HSA Bank. HSA account fees increased 1.8 million and interchange revenue increased 1.2 million, both reflect growth in a number of HSA accounts.
Other income increased 2.5 million including 1.2 million from higher client hedging revenue. Mortgage banking revenue decreased 2.1 million from lower originations compared to a year ago.
Slide 12 highlights our non-interest expense trend. The linked quarter increase was 8.8 million. Adjusting for the combined deposit insurance accrual and banking center optimization cost in Q2, expenses were relatively flat to Q1.
The 1.7 million decline in compensation reflects seasonally lower payroll taxes and benefit costs. Marketing increased to 1.3 million due to additional campaigns in the quarter. The year-over-year expense increase is 16 million or 8.8 million when adjusted for the deposit insurance accrual. Compensation and benefits represent 6.7 million of the adjusted increase reflecting 2.9 million from annual merit increases and 2.4 million from strategic hires.
Slide 13 highlights our key asset quality metrics. We have a positive near term view of asset quality. The net charge offs ratio remain below 20 basis points annualized. The allowance for loan or lease losses is now 207 million as the provision again exceeded net charge offs in support of loan growth. The allowance continues to represent 115 basis points of total loans.
Slide 14 provides our outlook for Q3 compared to Q2. We expect average loan growth to be in the range of 1% to 2%. We expect average interest earning assets to grow around 1% as total securities stay relatively flat. We expect NIM to be up 1 to 3 basis points, the smaller increases driven by lower expected increases in one and three month LIBOR, more normal levels of differed fees and discount accretion and some modest deposit rate changes.
Given our earning assets and NIM expectations, we expect net interest income to increase between 4 million and 6 million. Non-interest income is likely to be approximately 1 million to 3 million higher driven by anticipated commercial activity.
We expect our efficiency ratio to continue to be below 60%. Our provision will be driven by loan growth, portfolio mix, net charge offs and our portfolio quality. We expect our tax rate on a non-FTE basis to be approximately 20%. Lastly, we expect our average diluted share count to be similar to Q2’s level.
With that I'll turn things back over to John.
Thanks, Glenn. I'll conclude by highlighting this week's announcement of Webster Bank receiving an outstanding rating from our primary regulator the OCC for its community reinvestment performance evaluation. The outstanding CRA rating is the result of the dedicated efforts by our bankers and it's symbolic of the way we operate our business, deliver for our customers and support the communities where we live and work. This recognition is a testament to our enduring Webster values and sets us apart competitively in the marketplace. I want to congratulate all of the Webster bankers on this achievement and on a solid second quarter.
I will now open it up for questions.
Thank you. At this time will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steven Alexopoulos with JP Morgan. Please proceed with your question.
Hey good morning everybody.
Good morning Steve.
I wanted to start may be for Glenn on the margin, given that we had June hike so late in the quarter and the HSA deposits have been flat at 20 Bps, can you walk through why you are expecting much more subdued NIM expansion in 3Q?
Sure and I think it's primarily driven by the deceleration I would characterize it as one month and three month LIBOR, whereas in the first quarter and second quarter we saw LIBOR increase on average 31 basis points one month LIBOR, we think that's probably going to look more like 12 and as you know LIBOR is coming closer to Fed funds Likewise on three month LIBOR where we saw an acceleration of 41 basis points average quarter-over-quarter, we think that's going to be closer to 3. And so given that where we saw a 15 basis point increase in our loan yield we think that's probably going to be about half of that going into Q3. The other factor Steve is deposit rate increases and so in Q2 our data was about 12%. We might be a little conservative on our estimate, but we think that's going to continue to be pushed up a little bit and so closer to like a 20%, maybe even a little higher. Again that might be conservative and then the last thing I’d highlight is during the quarter as you probably saw on the slide we had some deferred fees about 2 basis points, so those factors all together are why – how we end up at like 1 to 3 basis points.
Okay. Glenn do you see any pressure to raise the rates on the HSA deposits would just stay at 20.
This is Chad, Steve. Good morning. We are not seeing any pressure at this point and there really hasn't been any movement in the market.
Okay. And Chad while I have you, so we look at account growth in HSA Banka it trended more favorably, a little bit more favorably this quarter, do you expect that trend to continue to improve from hear and can you talk about how you're feeling as we think about heading into the next enrollment cycle?
That's what we're working on every day Steve, is trying to improve our growth rates as you know we've talked a lot about the investments in our sales teams which are – we have 20% more on the street but we did last year and the quality and – of the team is higher in terms of professionals and leaders. We’ve also invested in the tools and the materials they need, demos, presentations things like that to make them more successful. So yeah, we're doing everything we can to increase our growth rates and what we're seeing is pretty positive signs in our pipeline right now for 1-1-’19 the size and the number of deals is up where we expect them to be and so we're optimistic about the traction we're getting for all the investments.
Okay. And then thanks, maybe just one final on back to Glenn. HDFTI [ph] fleet charge expenses were actually pretty flat quarter-over-quarter, how do you think about expense growth for the rest of the year?
So I think our general guidance is that we think will continue to be below 60 and obviously we're benefiting from the rate environment there, but we are continuing to make investments across the board on commercial whether it's cash management or credit monitoring and the wrist side BSA season [ph] on the CIO side, the cyber security mobile replacement. We're replacing our mobile platform in HSA as Chad indicated sales and then automated workflow initiatives that he has going on in HSA, so I think I'm not going to give a specific number, but I think if we're in the 57, 58 range over the next quarter that's probably where we would expect to be.
Okay, great. Thanks for answering my questions.
Thanks, Steve.
Thank you. Our next question comes from the line of Jared Shaw with Wells Fargo Securities Please proceed with your question.
Hi, good morning.
Hi, Jared.
Maybe just following up on the HSA side, Chad as we go into the next enrollment cycle and going forward, do you see the focus really shifting more towards that employer direct employer sales versus the referrals through the carrier networks and if so should we expect to see sort of like a continual growth in and hiring there.
Yeah. Good morning, Jared. We continue to invest in our direct to employer channel and that's really our primary focus. We absolutely are committed to supporting our partners and adding new partners, but we – most of our investment and efforts have been on the direct to employer channel. We’re seeing the kind of results we want to see in that channel that's where we're seeing the most growth and I think our investment and sales people will – it’s slowing down a little bit we've put a lot – we’ve grown about 20% each year over the past two or three years, so we'll continue to add salespeople, but probably not at the pace we have and that depends on market conditions as well.
Okay, great. Thanks and then looking at the economies up in New England primarily Connecticut and Massachusetts and metro New York, what are you seeing in terms of the strength in sort of customer demand there. And what – do you see any positive signs of a rise in that we could see some real improvement in the overall economy for commercial lending?
Yeah, it's a good question. I think there are positive signs sort of everywhere and as you know we've spoken to and I'm preparing Connecticut has had its challenges and it's growing slightly slower than the other New England states and the other states in which we operate and Jared that's been sort of a key to us as you think about the commercial bank being funded by HSA as being kind of the driver of the NIM expansion and the growing PPNR. We have strong commercial presence in Boston, in New York City, in Philadelphia, HSA is a national business so a lot of the choices, we've made previously to expand geographically and certain segments that represent high growth have enabled us to sort of be immune to the fact that Connecticut's growing a little bit more slowly. But I will tell you there are signs in Connecticut – are we look at asset quality across the footprint our borrowers are doing well I just think it's a question of a relative strength of growth, but I think you know most of our footprint is growing in benefiting from an expanding economy.
Okay, thanks and then just finally for me, looking at M&A we've seen some deal activity pick up in market, what are your thoughts on M&A here, it seems like acquires are able to really get a lot of cost saves out in eliminate the competitor and any change and serve your thoughts of both income and M&A end market?
We haven't really – obviously with the fact that we feel like we have a differentiated business proposition and we think we're starting to really show that bidirectional value that we keep talking about with HSA and the core bank. We think that our ability to generate shareholder return and create value organically, outlays opportunities we see in the marketplace and when I talked about before it's not only just the financial aspects of a transaction, but it's strategically and I think you know whole bank acquisition for us right now with a lot of banking centers just to get some contiguous market share in Community Banking is not a top priority for us, so I would say that our – even though obviously there's a lot more chatter in the market given the Crapo bill and everything that's occurred I think our position remains stable to prior quarters.
Great, thanks a lot.
Thank you. Our next question comes from line of Collyn Gilbert with KBW. Please proceed with your question.
Thanks, good morning, everyone. Let me start I guess with – well just with the topic of loans and this sort of ties in plan to your comment on the NIM and where you sort of see that mix of growth going? You guys, your loan yields have been you know I think really strong certainly more much higher than that a lot of your peers, so maybe if you can just kind of talk about that kind of where you're seeing the best opportunities for growth on the lending side and then also too I'd be curious to hear what types of loan structures geographies whatever that you might be walking away from as you guys kind of look at the pipeline? It's a lot.
Big question, big question sounds – I’ll do my best. Yeah, I think we had a really strong origination quarter across in our – record origination quarter across most of our C&I and commercial real estate categories along with business banking a lot of robust origination activity, so for us I don't think there's a particular pocket obviously in certain quarters when we have higher yield you see a mixed change away from sort of commercial real estate to some of the C&I loans and that was the – in terms of growth that's really where we were this quarter. I would say if – when we scour our loan segments and geographies, we asked our business line leaders every quarter to provide us with sort of a typical deal and what's going on with margin or structure. I'd say we're continuing to see really aggressive pricing and more aggressive structures in commercial real estate and one of the reasons I wouldn't say we've selectively exited it at all but I think we've maintained discipline. So you've seen that asset category be more flat year-over-year than grow. Otherwise, I think in our sponsored and specialty business in our regional middle market activities and our asset based lending across all geographies, we've made really, really good progress. I think we've been really disciplined in terms of structure and pricing. So for us it's about again and we've talked about this it's about having a lot of levers across a bunch of different products and a fairly broad geography been allowed us to avoid concentrations and just really good lenders out in the marketplace servicing their customers and certain hot topic loan categories like we've never been as we've said before a big participant in the New York City multifamily space. We're careful on real estate, but there really aren't any other segments that were either kind of jumping into or doubling down on or avoiding as we continue to serve our marketplaces.
Okay, that's helpful. And then just on the uptick in marketing and advertising expense is that just part of that – was there anything specific going on there or what was specifically driving that?
No, just seasonal. It really is, we have marketing spends or campaigns or we're supporting certain geographies we have lumpy expenses. Glenn called it out because it was higher this quarter, but it's not associated with a specific strategy.
Okay, that’s helpful. And then just finally on the efficiency, Glenn, 57 to 58 is –that's a nice change. I mean you guys have been saying below 60 forever and I feel like it's kind of hovered in that just below 60, but to 57 to 58 is a nice drop below 60. Do you – is it something that's kind of here now to sort of catching up on some of the initiatives that you've kind of have in place that you then sort of flat line at that level or do you think that there's continued opportunity to tick that down lower and lower. I mean I know you guys have been very clear invoke on saying most of the way you manage the expense side is kind of a reallocation of resources, but just trying to understand how you're thinking about that long growth term.
I think a lot of it Collyn will depend on you're out look on rates and we've certainly benefited from that and so if you look at the guidance if net interest income is up 4 million to 6 million and non-interest income is up 1 to 3, some of that will be reinvested and some along the lines of some of things I highlight whether it's cash management or credit monitoring or things like that seasonal. But generally there's a downward bias to our efficiency ratio meaning that we could push down provided things continue to improve quarter-over-quarter.
And Collyn, just to put a strategic focus on that, obviously we've benefited significantly from the revenue side of that equation which has helped us drive it down and that's really important to us because we've said we think we have some differentiated businesses. We need to keep opportunistically investing in those businesses whether its people or systems in commercial banking, we're providing Chad with the ability to continue to expand or in the community bank continue to invest so that we can really build out our digital capabilities both internally and externally to compete in 2020 and beyond. So we are very much focused on expense management, but we talk about 60 as a guide because we're not going to be afraid in a particular quarter to make a key investment that will ultimately drive long term value. But as Glenn said, I think if you look at our expectations over the balance of the year, I think you know we're in the range we are now and we can – we could go lower depending on investment opportunities.
Okay, that's very helpful. And then just one final question for Chad, Chad, do you see any sort of diverging trends among geographies as to where you're seeing success in building out your HSA relationships.
Yeah, I'd say we see some of that when we had a new partner obviously. We’ve had some new health plans that signed up over the last couple years and aggregators as well. So we'll see a little bit of regional activity there, but otherwise it's primarily we're seeing the same type of activity in the regions where we focus as we have historically.
Okay, I'll leave it there. Thanks very much, guys.
Thank you. Our next question comes from line of Mark Fitzgibbon with Sandler O'Neill. Please proceed with your question.
Hey guys good morning. John what would you contemplate additional branch sales in coming quarters is that something that's possible.
Mark I think we are constantly reviewing our network to make sure first and foremost we're taking care of all of our customers and so what we've said is, we'll continue to evaluate. We know we’re changing customer preferences that we need to try and free up capital to invest in digital technologies and the other non-banking centered channels, but that we have always said that banking centers are going to be core and important to our delivery of community banking services. So that may be an amorphous answer, but I think what you see is we could add some smaller sized banking centers in key areas to take advantage of opportunity, we could continue to consolidate if we had opportunities and certainly if there were an opportunity that maximize value to us in a market where we were consolidating we would look at a sale. But it really is the strategy is around making sure we have the optimal size network with lower square footage across the footprint.
Okay and then for Chad, just to follow up on Steve’s question earlier, what do you think sort of the catalyst is that causes employers to begin to pressure you to nudge up deposit rates in the HSA business?
I think as employers look at the HSA plan their first priority is the functionality, the technology, consumer experience, investment options things like that, so interest rates seem to fall to a little bit lower level. So we really haven't seen much pressure from our employers. I think as we see other competitors start to raise their rates that is how have us look at that all of it more closely or if it's – I think we will see some of the fluctuation is in fees as well as rates continue to rise.
And if I can – Mark, I’ll add a little color that, as you look at our non-interest income for the quarter in HSA 22.8 million. If you break that out about 12.6 million of that is account fees and 40% of that is paid by the company, the remaining 60% is paid by the employees and I think from conversations with Chad if there's a battle it's probably on that 40% that the company is paying as a subset of that 12.6 million.
And we have seen a little more pressure on these off late.
Great, thank you.
Thanks, Mark.
Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Please proceed with your question.
Hi, thanks. I had a question on deposits, so HSA deposit growth, is very good 14%, but overall deposits were flat in the quarter and you mentioned about seasonality and government deposits, but I was curious are there any initiatives to increase commercial banking deposits?
So you're speaking specifically to commercial deposits?
Right because the HSA deposit growth has been very strong and community banking deposits there a small uptick in the quarter, but I know it's commercial banking deposits were down in the quarter, so I was curious as to kind of the outlook there and if there are any initiatives in the works to kind of improve the deposit growth there?
Yeah, actually it's a good question in this quarter we really saw the reduction in deposits in government banking, so I think those clients where they're not the operating accounts in the transactional accounts with a lot of municipalities and government entities that we have relationships with but in terms of their excess cash I think they are being a little more selective in terms of making sure they're getting the best rate and that's what our view is of why we saw government deposits year-over-year down and so that that seasonality in some behavior in our institutional clients is driving that. I think we've been looking for a long time at whether or not as rates rise traditional commercial banking customers would either look for other investments and we obviously work very hard at making sure that every time we make a loan that we are getting the operating account and the cash management business of our customers. So I would say we are always focused on our incentive plans, our strategies around driving core transactional deposit growth in the commercial bank and we haven't had or felt the need to come up with a specific strategy to stem any departure of deposits. But in terms of our core commercial banking relationships and our transactional accounts, we haven't seen the positive attrition that concerns as yet.
Let me just add that John if I can, I mean the big swing I think as you’re highlighting was on the Treasury payment solutions group and is primarily government funds and it's seasonality and so we were down 354 million quarter-over-quarter and we probably anticipated that because if you look at over the last couple of years that's what you would expect this tax receipts coming in and then there's expenditures. So you can see some of that back on our appendix on page 25 by line of business if that's helpful.
Yeah and I would just add that they're very top of the of the house and we've said it often that we obviously enjoy a terrific the positive advantage with HAS, but we managed retail bank and we manage the Commercial Bank very much to make sure we continue to grow transactional deposits in relationships and that's critical to us so we don't take our eye off the ball there.
Thanks for that and I was curious about the Boston progress and the deposit growth there. I know it's been a couple years now that you’ve acquired those branches, just curious as to what the update on the progress is.
Yeah, we continue to make good progress in Boston across all lines of business, so referrals across business lines now that we have of our business find represented there in that important market in New England, we're really pleased with the results. I would say the market remains very, very competitive among the most competitive markets from a deposit pricing perspective that we're in and so we have been sort of really looking at balancing customer acquisition through high rate deposit offers and the profitability of what we're trying to drive in Boston. So if you look at our work two and a half years through our five year plan where we talked about $1 billion in deposits and $500 million in loans, I will tell you we are ahead of plan in loans. We recently in this quarter fell slightly behind in deposit growth, but again I think that – for us strategy is around customer acquisition and not chasing the highest price. So we also have looked at making sure that our banking center network there is rationalized and we just move one of our banking centers to what we think is a better location with smaller square footage. So as we manage the rest of the network we're managing Boston and I still think we're really happy with the with the move we made in that key market.
Okay and then lastly on HSA Bank the pre-tax net revenue growth it's been north of 60% a couple quarters now. Any change to kind of the guidance of 30% plus pre-tax net revenue.
No, I think – I’ll jump in and Chad can add to it, but I think a big driver of the PPNR growth was the increase in rate and that's again driven off the curve and so I think it was 44 basis points year-over-year, equates to $6 million. And if you normalize it for the rate it will be closer to our target which is about 30%, so I would not take 62% and extrapolate it out, I would temper down I think still in the thirty's, 35% PPNR year-over-year growth is where we expect to be. Anything to add, Chad?
I'd say that we still have a lot of opportunity to improve our efficiency in the business given all the activity we have around continuous improvement in the operational excellence, so we hope to continue to drive that expense as well.
Thanks very much.
Thank you. Our next question comes from the line of Mathew Breese with Piper Jaffray. Please proceed with your question.
Good morning, everybody. John you touched on it a little bit earlier just saying how competitive the environment is, you noted the non-bank lenders, can you just provide some anecdotes of what those folks are providing in terms of term structure, yield, what are they providing that you aren’t and how far is the delta between yourselves and them?
Yes, that's a good question. I would say, I was speaking in my prepared remarks specifically to the commercial real estate environment and I think you're seeing longer tenders on transactions. So people are going – willing to go out longer with fixed rates particularly the permanent finance providers, government entities, insurance companies, others which just doesn't make sense for us economically and on some of the LIBOR based loans we're seeing pricing on shorter term loans that is just below our ready rock model hurdle and as we've said all along we remain very disciplined to generating economic profit and making sure that our relationships hurdle our cost of capital. We do I think as far as rates go up some of the fund lenders in both commercial real estate and commercial finance companies will be a little bit squeezed by their cost of funds being higher in our cost of funds advantage will help us, but you know given this overall low rate environment we have seen a lot of non-bank lenders in and I would say it's on rate structure , tender, covenant package, it’s across the board and I think we're trying to remain pretty disciplined. And I think we're doing a pretty good job, if you look at it quarter-over-quarter where we're annualized 10% loan growth in the commercial bank this year, so I think we're doing it safely despite the competitive environment.
Thanks, that was helpful and then Glenn just thinking about the margin guidance for next quarter plus 1 to 3 basis points, but there was a June hike, as we think about our own – we make our own assumptions on Fed hikes going forward is that 1 to 3 basis points, is that a better proxy for margin expansion per hike from here or how would you characterize that?
If I look out over the next four quarters and I – let me try this way, if I assume look at the forward curve in our forecasts is very close to forward curve over the next four quarters you have Fed funds going up to – from like 2 to 250 into the second quarter of 2019, you 10 year swap say going like 325, within that scenario you would expect to see 3 to 5 basis points a quarter in NIM expansion.
Got it, okay. Thank you. And then my last one is just around Cecil [ph] and you mentioned that a couple of times investing there, any thoughts or color you can provide and give us some insight as to how we should think about the provision in 2019 and 2020?
I mean it's early stages obviously we feel like we're along the curve of preparedness obviously our disclosures will be consistent with market over time. We're happy with our preparation. We're currently developing our expected loss model and I think we feel like we're too far away to be able to give any indication of what the ultimate impact is going to be, but I think we agree with the industry that Reserve is likely to go up at some increment under the new standard and stay tuned as we report on it in further quarters.
Understood, okay, that’s all I had. Thanks for taking my questions.
Thank you. Our next question comes from the line of Eric Zwick with Boenning & Scattergood. Please proceed with your question.
Hey, good morning everyone.
Eric how are you and – Eric, I understand. Welcome to coverage of Webster. We’re glad you’re on the call with us this morning and give our best to Matt.
Well, definitely. Thank you very much. It’s good to be on. Just a quick question for credit with me looking at the net charge off in the quarter up a little bit but still obviously loan on absolute basis, looks like the commercial– you’re looking 513 commercial charge offs throughout the increase. Curious if you could provide any color on that loses this quarter and whether there were just borrower specific issues or higher rates variable loans maybe starting to pressure any of your borrowers.
Yes, basically three small charges that are not sort of correlated by industry or geography or risk, they’re unique to the borrowers. They’re not new originations, so at the end of the day we look at that number this quarter and we’re really pleased with the level and there’s nothing in those charge offs that sort of we see a trending with respect to correlated risk.
Okay and just with regard to the higher rates, I’m sure when you underwrite these loans, you just track for an increase in rates, are you starting to see high rates impact any borrower that might be operating at a similar margins or not at this point?
We’ve not and you are right to say that we do stress interest rate as we do scenario analysis during our underwriting. But the rates aren’t at a level yet where we’ve seen pressure on borrowers due to higher interest rates.
Great, thank you for the color. Look forward to working with you guys.
Thank you.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your question.
Good morning, everyone. I think covered all the fundamentals, I did hear you mention this congress bill in your intro remarks. I wondered if you could just speak in terms of the potential implications of that and if we see a more favorable public policy outlook toward the HSA business?
Yeah, absolutely. I’m going to obviously let Chad answer this question. He’s been very much involved in a lot of this process, so Chad.
Yeah. Good morning, Brock. We’re pretty excited about the fact the house ways and means committee marked up 12 bills that are very favorable to HSA. It’s probably bit of the most movement we’ve seen with regard to HSA legislation maybe even since the introduction of HSA. The bill is focused on a number of areas, expanded coverage, so looking at things like expanding HSA eligibility to brands qualified plans, allowing working seniors to contribute to their HSAs, eliminating some of the restrictions that qualify HSA plan like onsite clinics, something similar to logistical issues like over the counter medications and personal recovery and probably most importantly increasing limits to match the out of pocket maximum, which we have virtually doubled the available contributions to HSA, so. It’s a long way to go, you have to get through the house and senate and be signed by the President to get into law, so lot of things going to happen between now and then, but we’re really excited about the positive momentum and the fact that it’s – most of the bills that are being proposed are had particans.
Okay and you mentioned it was several bills that had been proposed?
Well, to be exact.
Got it, okay. Thank you.
Thank you.
Thank you. Mr. Ciulla, there are no further questions. I would like to turn the floor back to you for any final comments.
Thank you very much. I appreciate everyone’s continued interest in Webster and have a wonderful day.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.