Webster Financial Corp (WBS) 2014 Q4 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's fourth-quarter 2014 results conference call. 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 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 from the fourth quarter of 2014.

I would now like to introduce your host, Jim Smith, Chairman and CEO of Webster. Please go ahead, sir.

Thank you, Kevin. Morning, everyone. Welcome to Webster's fourth-quarter earnings call and webcast. CFO Glenn MacInnes and I will review business and financial performance, after which President Joe Savage, Glenn and I will take questions.

Webster moved further along the path to high performance in the fourth quarter and for the full year 2014, with our sustained growth and progress driven by a succession of solid, strategic choices. We've invested our capital, resources and energy in growth strategies that are adding value for customers and shareholders.

Beginning on slide 2, record quarterly net income of $51 million increased 6% year over year, excluding Volcker Rule OTTI in Q4 2013, while earnings per share also increased 6% on this basis. Full-year net income reached a milestone at $200 million. Return on average common equity in the quarter was 8.8%, and return on average tangible common equity was 11.8%, holding steady due to higher capital levels resulting from earnings growth. All my further comments will be based on core operating earnings.

Looking at slides 3 and 4, year-over-year results were driven by solid Q4 loan growth. Overall loan balances grew 3% linked quarter and over 9% year over year, with originations across the bank at near-record levels. Once again, strength in commercial and commercial real estate loans, up 5% linked quarter and 15% year over year accounted for most of the growth.

Quite notably, the net interest margin was unchanged at 3.17, which speaks to our rigorous pricing discipline predicated on relationship profitability and validated by independent outside sources. The strong loan growth and stable NIM produced record quarterly net interest income.

Non-interest income grew 5% linked quarter and 4% year over year, with particular strength in loan fees. Apart from the $1.8 million year-over-year decline in mortgage banking revenue, growth was almost 8%. Core pre-provision net revenue, or PPNR, grew nearly 3% linked quarter and over 4% year over year to another record. We've now reported 21 consecutive quarters of year-over-year revenue growth dating back to 2009.

Expenses again grew at a lower rate than revenues, both linked quarter and year over year, even as we continually invest in our chosen strategies and in the risk infrastructure. The net result, once again, is an efficiency ratio below 60%, pushing PPNR up 8% linked quarter to another record.

The quarterly loan-loss provision remained at $9.5 million, as loan growth was accompanied by continuing improvement in asset quality. Key credit-quality metrics are at levels not seen since 2007, reflecting the improving economy and vigilant risk management. We have now built reserves in four straight quarters totaling about $7 million net add to reserves for the year 2014 versus a prior-year net release from reserves of $24 million.

Turning to slide 5, to put performance into full-year context, sustained revenue growth and expense discipline have resulted in record PPNR of $327 million in 2014, up over 8% from prior year. We have now delivered five consecutive years of positive operating leverage, and our full-year efficiency ratio has steadily improved over that time by 700 basis points. This performance distinguishes Webster from most of our peers.

Slide 6 demonstrates the balance sheet drivers behind Webster's multi-year track record of PPNR growth and positive operating leverage. For instance, commercial loans have grown by more than half in four years and now represent 56% of total loans compared to 45% at the end of 2010. Transaction accounts have grown 73% since that time and represent 48% of deposits versus 32% at year-end 2010. The duration of our assets is much shorter than it was prior to the last upgrade cycle 10 years ago, and the duration of our liabilities is longer, so we are well-positioned for a short rate-up scenario.

I will now turn to line of business performance beginning on slide 7. Commercial banking continues to perform at a high level, growing loans, revenue and economic profit while earning regional and national recognition from its middle-market customers for excellence in client service. Commercial banking loans grew 5% linked quarter and 16.5% year over year, propelled by record quarterly originations of over $900 million and record fundings of $660 million, reflecting both strong lending activity and new customer acquisition across all business units and all geographies. Anticipated Q1 payoffs, combined with a smaller pipeline due to exceptionally strong loan conversion in Q4, may affect loan growth near-term.

The portfolio yield declined 1 basis point linked quarter, while the decline in the yield on new fundings reflects origination mix more than competitive pricing pressure. Q4, similar to Q2, saw a greater proportion of high-quality, lower-yielding investor CRE fundings representing 31% of Q4 commercial originations compared to 10% in Q3.

We continue to exhibit strong pricing discipline in the commercial bank. S&P, which each quarter provides objective pricing information on our loan originations and portfolio compared to the market, recently opined that compared to our peers, Webster's more selective use of price as a key lever to win business has resulted in margins remaining at a premium to the market.

The overall deposit decrease linked quarter reflects seasonality in municipal deposits. Transaction deposits increased 12% linked quarter and now represent 64% of total commercial deposits, up from 52% a year ago. This accounts for the year-over-year decline in deposit costs and evidences a strong momentum in establishing the growing primary bank relationships.

On slide 8, for the full year of 2014 the commercial banking segment posted positive operating leverage of over 8%, and PPNR has grown rapidly and consistently since 2010.

Moving now to community banking, slide 9 shows the business banking unit continuing its growth trajectory. Higher originations, up 30% linked quarter and 20% year over year, drove loan growth. The portfolio yield increased by 11 basis points linked quarter due to an increase in yields on originations and collected interest on non-accrual loans. Deposits grew year over year, while decline from Q3 is entirely attributable to end-of-period customer activities as average deposits were higher in the quarter. Transaction account balances far exceed loan balances and provide attractive funding for other lending activities.

Turning to the personal banking unit on slide 10, overall consumer loan balances grew modestly year over year and linked quarter. Resi mortgage loan growth reflects an increase in loans originated for the portfolio, while consumer loans increased about 1%. The linked quarter decline in originations reflects a seasonal drop in mortgage activity, which has now picked up a bit in Q1. The linked quarter increase in personal banking deposits reflects seasonal growth in transaction deposits. Investment assets under administration in Webster Investment Services grew 9% year over year to $2.8 billion, driven by a combination of new asset inflows and market gains.

Slide 11 provides more color on residential mortgage origination trends. Overall resi mortgage production declined 11% linked quarter and rose 27% year over year, somewhat better than the market, due in part to rapid growth in jumbo originations through new or correspondent channels. Consistent with our mass affluent focus, 82% of mortgages originated for portfolio were jumbo loans.

Slide 12, the community banking segment continues to make progress along our transformational strategic roadmap, designed to improve profitability from a lower expense base. Year-over-year revenues declined 1% against an expense decline of 4%, generating positive operating leverage of about 3%. PPNR, which totaled $134 million in 2014, has grown consistently since 2010.

Slide 13 presents the results of Webster Private Bank. With the strategic shift to our new business model now virtually complete, loans and deposits increased smartly linked quarter and year over year. AUM stabilized following the previously reported personnel changes triggered by the model makeover, and the AUM pipeline has increased significantly over the past two quarters.

Slide 14 presents the results of HSA Bank. Deposits grew about 3% linked quarter and 19% from a year ago. HSA Bank opened about 47,000 new accounts in the quarter, up 50% year over year, while the cost of deposits declined to 27 basis points. We expect that new accounts in the peak enrollment period in Q1 of 2015, apart from the January acquisition of JP Morgan Chase's HSA business, will substantially exceed the 118,000 new accounts that we opened in the first quarter of 2014. Through January 16, the legacy HSA Bank business has added 100,000 accounts and $147 million in deposits.

HSA Bank enjoys a well-earned reputation for outstanding customer service, as substantiated by recent recognition from Kiplinger as the best HSA account for outstanding reputation, service and breadth of investment offering. Our product suite also includes health reimbursement accounts, flexible spending accounts and other capabilities that meet the needs of employers and carriers as well as brokers and individuals.

Turning to slide 15 -- and let me take a couple of minutes here. Last week, Webster's HSA Bank division closed on the acquisition of JP Morgan Chase's health savings account business. Webster acquired over 750,000 transaction deposit accounts with an estimated $1.3 billion in deposits plus $185 million in linked brokerage account balances. Pro forma at last year end, HSA Bank had about $3.2 billion in deposits and about 1.5 million accounts, plus about $800 million in linked investment accounts.

The acquisition further solidifies HSA Bank's position as a national leader in health savings accounts and accelerates our strategy to move deeper into the large employer and insurance carrier markets as we added key partnerships with multiple large employer clients and with two of the five largest health insurance providers in the US.

The industry has been growing at 20%-plus for several years, and experts expect growth to continue at that rate for years to come as employers gravitate to high-deductible health plans to control costs and reward their employees for taking responsibility for their health care decisions. HSA Bank has been a fast-growing source of deposits for Webster with a 10-year compound growth rate of nearly 30%.

On a pro forma basis at December 31, this earnings-accretive transaction lowers Webster's loan-to-deposit ratio about 7 points to 82%, while transaction accounts overall increased from 48% of deposits to 53%.

HSAs are strategically important to Webster because they attract low-cost, long-duration, nationally diverse, purpose-driven transaction deposits which provide a stable source of retail funding for Webster's strong loan growth and liquidity and for managing interest rate risk. HSAs now represent nearly 20% of our deposits and differentiate Webster from our peers in a most positive way. Their enormous value will be seen even more clearly when short rates ultimately rise.

Now I will turn it over to Glenn for financial comments.

Thanks, Jim. I will begin on slide 16, which summarizes our core earnings drivers. Our average interest-earning assets grew $445 million compared to the third quarter, almost 75% of which was attributable to our loan portfolio. Net interest margin at 317 basis points was unchanged from Q3. Taken together, this resulted in record quarterly net interest income of $160.6 million, up over 2% from prior quarter and over 4% from prior year.

Core non-interest income increased by $2.6 million, or 5%, on a linked-quarter basis, with the primary drivers being loan fees and BOLI proceeds. Core expenses were $2.7 million higher than Q3, with the majority of the increase related to compensation and benefits. Taken together, our record core pre-provision net revenue totaled $86.6 million and was up 4% linked quarter and 8% from prior year. Our pre-tax GAAP reported income totaled $74.6 million for the quarter, and a reported record net income of $51 million includes an effective tax rate of 31.6%.

Slide 17 highlights the drivers of net interest margin versus prior quarter. As highlighted, we achieved quarterly growth in average interest-earning assets of $445 million. The securities portfolio had average linked-quarter growth of $92 million as we began to purchase securities related to the HSA acquisition. The yield on securities decreased by 2 basis points, and interest income was about $400,000 higher. Cash flow from securities totaled $242 million during the quarter, with a yield of 330 basis points.

In addition, we sold $62 million of securities that generated gains of $1.1 million, while there was $899,000 of OTTI related to spread widening in our non-Volcker-compliant CLO portfolio.

Securities purchased during the quarter totaled $464 million, with an average yield of 280 basis points and a duration of 4.5 years. Average loan balances grew $324 million, and the portfolio yield was 383 basis points for the third straight quarter, resulting in an increase in interest income of $3.3 million. The quarter included $1 million -- an increase of $1 million quarter over quarter in income collected on non-accrual loans, which equates to approximately 3 basis points in loan yield for the quarter.

In summary, the lower securities yield and unchanged loan yield resulted in a net reduction of 1 basis point in the earning asset yield. The reduction was more than offset by an increase in average earning assets, resulting in a $3.7 million increase in interest income. Average deposits increased $19 million. Demand deposits increased by $63 million, or 2%, offset by seasonal outflows in public deposits. The rate paid on deposits was 29 basis points for the third straight quarter, with a 1-basis-point decline in the cost of core deposits offsetting a 3-basis-point increase in CDs.

Average borrowings increased by $415 million, while the average cost declined by 7 basis points. The incremental funding was primarily short-term FHLB advances at a cost of around 22 basis points. The net result in Q4 was an increase of about $600,000 in interest expense on borrowings. We expect short-term borrowings to fall by about $1 billion on average in Q1 due to the HSA acquisition and seasonal growth in public deposits.

In summary, earning asset growth and a stable NIM resulted in a $3.2 million increase in net interest income.

Slide 18 provides detail on core non-interest income, which increased $2.6 million, or 5%, versus prior quarter. Loan fees increased $2.9 million linked quarter as a result of pre-payment revenue. Other income increased $1.4 million, primarily from BOLI proceeds. This was offset by lower mortgage banking revenue as a result of a 9% linked-quarter decrease in settlement volume along with modest declines in deposit fees.

Slide 19 highlights our core non-interest expense, which was up $2.7 million from both Q3 and prior year. The linked-quarter increase reflects approximately $2 million from a seasonal increase in medical expense, $1 million in expense as result of an increase in our stock price and $1 million from higher incentive payments.

Our expense discipline and continued focus on operating leverage are reflected in our efficiency ratio on the next slide. As you see on slide 20, solid revenue growth and continued expense control led to an efficiency ratio below 59%, 33 basis points lower linked quarter and 65 basis points lower than prior year.

The next three slides focus on the transformation of our interest rate risk profile to a more asset-sensitive position in anticipation of rising short-term rates. Slide 21 summarizes changes to our earning asset mix since 2004, the last time we saw short-term rates increase. As you will see, we are a much different bank today on both sides of the balance sheet from what we were 10 years ago. As a result, we feel we are much better positioned for a rising-rate environment than ever before.

The numbers shaded in blue show floating-rate earning assets have increased from 19% to 35% of total earning assets since 2004. Also note, 85% of our commercial real estate portfolio is floating or periodic. Periodic securities, CNI and commercial real estate loans typically have 90-day rate resets. Periodic resi mortgages are primarily five- and seven-year ARMs.

Slide 22 shows even more dramatic changes on the liability side. Transaction accounts have more than doubled and, with the addition of the JPM business, will compromise 42% of liabilities versus 16% 10 years ago. We have also taken actions to lengthen our time deposits and borrowings. In fact, after we pay down short-term borrowings in Q1, the remaining portfolio will have a duration of around two years.

Turning to slide 23, as we have discussed on past calls, we have been making a conscious shift to become more asset sensitive and this slide shows the progress we have made. Here you see our interest sensitivity profile as we get closer to a tightening of monetary policy, which we expect to occur later in the year. We have made this shift at minimal cost to our NIM and net interest income. In fact, our NIM has only declined 10 basis points over this time period despite a very challenging rate environment.

The HSA acquisition is included in the 2014 year-end numbers and has added 2% to our asset sensitivity. We expect to invest about $500 million of the deposits in securities and use the remaining proceeds to pay down short-term borrowings. In Q4, we have already purchased about half of that and expect to complete the investment program by April.

Our asset sensitivity assumes deposit rates react immediately to changes in market rates. The lag in timing of deposit rate increases, or a bold twister scenario, would improve our results significantly.

Turning now to slide 24, which highlights our asset quality metrics, non-performing loans in the upper left declined to $132 million and were 0.95% of total loans, our lowest level since Q4 of 2007. New non-accruals were up about $1.5 million to $25 million, though noticeably below the prior-year level of $40 million. Past-due loans, in the upper right, also sell another quarterly decrease and now represent 0.29% of total loans. Commercial classified loans, in the bottom left, increased $13 million and remain in line with the recent trend while continuing to represent a little over 3% of commercial loans.

Our annualized net charge-off rate of 20 basis points on $6.7 million of net charge-offs in the quarter represents the fourth consecutive quarter at or below 25 basis points. The full-year charge-off rate was 23 basis points compared to 48 basis points in 2013. Assuming recent economic trends remain intact, continued improvement in key asset-quality metrics is expected as we head into 2015.

Slide 25 highlights our capital position. The ratios that you see here decline slightly from the levels at September 30 but remain well in excess of the fully phased-in BASEL III well-capitalized level and our internal targets. Strong asset growth impacted capital ratios this quarter.

Tangible common equity was impacted due to a year-end pension liability valuation adjustment of $21 million, which lowered the ratio by 10 basis points. The decline in tier 1 common was driven by strong asset growth. The HSA acquisition will impact this ratio by about another 30 basis points in Q1 and bring us closer to our long-term target of 10%. Our strong capital position and solid earnings continue to support asset growth, provide for future increases in the dividend and selective buybacks, and enable us to confidently pass the annual regulatory severely adverse stress scenario.

Before turning it back over to Jim, I will provide a few comments on our expectations for the first quarter. Overall, average interest-earning assets will grow approximately 3%, which includes security purchases in connection with the HSA acquisition. And we expect average loan growth to be up to approximately 2%, with growth expected to be led by C&I.

We expect to see continued pressure on net interest margin. And assuming the level of the 10-year swap and its spread to mortgage rates remain in today's range, we would expect 2- to 4-basis-point compression in Q1, driven by lower securities and commercial yields. That being said, we expect an increase of up to $1 million in net interest income over Q4, driven by loan and investment volume with some offset in NIM compression.

Leading indicators of credit continue to signal further improvement in asset quality. Given the outlook for loan growth in Q1, we expect to see a modest increase in the Q1 provision.

Regarding non-interest income, we expect an increase of 10% to 11% over Q4 core level. This is driven primarily by an increase in deposit service fees as a result of our HSA acquisition in addition to higher wealth and investment fees with some offset from lower loan prepayment revenue.

While our expense base will increase by approximately $5 million from the HSA acquisition, we will continue to demonstrate a disciplined approach to investing in the business and expect to operate with core operating expenses at a targeted level to keep our efficiency ratio below 60%. Our expected effective tax rate on a non-FTE basis should be around 33% due to increased earnings and lower tax-exempt income. And we expect the average diluted share count to be in a range of 90.7 million shares.

So with that, I will turn things back over to Jim.

Thank you, Glenn. Before we begin Q&A, I just want to take a moment to acknowledge the recent high recognition of Glenn, Terry and Webster's overall investor relations program as nominated by sell-side analysts who cover us in Institutional Investor magazine's 2015 company rankings. Congratulations, John.

We will now take your comments and questions.

(Operator Instructions) Bob Ramsey, FBR Capital Markets.

Hi, this is [Martinos Dreskin] for Bob Ramsey. Could you highlight some of your expectation for non-interest income going forward? I saw that it showed (inaudible) some growth this year. How should we think about it going forward?

Well, I think you have to -- first, you have to factor in the acquisition, which will gross up non-interest income. And the guidance we gave is 10% to 11% quarter over quarter. Given that we have high expectations for growth in the HSA, I think you would see that increase as the year goes on and we fully onboard the seasonal enrollment. And then I think you would see an increase in wealth and investment management as the year progresses. So I would use that as the general guideline.

Got it. Thank you very much.

Dave Rochester, Deutsche Bank.

Regarding your NIM guidance, I was just curious what your outlook was for securities premium AM expense, how you are baking that in and what that expense was for the fourth quarter.

So the expense for the fourth quarter was $13 million. And we are thinking it's generally flat right now going into the first quarter.

Great, thanks. And you mentioned BOLI proceeds in that other income line. I was just wondering, is that line item going to remain fairly stable from here, or was that just a one-time payoff and we will see that line decline next quarter?

Well, it depends on volume. But I think there will be lumpiness in there. In the fourth quarter, it's definitely a one-time item. I wouldn't build it in as reoccurring.

Yes, but is it that -- all of that, in sum, is included in your 10% to 11% growth guidance?

Oh, yes. Yes, it's all-inclusive. I don't include BOLI. I don't forecast out BOLI increases. So the 10% to 11% I gave, Dave, is core revenue, core non-interest income.

Got you. And switching to the HSA Bank deal, it sounds like you already bought or pre-bought half of that $500 million in securities you were planning to purchase. And sorry if I missed this, but what were the securities reinvestment rates on those purchases, and then where are investment rates today?

So what we bought was, say, about $250 million at 2.87%.

Great. And then where are you seeing rates today, generally?

They are within that range.

Okay.

So when we buy the second piece, I think would expect to be somewhere from 2.75% to 3%, somewhere around there.

And what is that mix of securities that you guys purchased?

It's all primarily agency CMBS, CLOs -- CLOs. And there's some muni, very small amount of munis in there.

Perfect. And then just your comments on extending durational liability side. I was just wondering if you guys think you are pretty much done with that, or we should expect to see some growth in CDs or maybe termed-out borrowings, something like that.

No. We think we have more opportunity there. I think some of it will come from the paydown from the HSA acquisition. But we have a product set that includes some additional CDs, retail CDs. We have a bump-up CD that we just launched; it's a three-year CD. We also have our five-year offering out there. We also have another $150 million of forward swaps that will help extend that as well.

Okay. Thanks for that. And then just one housekeeping item, I was just curious what the breakdown of that intangible for the bank would be, HSA Bank deal, goodwill versus CVI and then what your expectation is for the amortization expense, if it's baked into that $5 million.

We are not final on that analysis yet. So we'll be -- over the next couple of weeks, we will be out with that, obviously, for the K.

Is that $5 million an increased expense roughly incorporate your thoughts on that, your general thoughts at this point?

Yes, it does.

Okay, perfect. All right. Thanks, guys.

Casey Haire, Jefferies.

Just a question, I guess, on the loan pipeline. It sounds like a strong fourth-quarter production pulled forward some of the loan growth in the first quarter. I was just curious if you could quantify the size of the pipeline versus September 30. And just broadly speaking, as we look forward to 2015, your view on whether or not you would be able to do better than the $1.3 billion of loan growth that you saw in 2014.

Yes, pipeline -- actually, we were delighted, pipeline ended the year at a little over $200 million. Of course, we are happy to have the business in-house and, in fact, did a download with the team yesterday. We are already starting to see a rebuild.

I would mention that that $200 million-plus is not inconsistent with some prior periods or prior end of years in times past. So we are not particularly concerned about it rebuilding. It does remain to be seen, with respect to the growth that we will be achieving and whether or not we can replicate that this year. But what is really, really good news is -- and I should probably take a pause to say that John Hewitt took over the lead for the commercial bank, and he's a year in. And if you will note, the transaction or the change in the transition has been absolutely seamless.

I would say that we would expect consistent performance. And that really has everything to do with having the -- adding the RMs. We have grown our RMs, and we've got about 70-plus that are in the marketplace today. And they all are doing very, very well.

So, long answer to your short question, expect us to perform at about those levels. Could be more churn end of book. But we are in a good place.

And Casey, let me just add one thing to that. If I look at the total pipeline -- and Joe is highlighting all the progress on commercial. But I think we are probably looking at a pipeline of $650 million to $675 million at the quarter end. And I think we ended the year somewhere around $800 million, a little over $800 million. And a lot of that came in and was pulled down, as you see, in our 3% loan growth. So I think we are rebuilding it across the business right now.

Okay, great. And then, Glenn, just one for you -- on slide 23, the asset sensitivity, I'm assuming that that is not pro forma for the HSA transaction. So I'm just curious what would that look like, pro forma?

Yes. So in the 8.5, if that's what you are referencing, about 2% --

Right.

-- 2% of that is HSA. So that is in there because we model that going forward. So about 2% of the 8.5 is relative to HSA. The rest of it (multiple speakers) --

For the deal that just closed on January 13?

That's right.

Okay.

We look forward and we model that in. And then the rest of it, if you look at it, 2% is due to organic growth and a portfolio positioning, another 1% from floating-rate securities. So there's a few. But the answer is about 2% of the 8.5 is HSA.

Understood. Thank you.

Mark Fitzgibbon, Sandler O'Neill Partners.

You guys have done a great job driving the cost structure lower, and your expense metrics certainly look favorable relative to your peers. I guess I'm wondering is there room longer-term to drive cost lower, or do you think sort of the expense run rate is going to flatten out for a while here?

So we appreciate your compliment, Mark, and we have had a lot of success at driving down expenses. And I think we've been saying more and more on calls recently that we look to keep the efficiency ratio under 60 as we continue to invest in our strategies and our businesses that are generating economic profit. So it's less about squeezing more out of the ratio, and it's more about level setting and investing in the business as we go forward with the idea that increasing revenues will absorb the expense that's required to advance the strategies. So less about significant positive operating leverage and more about keeping the efficiency ratio under 60% so we can continue to invest in our businesses.

Let me, if I may, just add, Mark, as you know there's pluses and minuses to this. We continue to rationalize our branch network. In fact, as part of the $2.7 million in one-time, there's a couple hundred-thousand dollars that's due to re-stacking of five or six offices and consolidation. So the community bank and the businesses continue to rationalize the distribution. That money is being reinvested in revenue-generating type of businesses. So that's a process that's continuing, all while we keep the efficiency ratio at or below 60%.

Okay. And then secondly, I wonder if you could share with us your thoughts on your capital ratios. Obviously, you've had good growth as well. Do you envision needing to raise capital in 2015?

No. We feel good about where we are. We are in excess. We have a slide way in the back of the deck, on page 50, that shows where we are versus well capital. But even by our own internal targets, we are in excess of capital by a couple hundred million dollars. So we feel good about our structure right now.

Okay. And then lastly, my question is on commercial lending. We have been hearing a lot about tight spreads in that space. And I noticed that your commercial loan yields actually rose a little bit this quarter. I'm wondering if you could tell us what was driving that.

Yields in the commercial bank -- I think it's the biz bank -- may have gone up a little bit. But overall, in the commercial bank they were down a little bit. I think the story there would be that we are delighted that we are holding the line with respect to yields and spreads. Jim made the comment earlier there's just a lot of discipline in the organizations regarding how we price, getting RAROC, and S&P has corroborated all that.

But I would hate to have you think that things are going to get better on the yields and spreads. It's -- I think, Glenn, you want to jump in.

Mark, you may have missed my comments. But I highlighted that it was about $1 million in the quarter-over-quarter increase, which is probably worth about 3 basis points on the loan yield of the total book. 3 basis points, I would say, on the loan yield and probably a point and a half on NIM. So some of that will always happen every quarter, but I think that was the spikeout quarter over quarter as well.

I did miss that, Glenn. What was that, prepayment?

Yes, to -- no. In the quarter, we had $1 million of income that came in on non-accrual loans.

Got you.

So it went from (multiple speakers) -- yes, and so $1 million on the loan portfolio is worth about 3 basis points. And then if you go all the way to NIM, you are probably about a point in the half, somewhere around there.

I think the story with respect to yields would be we talk to all our people, they think pricing is stabilizing a little bit. And that's good news for us. And we held the line pretty well last year with respect to our spread business. And we think that that's probably a good way to look at it.

The challenge that we face, of course, is the stuff that's rolling in is at these current market rates. And when we have a rolloff, that puts some pressure on yields and spreads. But we've managed it pretty well, as you noted.

Great. Thank you.

Jared Shaw, Wells Fargo.

This is actually (inaudible) filling in for Jared. I guess my first question goes back to the asset sensitivity picture. With the acquisition of the HSA deposits, that certainly improved your overall asset sensitivity profile. Might there be any opportunity on the asset side to try and pick up some yield today, or will that just be held on to until rates finally start to move?

Well, I think some of that will happen, obviously, when rates begin to move. We did invest -- or will invest about $500,000 in the investment portfolio relative to HSA. So we'll pick up some income from that.

And you are paying down the loan?

And we will be paying down the loan fees during the first quarter, and it's probably about $800 million to $900 million of the FHLB borrowings. So we will pick up some there as well.

Okay. But as far as changing the strategy, particularly in the investment securities portfolio, that's not going to happen, doesn't seem like?

No, I don't see us doing that.

And then looking at the linked-quarter increase within comp and benefits, it looks like it was a little bit higher than that of the year-ago quarter. I'm just wondering what portion of that increase, if any, was attributed to the new incentive plan rolled out during 2014.

Yes, a bigger piece of it was related to the strong volume and the strong finish we saw in the commercial side. So that piece -- and then the other piece I would highlight is we did see a pop in medical expense. And typically we do see one in the fourth quarter, but even on a year-over-year basis it's probably worth $500,000 to $750,000. So that was something that we hadn't anticipated a quarter or two quarters ago. But that's the way it came in.

Okay. And then, lastly --

The retail -- I'm sorry for interrupting. But the community bank's incentive program is quarterly. So it's running -- and there's monthly payments, so it's not as much -- so you are not going to see as much of a pop there. Although we have seen more productivity and we have higher payouts. And so it's hitting on all cylinders. But the bigger driver was the strong, really strong finish on the commercial bank side.

Right. What's happening is the consumer incentive program is not net increasing payouts; it's allocating them better to value derived.

Okay. And I guess just a quick follow-up on the incentive plan. Can you maybe just touch on where that program is on a rollout perspective versus the original plan?

Sure. We are fully rolled out on the community bank side and have been for two -- three quarters now. And we are getting traction. I think our productivity is up about 11%. And we are selling -- we are so tightly lined up with profitability that we are selling the right products. So a lot of good things happening there. I think we continue to look at where we roll it out next, whether it's our call center or other lines of business. But I think we've been very satisfied with where we are on the community bank side.

Okay, great. Nice quarter.

Matthew Kelly, Sterne Agee.

Just to clarify a couple things on the fee income side -- so it was a one-time -- or non-recurring BOLI gain in the other non-interest income. What was that, specifically?

Well, that's proceeds received as a part of a death benefit.

(Multiple speakers).

I'm sorry?

Oh, I'm saying what was the dollar amount of that?

It was about $1.4 million.

Okay. And then what are your thoughts around the loan-related fee income? Big spike this quarter -- do you think that gets back to the $5 million run rate you had been running at the last couple quarters? Or are we going to see an increase there?

I think it's more and better, I guess, would either best way to describe it. I think it might not be at that level. I always like to think in terms of the year rather than specifically with respect to a quarter. Last year, we did very, very well on the swap side. We did very well on pre-pays. Did very, very well on amendment. And I think we are just always looking for that year-over-year performance. But will it be as good as 8% for as low as 5%? It's something that we look at all the time. There's good momentum swap side, good momentum on the amendment fees. It's a little skimpier and stick year and slower with respect to syndications. So there's so many elements push-pull that are associated with it that it's really hard to predict on a quarter-by-quarter basis.

Cash management stepping up very, very nicely for us. So we are happy with that. We saw a 7% year-on-year lift, notwithstanding losing a large client. So these are good things that are heading our way.

Got you. And then a follow-up question for you, Joe -- on slide 36, looking at the $380 million of commercial real estate originations, what was the yield on your pre-originations in the fourth quarter?

I'll have to look for those originations. While we are trying to find the information, we are doing a lot of -- we are doing a lot of multifamily in that. So (inaudible) -- we came in at, if I'm reading it right, 266 was the yield on that business. Remember, that's heavy swap and it's all float, essentially. So we are pretty happy with that.

Okay. And a question for you, Glenn -- you talked about earlier you think that the premium amortization expense will be flat in the first quarter. Obviously, loan rates are down quite a bit. What's driving that confidence level in it being flat?

Part of it is the spread between the 10-year and 30-year and the lag. So there's two factors. So we haven't seen -- we have seen the spread widen. And we look at this, we look at the 10-year versus the 30-year. And that's -- we use that as a benchmark for CPRs, and we think they will either decrease or accelerate. So that's a big factor. I think the spread is now at 1.50%, 1.60%. If you go back a year and a half ago, it was 1.25%, 1.40% or somewhere around there. So it has actually widened. So you see the decrease in the 10-year, but you don't necessarily see, at least as far as an indicator, the 30-year coming down as much. It's not moving in lockstep; it's widening.

So that's part of it. And then there's the lag. So we might see more of it. I think we will see 13, but you could see it accelerate as we get into the second and third quarter.

Got you, okay. And then last question -- the FDIC came out with some guidance on what constitutes broker deposits, that was guidance about two or three weeks ago. Do you think there will be any impact on the HSA deposit business, your business or your competitors' in terms of how HSA deposits are classified? I know you guys have a direct operation, but some of your competitors operate through a trustee type of model. Can you talk about that and what you have learned since that memo came out from the FDIC?

Sure. Actually, that was a very interesting memo, good guidance. I know they made a couple of calls, too, with regard to certain portfolios at banks. I guess what we want to focus on is our deposits are retail deposits. They are not broker deposits. I think I will let the other players speak for themselves. But I think it could have an impact on the competitive landscape.

Yes, got it.

We've always said that one of the most important aspects of HSA to us is the value of the deposits being able to fund our loans and be considered as retail transactional deposits. So we are 100% confident that that's the case. I think that's part of the value of a bank and being able to have a full vertical here in terms of all the way through enrollment and service. And holding the deposits gives our model, we think, a competitive advantage over others.

Got it. Great. Thank you.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you very much for being with us today. Thank you, Kevin. Good day.

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