Webster Financial Corp

NYSE:WBS

Earnings Call Transcript 2018-Q4

[Operator]

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

[Terry Mangan, Director, IR]

Thank you, Christine. Welcome to Webster. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations, and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from 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 fourth quarter of 2018.

I'll now introduce Webster's President and CEO, John Ciulla.

[John Ciulla, President & CEO]

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

I'll begin on Slide 2. When I became Webster's CEO just over a year ago, I felt to assure all of our stakeholders that our transitioning leadership would not entail a pivot and strategy. Our results in the fourth quarter and in all of 2018 demonstrate clearly the positive outcomes of our well-executed long-term strategy. We're very pleased with the progress we've made.

Reported earnings per share were $1.05 in the fourth quarter, adjusted for one-time items EPS was $1.01 compared to $0.98 in Q3 and $0.71 a year ago. Pre-provision net revenue in Q4 grew 36% from a year ago. Loan growth and a higher net interest margin led to our 37th consecutive quarter of year-over-year revenue growth. Each quarter of 2018 saw year-over-year revenue growth in excess of 10%. In Q4 total revenue was 15% higher than a year ago, while expenses increased approximately 2%. This resulted in the seventh consecutive quarter of positive operating leverage. The efficiency ratio dropped below 57% to the lowest level in my 15 years at Webster. Webster's asset quality also remained stable.

Turning to Slide 3; loans grew 5% from a year ago with commercial loans growing 12% and consumer loans declining 4%. This performance is consistent with our strategic focus on expanding commercial banking. As with the industry, consumer balances have been affected by lower mortgage origination volumes and continued reductions in home equity balance balances driven by changing customer preference. Commercial loans now represent 63% of total loans compared to 60% a year ago. Deposits grew 4% from a year ago. Health savings accounts represented more than 80% of the deposit growth and were unchanged in costs from a year ago at 20 basis points. The net takeaway is that our loan portfolio yield was 65 basis points higher than a year ago while the cost of deposits increased only 17 basis points.

Starting on Side 4, I'll review the lines of business. Commercial banking reported solid fourth quarter and full year results. Loans grew 1.4% linked quarter and 11.9% year-over-year. Linked quarter growth was led by commercial real estate which increased 4.1%. CRE [ph] represented almost 40% of the quarter's originations and approximately 75% of commercial banking fourth quarter net loan growth. Our pipeline remains solid as we enter Q1 even with a strong origination performance in Q4. Continued investment and focused execution have generated consistent growth and strong profitability. Year-over-year revenue growth of $9 million was led by net interest income which increased 11% while non-interest income was up modestly.

Asset quality metrics in the commercial banking loan portfolio remained stable and it's cycle lows [ph]. Our commercial classified loans at year-end 2018 represent less than 3% of total commercial loans, the lowest level in over 11 years.

Turning to Slide 5; HSA Bank closed out 2018 with another solid quarter performance and entered 2019 with momentum. Our $2.7 million accounts are comprised of $5.7 billion in low cost, loan duration deposits, and $1.5 billion in linked investment balances. New account production in 2018 totaled 701,000 accounts. Total accounts were 11% higher than a year ago and footings per account are 3% higher. The combination of account growth and account seasoning resulted in year-over-year growth in total footings of 14%. Recent equity market performance is the primary cause of the linked quarter decline in investment balances.

Quarterly revenue at HSA grew 27% from a year ago. Net interest income was 35% higher from a 14% increase in average deposits and a higher net credit rate. Year-over-year expense growth was 8% resulting in positive operating leverage and pre-tax net revenue growth of 57% from a year ago. In addition, so far this month, deposits have grown approximately $400 million from year-end, and we expect new account production this January to exceed that of January last year.

Moving to Slide 6; community banking continue to make solid progress along it's transformational roadmap and delivered another solid quarter. Deposits grew by 3% year-over-year with balanced growth in both business and consumer deposits. Business loans grew over 6% year-over-year, driven by solid originations across all markets. Consumer loans declined 4% as I mentioned earlier. Total net interest income grew 5% year-over-year driven by deposit growth and increased deposit spreads. Total non-interest income was essentially flat apart from a gain of $4.6 million on the strategic sale of six banking centers in Q4. Increased deposit-related fee income was offset by decreased revenues from mortgage banking activities.

For the full year 2018, our ongoing optimization initiatives resulted in a 7% reduction in banking center square footage. Total non-interest expense increased 6% year-over-year as we continue to invest in our bankers, technology, and an enhanced customer value proposition. Overall, PPNR was $36.5 million including the gain on the sale of the aforementioned banking centers in Q4.

Before I turn it over to Glenn, I'd like to highlight on Page 7; our PPNR growth for the full year, both on a consolidated and line of business basis which demonstrates the significant progress we've made in organically growing our business. All three lines of business generated an excess of 10% PPNR growth resulting in consolidated PPNR growth from 2007 to 2018 of 22.5%.

I'll now turning the call over to Glenn.

[Glenn MacInnes, EVP & CFO]

Thanks, John. Slide 8 provides highlights of Webster's average balance sheet. Average loans grew 2% linked quarter to $18.4 billion and 5% year-over-year. Loan growth was led by commercial real estate which increased $242 million or 5.2% from September 30. Loan originations for the quarter totaled $1.6 billion and fundings were $1.2 billion with commercial loans accounting for $1.4 billion and $1 billion respectively. Loan pay downs totaled $1.1 billion which were up from $713 million in Q3 as we saw a higher levels of pay downs in commercial real estate and middle market. The linked quarter decline in consumer loans reflects continued pay downs of home equity lines consistent with industry trends.

Year-over-year average loans increased $922 million or just over 5%. The net result of commercial loan growth of 11% partially offset by a 4% decline in consumer. Average deposits increased $20 million from Q3, this was driven by growth in consumer and business banking. The banking centered sale which reduced average deposit balances by around $100 million in seasonality and public funds. Year-over-year average deposits increased $970 million or 4.6% with HSA Bank representing over $700 million or 72% of the increase. Our loan to deposit ratio of 84% remains well below the northeast medium of 101%. Common equity Tier 1 and tangible common equity ratios remain strong supported by our earnings growth. And tangible book value per share increased more than 9% from prior year and it's increased 15 consecutive quarters.

Slide 9 summarizes our Q4 income statement and drivers of quarterly earnings. Net interest income totaled $237 million and increased $7 million or 3% from Q3. Of this, $5 million was the result of higher rates and $2 million from additional volume. Versus prior year, net interest income grew to $32 million or 16%. Non-interest income increased modestly from Q3 and includes the gain on sale. On a year-over-year basis, non-interest income increased $7 million due to higher levels of fee income in HSA, higher commercial loan fees and the gain on sale. Non-interest expense decreased $4 million linked quarter.

Recall, our third quarter included a final true-up of $2.9 million in FDIC expense per periods prior to 2018; absent this, expenses were basically flat. Non-interest expense increased $3.7 million versus prior year primarily from additional investments in our businesses. I'll provide more detail on slides. Reported PPNR of $136 million in Q4 increased 9.4% linked quarter and 36% from prior year. Loan loss provision for the quarter was $10 million and continues to be reflective of loan growth and stable credit quality. The effective tax rate was 21.3% which was higher than anticipated primarily due to timing of tax planning projects that are underway. The efficiency ratio of 56.2% was more than one point below Q3.

Slide 10 provides additional detail on year-over-year pre-provision net revenue which increased 36%. Net interest income grew by $32 million or 16%, $22 million driven by rate and $10 million from volume. The rate component is primarily the net result of a 65 basis point improvement in loan yield and a 17 basis point increase in deposit costs when measured against the 99 basis point increase in the average fed funds rate. This resulted in a loan beta of 66% and a deposit beta of just 17%. Combined, this drove a 33 basis point increase in net interest margin to 3.66%.

Slide 11 provides additional detail on net interest income which increased $6.8 million linked quarter. Our performance continues to benefit from a significant amount of loans with rates resetting in 30 days or less. At December 31, $7.3 billion of loans were indexed to one-month LIBOR and $2.5 billion were indexed to Prime [ph]; combined, this represents 53% of our total loan portfolio. Another 19% of our loans reset at least once before final maturity. As a result, 72% of our loans are priced on a floating or periodic basis. We provided additional detail on the nature of our earning asset and funding mix on Page 19 of the appendix. For the quarter, the yield on interest-earning assets increased 12 basis points while the cost of interest-bearing liabilities increased only 7 basis points; this resulted in a 5 basis point improvement NIM to 3.66%.

Slide 12 highlights non-interest income which increased $879,000 from Q3. As we highlighted, Q4 includes a $4.6 million gain on sale. Partially offsetting this were lower loan fees of $2.9 million as Q3 included higher syndication fees. A seasonal decline in HSA fee income as participants achieve deductibles and lower mortgage revenue driven by lower origination volume. Versus prior year, non-interest income increased $7.1 million as a result of strong HSA account growth, loan-related fees and the gain on sale.

Slide 13 highlights our non-interest expense trend. On a linked quarter basis, expenses decreased to $4 million, primarily as a result of lower SBIC expense due to a true-up of $2.9 million in Q3 and a lower run rate of $1.7 million. Year-over-year expenses increased $3.7 million. Adjusted for $6.1 million of one-time items in prior year expenses increased $9.5 million. The increases are result of ongoing investments in our businesses including strategic hires, annual merit increases, technology and marketing spend.

Slide 14 highlights our key asset quality metrics. Non-performing loans in the upper left remained about 84 basis points of total loans. Net charge-offs in the upper right were $9.5 million in the quarter representing 21 basis points annualized and were 16 basis points for the full year 2018. And as John highlighted, commercial classified loans were below 3% for the first time since the second quarter of 2007. The provision of $10 million brings our allowance for loan loss to $212 million representing a coverage ratio of 115 basis points.

Slide 15 provides our outlook for Q1 compared to Q4. We expect average loans to increase around 1%, once again led by commercial loans. We expect the average interest-earning assets to also grow around 1%. We expect NIM to be up 7 to 9 basis points driven by the December Fed hike and the seasonal Q1 inflow of HSA deposits utilized to pay down short-term borrowings. Given our earning asset NIM expectations, we expect net interest income to increase between $4 million and $6 million. This includes a reduction of $3 million from two fewer days in Q1. GAAP non-interest income is likely to be lower linked quarter as a result of the Q4 gain on sale. On an adjusted basis, we expect it to be $1 million to $2 million higher driven by higher HSA fee income. We expect our efficiency ratio to be below 58% and our provision will be driven by loan growth, mix, and quality. We expect our tax rate on a non-FTE basis to be approximately 21%. And lastly, we expect our average diluted share count to be similar to Q4's.

I'll turn things now back over to John.

[John Ciulla, President & CEO]

Thanks a lot, Glenn. An external proof point of our well-executed strategy came recently with Bank Director Magazine's identification of Webster as the best overall bank in the Northeast and Number 2 nationally in it's 2019 Ranking Banking Study, which was also the top bank in the Northeast in the key categories of best board, best small business strategy and best technology strategy.

I'd like to take this opportunity to express my congratulations and appreciation to Webster's Board of Directors and all Webster's bankers on the Webster Bank recognition, a great quarter, and our continued commitment to the communities we serve.

We'll now open it up for questions.

[Operator]

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Steven Alexopoulos with J.P. Morgan, please proceed with your question.

[Steven Alexopoulos, J.P. Morgan]

I want to start on the margin; so you had good expansion of the fourth quarter and the guidance implies good expansion coming in 1Q given we have the benefit of the December hike. Assuming that Fed's now on hold, maybe for Glenn, how do you see the NIM progressing beyond the first quarter if the Fed funds rate is pretty flat for the rest of the year?

[Glenn MacInnes, EVP & CFO]

So I think if right now our baseline forecast is for the Fed to go up in June and the long end, I mean the tenure to be about 3%, but if we assume the Fed stays put meaning funds stay at 2.50% and the tenure stays around 2.70% to 2.75%, I think what you would see is a quarter-over-quarter reduction of one to two basis points in NIM. That being said, and that's primarily driven by investment yields coming down two basis points, loan yield staying basically flat. Some additional cost on deposits as it catches up to previous like the December rate hike, so 50 basis points, maybe go up a few basis points. And then borrowing costs, again, driven by the December hike, maybe up two basis points. All that being said, our net interest income will still increase somewhere between $2 million and $3 million a quarter.

[Steven Alexopoulos, J.P. Morgan]

Okay, that's helpful. And then on HSA Bank maybe for Chad; so you guys had consistent growth through the year, which is great. Now that we have the fourth quarter enrollment season now done, what are you seeing -- and Chad, are you seeing any improvement to the 11% year-over-year account opening pace you've been seeing?

[Chad Wilkins, HSA Bank-President]

So the enrollment season's not quite done yet Steve, we're still in the middle of it. But in '18 as John stated, we had over 700,000 new accounts opened and so far in January we're slightly ahead of the same period last year. And the growth is greatest in our DTE channel which is where we've been investing the most, we're actually at about 28% in that channel. And we've talked about the fact that we've been building pipeline throughout the year, so we're really happy with that traction. And that's making up for some slower growth than other channels, so we think we really made the right move in investing in our capabilities there.

[Steven Alexopoulos, J.P. Morgan]

Okay, that's helpful. And then finally on credit, maybe for John; so there has been a ton of attention on leverage lending, even last night, Texas Capital reported charge-offs under leverage lending portfolio. And this is something that is more and more coming up for Webster. One, could you size the leverage lending portfolio, give some color around the type of leverage lending that you're doing and maybe walk us through the risk profile of those loans should the economy see a downturn? Thanks.

[John Ciulla, President & CEO]

Sure, Steve. I think it is a timely question and before I'll provide some metrics and sizing on leverage loans, but I'd obviously like to give you some context on that first. And I always reiterate, we don't have a leverage lending desk or group dedicated to originating leverage lending in the broader market, I think that's really important. Obviously, we do in the normal course, originate loans that meet the regulatory definition of leverage and those are primarily in our sponsor and specialty group. And if you remember, and the reason I think it's differentiating for us is that we started that sponsor and specialty group. In 2004, it was Chris Modal, our current Head of Commercial Banking and myself that founded that group. We've engaged in the activity of providing financing for portfolio companies or private equity firms and directly to management teams in that group where we have most of our -- the vast majority of our leveraged lending for 15 years as an OCC regulated bank. It's been very profitable, and we've had outstanding credit performance.

We've got a great leader in that group, Andre Paquette [ph], and we've been able to in our geography and given our commitment to this business over 15 years, we've been able to attract terrific teams of both originators, portfolio managers, underwriters, and importantly, credit executives who really understand the business. And so it's a differentiator for us, as you know, with HSA as a funding source, we've really been able to help perform from a NIM expansion perspective. So that group in sponsor and specialty includes industry-specific verticals, technology, media and telecom, healthcare, environmental services and a few other industries. We picked the industries that have predictable, sustainable, protectable cash flows and I've said that over 15 years when we've talked to people and that's the basic premise. So we've avoided industries like transportation, oil and gas, and retail in that space; things that are more cyclical in a downturn. And it served us well during the Great Recession and we expect it to serve us well during the next cycle. And we have within those specialties substantial diversification in each sector.

So why do we have a specialized lending group? Well, and I've said this publicly, and forgive me for repeating it; we think it allows us better credit selection because of the quality of the people we have and our deep industry knowledge. It gives us broader loan opportunities across geographies, it gives us the ability to get paid more appropriately for risk because we add value and expertise in the situations and it allows us to develop deep relationships with private equity sponsors and management team that generally lead to better outcomes during tough times. We certainly saw that during the Great Recession.

And I want to give you one data point if I can, on sponsor and specialty performance; we went back and we looked at 2008 through full year 2018, that's 11 years of net charge-offs. And if we look at the total commercial bank of Webster and we compare it to Fed data on CNI and CREE, we stack up pretty much in line with the market. So I'll make the statement and ask you to accept that Webster's commercial bank net charge-off performance over the last 11 years, which by the way includes the two years of highest charge-offs at the end of the Great Recession is in line with Fed data. Within our bank, that Sponsor & Specialty Group had the lowest annual charge-off rate of all of our lines of business within commercial; lower than commercial real estate, lower than asset-based lending, lower than equipment finance, and lower than regional middle market. And I think it's something we're proud of, it's the most profitable unit and it's had the lowest net charge-offs, including a period of time during the Great Recession on an average annual basis.

Okay, let me talk about leverage loan specifically to your question. We are not a general market participant as I said before. I think that's really important from a differentiation perspective because the market, whether it's investors, whoever is looking at this, they basically, in my view have three big concerns around leverage lending. Are we stretching as an industry and the shadow banking market? Are we stretching leverage multiples that we put on companies? Number one. Two, the structure go out the window where things like covenant light as a measure of that. And three, are people taking big underwriting positions like the big banks did during the Great Recession on leverage loans where when the market ceases they are stuck with a lot of inventory, they can't distribute it and they end up taking big writedowns. Well, let me give you some of Webster's view in those three areas.

The loans we originate that are leveraged based on funded debt had closed on average carry more than a full turn less leverage than is reported in the broader leveraged market, both on a senior debt and total debt basis. And we looked at S&P in the broader middle market and large cap leveraged base, and we're full turn of senior leverage and a full turn of total leverage lower than the market. I believe that demonstrates that we're not chasing the maximum leverage yields that we see in the broader market. Also based on S&P, LCD and Bloomberg data across the broader middle market and large cap leveraged space, somewhere between 55% and 80% of those transactions are what's called Covenant-lite; I think most of you on the phone understand that. Meaning that we've lost the ability to measure or restrict the borrower's performance via leveraged covenants, debt service covenants and so on and so forth.

In Webster's leveraged lending book of loans that are leveraged, funded at close, only 6% of our deals are covenant-lite; one's we lead, one's we participate in or one's where we're only the bilateral lender evidencing that we're staying more disciplined to structure. And with respect to underwriting and inventory, you heard us talk about our largest underwriting in Sponsor & Specialty in the third quarter where we made something like $3.5 million in syndication fees. Well, the market got choppy in the fourth quarter and I can tell you we took commensurate steps, we don't have any leveraged lending, underwriting or inventory at 12/31/2018, so we have no exposure to inability to underwrite because I think we react well to the market.

So let me side [ph] it for you, Steve. You know it's difficult, there is a myriad of definitions, banks have latitude to be able to define leverage loans within the guidance of the regulator and within frequently asked questions that are issued by the OCC. What I'm going to do is, I'm going to try and provide you metrics here on the loans that we look at, at origination are leveraged based on funding debt to cash flows. We've tracked this category by the way for more than 10 years from a performance perspective. Generally, leverage on these deals exceed three times senior debt to cash flow, by four times total debt to cash flow on a funded basis. However, consistent with regulatory guidance there are some industries where those thresholds three by four may change based on characteristics of the industry.

So here we have about $1.1 billion of loans that meet that threshold. So at close and at origination, the funded senior and total debt to cash flow exceeds three by four, generally. That represents about 6% of our overall loan portfolio balance funded at the end of the year. And let me give you some stats on that $1.1 billion; that balance when compared to our leverage loan balance in 2006 before the Great Recession is only at a slightly higher percentage of Tier 1 capital plus reserves, meaning that over that period of time we've grown our leverage lending exposure commensurate with the growth in capital and size of the bank which we think is appropriate so that we're sizing it well.

The weighted average risk rating of those loans which flows into our provisioning is in line with the commercial banks overall weighted average risk rating. The percentage of criticized loans in that $1.1 billion is lower than the general commercial loan population. And you heard Glenn and I mentioned in our 12-year -- at our 12-year low of commercial classifieds, we posted 2.7% of commercial classifieds. We have no funded leverage loans at close as of 12/31, so even within that relatively small percentage of commercial loans that are classified, none of the $1.1 billion in loans are classified at 12/31/2018. And we've had zero charge-offs in the $1.1 bucket over the last two years, including no contribution from leverage loans in the charge-offs in the fourth quarter.

So I hope that gives you a sense of size. In addition to the actual loans that are leveraged, we track under regulatory guidance loans that are not leveraged at origination but could become leveraged if the unfunded commitments in those transactions are fully drawn. Those are not leveraged loans at present but we track them because we monitor our portfolio very carefully and just again, to give you a size that's an additional $450 million of funded loans. But those are -- have the ability to become leverage but are not leveraged currently under the cash flow definition.

So the only thing I'm going to wrap up, and I know I went on for a while but I wanted to put it in context and let you know that we're very proud of what we've accomplished, we think we're differentiated, we think we're disciplined and that we don't chase the market, but we are in the business of taking risk and I think I always say this, Steve, you probably heard me even back when I was a Chief Credit Risk Officer; we'd grown our commercial loan portfolio by $7 billion across all asset classes in the last 15 years. And we've now experienced one of the longest expansion period and a very benign credit environment. So we expect credit losses for the industry obviously to increase as we enter the next cycle but when that occurs, we think we have the capabilities, talent, capital and loan loss reserves to maximize the outcome there.

So I hope that gives you sort of a full, complete -- you know, I like talking about the commercial bank, but I wanted to make sure I put in context that $1.1 billion.

[Steven Alexopoulos, J.P. Morgan]

John, thank you. That was extremely helpful and I appreciate the thorough response. And thanks for taking my questions.

[Operator]

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

[David Chiaverini, Wedbush Securities]

Just starting with the six banking centers that were sold, what's the strategy kind of going forward? Do you see any additional branches kind of that can be consolidated over the next few quarters?

[John Ciulla, President & CEO]

I hate to give you the stock answer but in general, and as we've said, we do not have anything in the current pipeline. I will tell you that we are constantly evaluating our footprint to ultimately reduce square footage and become as efficient as we can and we say reduce square footage intentionally because we think the banking centers are still a critical delivery channel for us. We've made a lot of progress in branch consolidation over the last several years, as you know, including the sale of the six branches in Eastern Connecticut and Springfield during the fourth quarter. So we'll continue to evaluate, we may add branches and locations, we may consolidate additional locations; our ultimate goal is to reduce square footage and be able to redeploy that capital into technology spend.

[David Chiaverini, Wedbush Securities]

My follow-up question is on loan growth. So loan growth was pretty solid in the quarter and now it is kind of surprised to see pay downs were up so significantly from $700 million in third quarter to $1.1 billion in the fourth quarter. What's kind of the outlook on pay downs looking into the first quarter here and assuming we see those pay downs subside? I imagined that's going to provide a nice boost to loan growth.

[John Ciulla, President & CEO]

Yes. I mean -- I think that's a good perspective. You know, it was an interesting quarter for us because we had good in the commercial bank, we had good average loan growth quarter-to-quarter, but the spot was not that much because we had such significant prepays at the end of the quarter. And I would say that just to let you know it's very difficult for us to predict because a lot of our prepayment activity, particularly in commercial real estate and in Sponsor & Specialty tends to come at quarter-end because it's based on the closing of transactions that seem to close around then. I would say right now we don't see the same level of prepays that we saw at year-end which is encouraging and as we mentioned, we've got a pretty strong pipeline; so we're hoping that your perspective is accurate that we'll see a reasonable amount of originations and a muted amount of pay-off but it's too early for us to give you a really good indication.

[Operator]

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

[Jared Shaw, Wells Fargo Securities]

Maybe just shifting back to the HSA for a few seconds here. How are you seeing the seasoning of the existing accounts? When I'm looking at -- call it the fee income to accounts that's continuing to march higher, are you seeing -- are the new accounts in the vintages seasoning as expected? And any color you can give there would be helpful.

[Chad Wilkins, HSA Bank-President]

I'd say yes, there are -- the trends continue to remain consistent with regard to seasoning. I think what you're seeing on the increase in the fee revenue is really more related to the mix, we've been selling more in direct to employer channel and I think that's reflected in the growth and feedback [ph].

[Jared Shaw, Wells Fargo Securities]

So should that continue to march higher through this enrollment cycle you think?

[Chad Wilkins, HSA Bank-President]

It has. I mean year-over-year for instance, interchange, Jared, is up like 18% primarily driven by account growth, right. Account fees on a whole are up 10% but as John points out, there is seasonality in this, right. So as employee [indiscernible] and things like that, you'll see it and we saw some of that in the fourth quarter. But generally the trend is as we grow accounts that it would march higher.

[Jared Shaw, Wells Fargo Securities]

Okay. And then Glenn, maybe -- how are you thinking about when you look at the full year 2019 loan growth given the headwinds from consumer? Should we continue to expect to see commercial be a bigger piece of the pie as we go through the year in addition to CRE [ph] maybe?

[Glenn MacInnes, EVP & CFO]

Yes. I think that both commercial and commercial real estate will be the two drivers as we go through 2019. I think residential mortgages are probably like mid-single digits and we continue even as we look forward to forecast the decline in home equity loans.

[Jared Shaw, Wells Fargo Securities]

And then any color you can give on the commercial charge-offs increase this quarter?

[John Ciulla, President & CEO]

Yes, sure. There are four credits in there, modest charges on those four credits. I'll give you my perspective on them. We had average charge-off or full year charge-offs, 16 basis points as opposed to 20 basis points, the prior year in 23 basis points. So obviously we're still seeing lower trending, overall. But on those four credits, none of them are in the same geography and none of them are in the same business unit, there doesn't seem to be any correlated risk. And I think an important point is, two of them are sort of three plus year old credits and the other two are more than five years old. So I think what I take from that is it's not demonstrating any sort of weakening discipline in credit underwriting, they are all unique circumstances and so we're obviously really pleased with where the overall commercial and total bank net charge-offs are, and the way they're trending.

[Operator]

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

[Matthew Breese, Piper Jaffray]

Just to follow-up on that question; were the charge-offs in the syndicated or Sponsor & Specialty finance portfolio or are those more traditional CNI loans?

[John Ciulla, President & CEO]

More traditional CNI loans.

[Matthew Breese, Piper Jaffray]

Okay. And then could you comment on the -- in that bucket we also saw year-over-year some decent migration upwards in on NPLs, what was driving that?

[John Ciulla, President & CEO]

NPLs are flat kind of quarter-to-quarter or, I’m sorry I...

[Matthew Breese, Piper Jaffray]

Yes, year-over-year commercial non-performing loans are up $62 million from $39 million. I just wanted to get a summary of kind of what drove that $20 million, some odd million dollar increase year-over-year?

[John Ciulla, President & CEO]

Again, it's kind of across the board situational, so it's not in any of the -- kind of general seasoning of the portfolio as it grows. So there is not an area in the bank with respect to division unit or certain industry segments that are contributing to that, it's just the normal avid [ph] flow of credit performance.

[Matthew Breese, Piper Jaffray]

Understood, okay. Focusing on the Northern New England markets to Boston markets, a couple of smaller competitors but very competitive on the deposit side of things has been announced for take-outs. Has that lead to any sort of reprieve in deposit competition or pricing in that market?

[John Ciulla, President & CEO]

No, it really hasn't because on the other side you see the arrival of P&C and JP Morgan, that just opened up their first branch there and they are hitting the ground very competitively. So we still -- and obviously, anticipating a question like this; Boston is still the most competitive market for us from a new customer acquisition and a deposit pricing perspective but I will add that we've had a couple of really good quarters in a row and our year-over-year performance there with respect to deposit and loan growth is tracking now back towards our original projections of $1 billion in deposits and $500 million in loans over the 5-year projection. But we're having to be more aggressive from a pricing and acquisition and offer -- new offer perspective; so we have not seen a reprieve to directly answer your question.

[Matthew Breese, Piper Jaffray]

Is that true across your footprint; take out Boston, are you seeing any sort of change from a promotional or special product?

[John Ciulla, President & CEO]

Some of the big banks and say Fairchester [ph], which we call Fairfield and Westchester Counties; it's really in the more mass affluent and metro markets where we see more big bang competition on the size of initial offer and on rate. And I think we're very fortunate that we have such a nice market share in sort of Central Connecticut and the competitive landscape where most of our retail deposits has been less subject to aggressive pricing.

[Matthew Breese, Piper Jaffray]

Just last one, as we think about HSA accounts and deposit balances year-over-year; how should we be thinking about that for year-end '19 or is it too early to tell at this point?

[Chad Wilkins, HSA Bank-President]

It's too early to tell for '19. All I can tell you is that from an account standpoint and deposits we're tracking ahead of last year at the same point in time, and historically trends tend to continue; what we see in January in the first quarters tend to continue throughout the year.

[Operator]

Mr. Ciulla, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[John Ciulla, President & CEO]

Thank you, everybody. Have a wonderful day.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.