Webster Financial Corp (WBS) 2015 Q4 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's fourth-quarter 2015 results conference call.

This conference is being recorded.

Also, the 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 operation, 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 differ materially from those in the forward-looking statements are 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 2015.

I will now introduce your host, Jim Smith, Chairman and Chief Executive Officer of Webster.

Please go ahead, sir.

Thank you, Christine, and good morning, everyone.

Thanks for joining Webster's fourth-quarter 2015 earnings call.

CFO Glenn MacInnes and I will review business and financial results and then take questions along with recently promoted President John Ciulla and Executive Vice Chairman, Joe Savage.

Congratulations to both John and Joe.

Webster produced solid fourth-quarter results, as you can see on slide two, with record pretax earnings and record net income.

Our results showcase sustained progress in executing our well articulated growth strategies designed to add value for customers and maximize economic profits for shareholders.

We haven't yet attained our overarching financial goal (inaudible) in excess of our cost of capital, but we are gaining on it.

Strong loan growth remains a common denominator across all of our businesses.

Record quarterly loan originations, coupled with net interest margin expansion, drove higher net interest income and helped produce year-over-year core revenue growth of 9%, the 25th consecutive increase.

Record full-year loan originations of $5.6 billion were 19% higher than in 2014.

Robust linked quarter loan growth drove the quarterly loan loss provision higher, representing a $2 million build in the allowance for loan losses after net charge-offs.

Our reserve to loans ratio of 1.12% is comfortably within our current desired range.

I will note here that we have virtually no direct exposure to the oil and gas sector.

All my further comments will be based on core operating earnings.

Turning to slide 3, you can see the four-year trend for loans and deposits.

This slide underscores Webster's balance sheet growth and transformation in that loads have grown by $4.5 billion or almost 9% compounded annually.

Commercial loans have led the growth with a 15% compounded annual growth rate and now comprise 57% of total loans compared to 47% four years ago.

This shift in loan mix has favorably altered our asset liability profile.

Its floating rate and periodically adjusting loans now represent 68% of total loans.

Deposits have grown by $4.3 billion, all of it in transactional and HSA accounts, which now represent 55% of total deposits.

Given the strength of our deposit profile, our loans to deposit ratio remains highly favorable at 87%, even with strong low growth loan over this period, and the borrowing to assets ratio has declined to 16%.

On slide 4, you can see the quarterly trends for loan deposits over the past year as the pattern continues with strong low growth more than fully funded by growth in transactional and health savings account deposits.

The true value of our low-cost funding advantage will be more fully realized as interest rates rise.

On slide 5, that loan growth and a higher net interest margin contributed to another quarterly record for net interest income.

All key loan segments again posted year over year and linked quarter growth with all but consumer in double digits compared to a year ago.

In addition to record net interest income, noninterest income rose 12% year over year, reflecting HSA Bank's strong fee income stream.

Noninterest expense growth also reflects the effects of HSA Bank's growth, both organically and through acquisition, with HSA Bank accounting for more than half of the $16 million increase.

Much of the remaining increase came from investments in our growth strategies, including costs related to recruitment and support of commercial bankers, investing in more sophisticated treasury and cash management systems as we move upmarket, implementing salesforce.com as our lead CRM system, and investing in mobile and digital banking capabilities, while simultaneously making serious investments in our risk infrastructure, including enhanced compliance systems and cyber security tools.

Again, our strong revenue growth enables us to invest in our future while keeping our efficiency ratio at 60% or better for 11 straight quarters now, and producing record PPNR again in Q4.

Slide 7 shows the longer term value of sustained revenue growth and expense discipline that have resulted in consistent PPNR growth in recent years, including growth of 7% in 2015 and compound growth since 2011 of nearly 10%.

Before reviewing the business unit's performance, I will spend a minute to discuss the strategic overview of our exciting expansion in greater Boston announced last month.

In effect, this transaction is a turnkey de novo addition of 17 banking centers to our Boston flagship that gives us instant critical mass and the economic engine of New England and the marketing power that goes with such.

The expansion advances our goal to be New England's leading home-grown bank while achieving a compelling financial outcome.

Since last week, 15 former Citibank locations have opened as Webster banking centers.

In the coming days, two more will formally open, bringing our total for greater Boston to 18 when you include our Franklin Street flagship.

Seven offices are in the city, and 11 are in the immediately surrounding suburbs, all but one inside Route 128.

These banking centers are prominently located in bustling neighborhoods with high-value consumers and businesses.

The undisclosed terms of our agreement involve leases, all of which have long terms or include renewal options and fixtures, but do not include deposit accounts or loans.

Importantly, we successfully recruited about 80% of the Citibank staff, ensuring that we have familiar faces in the market from the very start.

Many moved as a team to Webster because they identify with our values and brand promise.

Once again, you can see the advantage of the unshakable core.

We are supporting these new banking centers with an intensive integrated sales and marketing campaign built on the Webster foundation of surprisingly good service.

The remarkable success of our commercial banking business in Boston since we put our flag down in the old Boston Stock Exchange in 2009 gives us a high degree of confidence in the success of our new banking centers.

The Boston commercial loan portfolio has grown fourfold to more than $1.4 billion today.

We see Boston as a $1.5 billion deposit opportunity in the next five years, including about $500 million in the market today, as well as an important source of loans and assets under management.

All business units will benefit from the expansion.

As most of you know, we have long planned to expand in Boston, but until the Citibank opportunity arose, there were no alternatives that satisfied both our strategic and financial criteria.

Stepping into Citi's shoes as tenant in these prime locations provides a far more attractive return on investment than either building out our network piecemeal or making an expensive whole bank acquisition.

We expect the transaction will be about 4% to 5% dilutive to EPS in 2016, breakeven in 2017, and economically profitable in 2018.

It has a positive three-year NPV and a compelling five-year NPV.

Glenn will provide more details in his report.

My performance slides begin on slide 8. Commercial banking continues to perform extremely well, growing loans, revenue and economic profits, while executing on its strategic initiatives of geographic expansion, leveraging industry expertise with a strong emphasis on new client relationships, and maintaining local presence and feel.

Solid loan growth is reported in each business unit with record-setting originations in the quarter.

Commercial banking closed on more than $1 billion in commitments for the first time, and loans grew at a double-digit pace once again as our bankers continue to win over well-established commercial businesses across every geography and every line of business.

Commercial banking is a major driver of EP, and we expect it will remain so as our successful expansion continues.

We are thinking we can deliver around 10% PPNR growth over the new three-year planning horizon, assuming interest rates gradually rise, the economy continues to grow, and credit risk remains stable.

Moving to community banking, slide 9 reflects positive momentum in business banking with loan and deposit balances up smartly year over year.

Full-year loan originations set a record.

Our straight through processing initiative to reduce loan processing time has begun to generate higher volumes and lower withdrawal rates and lower unit costs for smaller sized loans.

Strategic focus on high-value relationships pushed average balances per checking account higher by 12% year over year.

Strong momentum in swaps and credit cards drove fee income of 14%.

Slide 10 highlights the steady growth in loan and deposit balances for personal banking.

Loan growth was accompanied by improving yields, and strong transaction account deposit growth drove down the cost of deposits.

The concentration of high balance premier checking among new accounts continued to increase, driving up average checking balances by 6% year over year.

Our response to changing customer preferences is bearing fruit as active mobile users increased by 14% year over year and mobile deposit transactions increased by 47%.

Self-service deposits rose 9% year over year to 39%, and banking center transactions declined 7%.

Slide 11 reflects the trends in mortgage originations with notably 85% of portfolio loans coming from high-valued jumbo mortgage relationships that typically have much higher than average products and services per household.

Gain on sale income grew 58% linked quarter and over 130% year over year.

Overall, in community banking, our transformational strategic initiatives are driving improvements in financial performance, resulting in strong linked quarter and year-over-year PPNR improvement.

Slide 12 presents the results of HSA Bank.

We were pleased to have many of you join us in Milwaukee in November for HSA Bank's Investor Day.

Chad Wilkins and the HSA Bank team did a great job in bringing to life why HSA Bank is the industry leader.

HSA deposits more than doubled for the year, growing about $2 billion, much of that due to the mid-January 2015 acquisition of JPM Chase's HSA accounts.

Excluding the acquisition in order that we could get a look at organic growth, deposits grew 4.3% linked quarter and 27% year over year, and accounts grew a little over 1% linked quarter and 27% for the year.

Organic gross account production in 2015 was double the previous year, and the cost of deposits declined 4 basis points during the year.

During the quarter, we completed our third migration of the acquired JPM accounts.

The phased account migrations have gone well to date, and we are on target to complete the final migration and then the transition agreement this quarter.

As most of you know, we onboard the majority of our new accounts during our peak enrollment period between October and January with fundings mainly in January.

We expect it will open about 320,000 new accounts this quarter, up 19% from last year's record, and HSA deposits should grow about $400 million in the quarter.

This production is in line with previous expectations and supports our earlier communicated projected growth rate in PPNR of 50% from year-end 2014 through 2017, which includes the significant initial positive effect of the early 2015 JPM HSA acquisition.

As we look out now over the 2016 to 2018 planning period, we expect the growth in PPNR to be in the range of 35% as we continue to benefit from account growth and economies of scale.

We strengthened our management team at HSA Bank by adding two industry leaders in Q4, Tim Patneaude as CIO, who has navigated similar growth curves in his outstanding career, and Kevin Robertson, who rejoined the organization as Director of Sales after having successfully managed the HSA sales team at a competitor bank in recent years.

Experts expect growth to continue at a rate of better than 20% 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.

We don't expect the delayed implementation of the Cadillac Tax to diminish these growth expectations.

Slide 13 summarizes results for Webster Private Bank, highlighted by loan growth and increasing momentum in producing noninterest income.

Revenue grew both linked quarter and year over year as did assets under management and administration, and the AUM pipeline is twice what it was a year ago.

I will now turn it over to Glenn for his financial comments.

Thanks, Jim, and good morning, everyone.

I will begin on slide 14, which summarizes our core earnings drivers.

Average interest earning assets grew $438 million compared to the third quarter, all in the loan portfolio where we experience growth across all loan categories.

Net interest margin was 308 basis points for the quarter, driven by higher loan and security yields and no change in deposit costs.

Linked quarter earning assets grew 2%.

Coupled with the NIM increase, this resulted in record net interest income of over $173 million.

Core noninterest income decreased by $1.2 million or 2% on a linked quarter basis, consistent with our expectation.

Recall the third quarter included a high level of commercial activity.

While core expenses were up $3.4 million, we once again demonstrated the discipline of investing in our business while maintaining a 60% or lower efficiency ratio.

Taken together, core pre-provision net revenue totaled a record $90.3 million, up 1% linked quarter and 4% from prior year.

Asset quality remains stable during the quarter, and the loan loss provision of $13.8 million is primarily reflective of loan growth.

Pretax GAAP reported income totaled a record $76.7 million, up modestly linked quarter and 3% over prior year.

And reported net income of $52.6 million -- also a record -- includes an effective tax rate of 31.5%.

Slide 15 highlights the drivers of net interest margin versus prior quarter.

Starting at the top, while the securities portfolio balances were relatively flat quarter over quarter, we enjoyed a 7 basis point increase in the yield, primarily due to lower premium amortization and higher yields on floating rate securities.

Total premium amortization of $13.5 million was $700,000 lower in Q3 and is the result of a reduction in prepayment speeds from 15.1% to 12.9%.

Coupled with the 20 basis point higher yield on approximately $800 million in floating-rate securities, the investment portfolio and interest income increased by $1.4 million.

Cash flows totaled $248 million with a yield of 320 basis points, and purchases totaled $286 million at a yield of 304 basis points.

Further down, you see average loan balances grew 2.9%, and the total portfolio yield increased 2 basis points.

Commercial loans grew 3.5%, while the yield improved 2 basis points, and consumer loans grew 2.1% and the yield improved 3 basis points.

As we highlight, the combined interest income generated by our loan portfolio increased $5 million quarter over quarter.

Average deposits increased $97 million as a result of growth in demand and interest-bearing checking accounts, and overall deposit costs remain at 26 basis points.

Average borrowings increased $330 million due to seasonality in government deposits and in support of loan growth.

The average cost decreased 3 basis points to 134 basis points as the additional funding was primarily short-term FHLB borrowings at 31 basis points.

To summarize, continued strong loan growth and NIM expansion to 308 basis points combined to result in the $5.3 million increase in net interest income to $173.3 million.

On slide 16, we provide additional detail on core noninterest income, which decreased $1.2 million or 2% linked quarter.

Mortgage banking revenue, the top box, increased by $835,000 on settlement volume of $98 million, and a pre-loan comp spread of 177 basis points, which compares to a volume of $142 million in the third quarter and a spread of 162 basis points.

Loan fees, highlighted in light blue, decreased $2.4 million as Q3 benefited from higher commercial activity.

Other income increased due to commercial customer-related transactions and corporate items.

Wealth and investment services highlighted in gray increased as a result of a slight pickup in our retail brokerage.

HSA fee income decreased, reflecting seasonality and interchange revenue, but grew 133 basis points over prior year.

And deposit service fees saw a linked quarter decrease primarily as a result of an 8% drop in NSF volume, reflecting recent adjustments to check processing order.

We expect that, as previously reported, NSF fees will be about 10% lower going forward.

Slide 17 highlights our core noninterest expense, which was up $3.4 million.

Compensation and benefits expense increased $5.9 million, driven by a $2.3 million increase in group medical claims due to seasonality and unanticipated large medical claims; a $1.7 million increase in deferred compensation, driven by the increase of Webster's stock price in the quarter; and we also had an increase in sales incentive payments of $700,000 related to higher volume.

Partially offsetting the [$5.0 million] increase in comp and benefits expense was a decline of $2.1 million in technology and equipment expense, primarily attributable to a reduction in the TSA transition services agreement as acquired JPM accounts migrated onto the Evolution 1 platform.

Slide 18 highlights our efficiency ratio.

We are pleased to report 11 straight quarters with an efficiency ratio at or below 60%.

This has been achieved while we continue to invest in our business and despite the prolonged challenging economic environment.

We expect the Boston expansion to increase the efficiency ratio above 60% during the first half of the year, and I will discuss the financial aspects of the Boston expansion in more detail in a few moments.

On slide 19, we highlight our PPNR sensitivity for 100 basis point increase in short-term interest rates combined with a 50 basis point increase in long-term interest rates.

Given recent global economic developments, financial volatility and continued low domestic inflation, our interest rate views are more in line with the market than the Fed.

Our current assumption is for only one additional 24 -- 25 basis point increase to occur in 2016.

Consequently, we are targeting a slightly asset-sensitive interest rate risk profile.

We do, of course, retain the flexibility to make adjustments should conditions change.

Note that our asset sensitivity modestly decreased since last year, but is still within our targeted range and our position remains improved from 2013.

Turning now to slide 20, which highlights our asset quality metrics, nonperforming loans in the upper left decreased by $19 million to $140 million and represent 0.89% of total loans.

The decrease was led by reductions in commercial nonmortgage and commercial real estate loans.

Residential mortgages and consumer loans combined posted a small net decline, and our allowance for loan losses improved to 125% of NPLs at year-end.

Past-due loans, in the upper right, decreased $2 million and represent 0.25% of total loans.

Commercial classified loans, in the bottom left, increased by $36 million and have been in a range of 3% and 3.5% or so over the past year.

Our commercial classified asset levels remain well below the five-year average of 5.8%.

New nonaccruals were around $20 million for the quarter, and this compares to the average of about $35 million for the prior four quarters.

Our annual -- annualized net charge-off rate was 31 basis points or $11.8 million.

The increase from prior quarter reflects charge-offs in the commercial segment.

The net charge-off rate remains well below the five-year average of 52 basis points over average loans.

Looking forward, we expect stable asset quality metrics with some customary variation in the commercial portfolio, given the nature of the business, and assuming no significant deterioration in the US economy.

Slide 21 highlights our capital position.

Ratios remain in excess of Basel III well-capitalized levels.

The tangible common equity ratio decreased 12 basis points from September 30, primarily as a result of our strong loan growth and a reduction in unrealized gain in our AFS portfolio.

The common equity Tier 1 ratio decreased by 7 basis points to 10.7%, also as a result of loan growth.

We recently completed a review of our capital levels and established modestly lower operating ranges.

We intend to operate between 6.75% and 7.25% on TCE and between 9.25% and 9.75% on common equity Tier 1 ratio.

Before handing it back to Jim, a few comments on our outlook for Q1.

Overall, average interest-earning assets will grow approximately 1% to 2%, and we expect average loan growth to be up approximately 2% to 3%.

We expect another 5 to 7 basis points of NIM expansion in Q1, given the Fed's rate hike and assuming a continuation of the stability we have seen in deposit rates.

I will emphasize that any upward movement in deposit rates or continued downward pressure on the long end of the curve would pressure NIM in Q1 and beyond.

Reflecting the loan growth and NIM expansion, we expect an increase of $5 million to $6 million in net interest income in Q1.

Our credit indicators remain stable, and we expect a reserve build will be primarily driven by loan growth.

Regarding noninterest income, we expect to be about the same in Q4 with increases in deposit-related fees, partially offset by lower mortgage gain on sale.

Regarding our expense outlook, as Jim highlighted, the Boston expansion will be modestly dilutive to earnings per share in 2016, breakeven in 2017 and accretive thereafter.

We believe there is significant loan and deposit growth opportunity in the region, and we are focused on capitalizing on it.

Our expected annual operating expense per banking center is between $800,000 and $1 million.

Together with marketing and facilities related costs, we estimate additional expenses associated with the Boston expansion to be between $5 million and $6 million in the first two quarters.

The Boston transaction will impact our efficiency ratio by 100 basis points, pushing the ratio to a 61% handle before gradually returning to the targeted level of 60% or below sometime in the second half.

Excluding the Boston transaction, we have estimated the efficiency ratio would have remained below 60% throughout the year.

Our expected effective tax rate on a non-FTE basis should be around 33%, and we expect our average diluted share count to be about 92 million shares.

With that, I will turn things back over to Jim.

Thank you, Glenn, and I will conclude by acknowledging Glenn, along with Terry Mangan and Webster's overall investor relations effort, for the continued high recognition under Institutional Investor Magazine's 2016 company rankings.

Pretty much a clean sweep, gentlemen.

Congratulations.

I think you all know how much we value our dialogue and relationships with the investment community, and we appreciate knowing that we are serving your needs and meeting your expectations.

Congratulations to Glenn and Terry and all the individuals at Webster who contribute to our investor communications effort.

Let's open it up for comments and questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

I want to start, Jim, regarding the 10% expected growth in PPNR that you cited over the next three years, you did say that it was based on rising rates.

What will that number look like if rates don't rise from here?

So I did say at 10% I was referring specifically to the commercial banking group, and assuming that we get gradually rising rates, we are less optimistic about the rise than a lot of people have expressed.

So I will ask Glenn to comment on that.

But, obviously, if rates don't rise as fast, then it is going to put a damper on the PPNR, at least early along the way.

Yes.

And, Steve, I will just jump in.

Obviously, we use the forward curve and a lot of volatility in the market, and we use the forward curve even in respect to our guidance as of two weeks ago.

And you know that a 10-year swap is at 2%.

We are now down to 1.80%, so.

But that is generally the curve that we use when we looked out for years.

So I don't have the number if the rate stays at 1.80% going out, but obviously, as Jim pointed out, it would be downward pressure on PPNR.

Okay.

But it sounds like the assumptions are relatively modest in terms of rates.

Yes.

I mean, it is based on the forward as of two weeks ago.

The forward of two months or so ago, right?

Yes.

Two weeks.

Yes.

Okay.

That's helpful.

I wanted to just ask on the HSA, Jim, I think you said you expect 35% PPNR over the 2016 to 2018 horizon.

Could you just give us -- what are the balance and account growth assumptions that are underlying that?

Are they just unchanged, essentially?

The balance and -- the growth assumptions are very similar to what we had in the 2015 to 2017 Investor Day.

Yes, they are.

And I think the nuance there is that the acquisition of JPMorgan increased or showed from a period of 2014 up to 2017 a higher PPNR.

And when you normalize for that and then you push it forward, that is where we come up with the $36 million.

So it is just an adjustment.

There is no difference in how we are thinking of the scalability of the platform or the profitability of the PPNR on a per account basis.

Okay.

That's helpful.

And then, I think you referenced 320,000 new accounts expected in 1Q 2016.

What would be the total annual enrollment if you include what is already opened in the fourth quarter, and is it just that the planning process pushes most of these into the first quarter?

It is the enrollment process, actually, that, when the plans in effect start taking the funding is generally in January, even though the enrollment period -- as you know, all companies they send out their enrollment forms, and you enroll in the fourth quarter and it goes live in Q1.

So a lot of the deposits roll in in January in the first quarter.

Probably more than half of the deposits will come in at that time, and a big jump of the overall accounts are opened in that period.

See, we might actually get -- if you look at the number of accounts that actually get opened, it is well over 600,000.

Then there is some natural attrition that goes with that.

So you net it out down in the 300,000 to 400,000 range.

Okay.

Perfect.

And then, just one final, if I could sneak it in.

You commented on the Boston expansion.

That helped.

Any need to add any additional branches, or are you guys basically done now?

Thanks.

We are very happy with the Boston footprint.

It is possible we might add a branch or two as we get more use used to the location, but we think that these 17 locations, plus our flagship, right there in the financial next to the retail center, gives us a great footprint in that market.

So maybe one or two over some period of time to make sure we are serving the entire market.

No immediate plans for that.

And we will continue to look at our overall footprint for opportunities to optimize.

You probably should expect to hear something over the next few months.

Jarrod Shaw, Wells Fargo.

This is actually [Timoor] filling in for Jared.

Maybe just following up on one of Steve's questions.

In your NIM outlook -- I appreciate the color on the one expected raise this upcoming year -- when is your expectation for the steepness of the yield curve?

Are you assuming that that 25 basis points kind of goes across all points, or are you assuming additional flattening from here on?

Yes.

We are assuming flattening.

Okay.

In our assumptions.

But I think, Timoor, what you are hitting on is that there will be -- we are benefiting from the initial rise in the first quarter.

But if you look at the yield curve right now, the forward curve, even as of two weeks ago, it has flattened out a little bit.

So you wouldn't expect to see that kind of rise going forward.

If I am talking about NIM going up about 5 to 7 basis points, I would not count on that over the next three quarters given the current forward curve.

Okay.

Great.

Maybe switching over to the increased linked quarter and comp expense.

What portion of that was driven by the acquisition of the Boston branches, and what was coming from the sign-on bonuses of the acquired teams?

That is not in there at all.

To the extent there are sign-ons, they will show in the first quarter when we closed on the deal.

The comp expense, as I indicated, was, we did get a bit of an upside surprise on expense on group medical.

And you can characterize it as episodic, but these are claims -- catastrophic claims that are filed, and they are large.

So that in conjunction with the seasonality, people hit their deductible in the first two or three quarters, and then we are self-insured.

So we have to fund that in the third and fourth quarter.

Those combine to drive that number up.

Okay.

Great.

So the $5 million to $6 million in additional expenses, that is just from the Boston acquisition alone?

That doesn't include anything like your typical first-quarter payroll tax?

No.

So if you look at quarter over quarter, then your group medical is offset by higher FICA and tax expense -- employee tax expense in the first two quarters, right, until people hit their maximum.

So there is a natural that washes out there.

The $5 million to $6 million on Boston for the first two quarters is, if you look at it and the guidance I gave on the cost to operate it per branch, $800,000 to $1 million, the difference between that and the 17 branches that we are highlighting is all marketing and facilities related costs, which are upfront.

We are going out with a pretty high profile marketing campaign in the first two quarters.

And so there is an expense associated with that, and the revenue is in the back end of it.

So I think you're saying that, excluding the $5 million to $6 million for Boston in Q1, that expenses will be (multiple speakers).

Relatively flat.

Yes.

Okay.

Great.

And then one more, if I can.

Just looking at the HSA platform, what portion of the acquired JPMorgan deposits have yet to migrate onto the Webster platform?

I think there is 400,000 accounts that will come off in the first quarter.

And is that the remaining portion, or is there still going to be some lingering?

That is the remaining portion.

Collyn Gilbert, KBW.

Glenn, just to go back, if we could, and talk about fees for a minute.

I know you obviously gave indication of what you thought could occur in the first quarter.

But just kind of a bigger picture, how should we think about the fee to revenue ratio over the next year or two, mindful of the HSA competitive strategy with what you are seeing in your own -- you had said NSF fees down 10%.

But just trying to get -- and then the volatility and perhaps the private banking wealth business -- just trying to get a sense of where you think that fee trajectory can go over the next year or two.

So I think we get closer to a 28% range on a full year -- and this is -- we don't typically give out full-year guidance.

But if you just look at it and you say, what would it look like -- how is the growth look like going out for the rest of the year given it is flat in the first quarter, I would expect it to be close to 28% of total revenue on a full-year 2016 basis.

Okay.

That's helpful.

And then, with the movement in the -- on the NPLs, was there anything specific that led to that $13 million decline in the C&I NPLs, and then how much of that was the charge-off related to that?

It is John.

I don't think there was anything specific.

It is our normal resolution cycle, and so we had a couple of commercial credits that were resolved during the period, naturally.

That slightly higher charge-off level in the quarter as referenced earlier was the result, primarily, of one commercial loan account that we have had since 2010, and that certainly did help reduce the NPLs and, as I said, it was a long relationship.

It is not in a challenged industry.

The issues around the credit were unique to the specific company.

So we don't see any trend there, and the resolution is just in the normal course.

Okay.

And then, just one follow-up to that.

And, again, I know, Glenn, you had indicated that the reserve will likely -- or provisional will be mostly loan growth driven.

Any sort of insights into the quality of the portfolio if we start to see some economic stress?

I mean, is there any migrations that you are seeing or any segments that you guys are looking at on a more cautionary basis?

You know, we are fortunate given our geography and where we have chosen to specialize that we don't have a lot of exposure to the energy space.

The short answer is no.

We are not seeing any specific points of weakness.

Obviously, to the extent that this market turmoil lasts a longer period of time when we go into a credit cycle, we will be obviously looking at the performance of all of our industries.

But we don't see anything in particular right now.

We don't see a lot of loss content on the horizon in the short term.

You heard Glenn earlier say our view is that we are confident and we will remain relatively stable if the current economic conditions continue.

But that we are also always aware that with higher single point exposures in commercial banking that we can have choppiness any quarter to quarter, but we don't see any trends, and we are not particularly concerned about any industries right now.

Bob Ramsey, FBR.

It is Martin Terskin in for Bob.

Most of my questions have already been answered, but I just want to follow up on the trend that I am seeing in mortgage banking.

It seems like it has been in an upward trajectory over the past year.

Are you seeing continuing that into 2016?

I would say going out into the first quarter, we see on origination volume, whether it is on a portfolio that we sell or we book, about a 12%, 13% reduction at this point, leading into the first quarter.

And that is what we saw -- and, again, rates have come down so we might see that pop back up.

But that is what we saw, say, as of a couple of days ago.

So some of that pipeline might be rebuilt as we enter into the quarter, but that is where we are right now.

And I think that box is to the MBA studies as well.

Got it.

And just following up on the previous question, you are absolutely not seeing any softness in any of your markets, obviously not related to energy, but just overall.

No.

Performance across geographies has been relatively consistent, so I would say both from an industry perspective and a geographic perspective, it is pretty stable.

Dave Rochester, Deutsche Bank.

Hey, Glenn, you had mentioned the change in check orders this quarter.

I guess you changed the processing order.

Can you just talk about why you made that change this quarter, and do we have a full quarter impact of that in Q4?

You have, as of November, so you don't have a full quarter.

We did it in response to our customer, and we think it is the right thing to do, and it is really time stamped, if you think of it that way.

It is batched and then time stamped.

So even though it is, say, a 10% hit going forward on fee income, which is anywhere from around $2.5 million, we think it is the right thing to do.

And we have talked about it before.

And so I think from a retention standpoint, customer satisfaction standpoint, although it is a negative financial, we think it is the right thing to do.

Okay.

And then, on expenses, how much more in quarterly expenses should be coming out of the run rate as the JPMorgan deal agreement rolls off?

Yes.

So, you know, we peaked in -- on total service costs in Q2 where we were running both the EB 1 platform and the TSA costs, and that peak was at $5.3 million.

If you were to go into the fourth quarter, that came down to $3.7 million.

As we run off the last piece and convert the last piece under EB 1, the normalized run rate is about $2.6 million.

So it depends on what quarter you are working off of, Dave.

If you are looking at the fourth quarter, there is about $1 million that comes off beginning in the second quarter -- per quarter.

Perfect.

And then, I guess just bigger picture, seeing all the moving parts you talked about with the new branches coming online and some seasonal items rolling off for Q4 and some coming out of Q1, can you give us a rough dollar range for where you see expenses going in Q1 as a starting point?

I know you talked about the efficiency ratio guide is maybe around a 61% handle, but what does that equate to on a core expense basis?

Yes, I think if you just look at it -- the $5 million to $6 million is all inclusive, so we think our expenses (multiple speakers) right?

Oh, okay.

So if you back that out, that would be relatively flat.

Yes.

Oh, okay.

Got you.

And the efficiency ratio would improve, ex-Boston, would be probably 59%, right?

So you can look at it that way if you want to go on a core bank basis or post -- excluding acquisition.

Got you.

Okay.

And then just one last one on the NIM.

I appreciate the outlook for Q1.

I guess, if you are expecting a flatter curve going forward, should we expect to see NIM pressure beyond Q1, or are you thinking that can remain somewhat stable through the end of the year?

Given today's curve and if there is more downward pressure on the long end, you would see more pressure on NIM going forward, beginning even in the second quarter.

I mean, we haven't seen it all flow through yet.

So the first quarter we feel pretty good about.

But there is still -- the impact of the current curve is not fully impacted or is not fully factored into Q2 to Q3 and Q4.

Mark Fitzgibbon, Sandler O'Neill.

Just to follow up on that margin question, Glenn, what are the major items sort of driving the NIM up so much in Q1, in your view?

So floating rate assets, which we have talked about a lot.

So C&I, CRE, home equity, those are a big part of the expansion.

Growth in our consumer personal portfolio is another component.

No lift in deposits.

We have seen some pressure on only the government side.

But, for the most part, all our retail deposits are still at the same costs.

We do have slightly higher borrowing costs.

And, the wild card, Mark, as you know, is always going to be the betas on the retail side and how the market reacts to it.

But what is encouraging is, no one is moving right now.

So the bigger driver, the biggest driver comes from our floating rate assets.

So if we are 5 to 7 basis points, that is the bulk of that expansion.

And then, obviously, it assumes no move on the retail deposits.

Okay.

And then, secondly, an unrelated.

Given the recent joint regulatory white paper that came out in commercial real estate and some comments we have heard from other banks about community banks doing dumb things in terms of commercial real estate underwriting, I wondered if you could sort of share your perspective on CRE trends that you see out there in the marketplace?

Yeah, sure, Mark.

This is John.

First of all, we are sort of underweight when you look at our commercial real estate exposure against our capital base.

And I think you know our portfolio on the commercial real estate side tends to skew institutional, so we have sort of larger higher-quality buildings with strong sponsors, and that has always been our modus operandi.

And our portfolio credit asset quality is in pretty good shape.

If you talk to Bill Wrang, who runs our CRE group, and you try and get out of him a comparison to pre-Great Recession to now, he still thinks that the underlying fundamentals, as long as you are dealing with good real estate and strong sponsors, are much stronger than they were heading into the last cycle.

So I think we are cautious, but we are bullish and optimistic that we are not on the precipice of another bubble in real estate.

And we underwrite -- for instance, we love apartments, we love multifamily, but we are not a participant in a lot of the broad metro multifamily programs.

So we look at specific sponsors, specific properties, and specific real estate, and underwrite to those circumstances.

So I would say we are aware.

We are cautious.

We kind of are aware of where we are in the credit cycle, but we are not too nervous about the underlying fundamentals in real estate right now.

John, do you see other banks -- large or small -- doing dumb things on the commercial real estate side, though?

That is a loaded question, Mark.

You know, I think competition is fierce, and so I think when you go from the very top in the sort of corporate space and the institutional space all the way down to community banking real estate and where values have been, a lot of people are putting a lot of money to work in the real estate space.

And, obviously, I just think you have to be careful about the quality of the portfolio, where rents are going, what the tenancy looks like.

So I am sure people are being more aggressive than we are, but I can't really comment on seeing significant trends in the market.

Casey Haire, Jefferies.

Just one question for me.

On the Boston branches, you guys are targeting break even in 2017.

Just curious, what kind of critical mass are you guys -- what kind of critical mass is needed to hit breakeven from a loan and deposit perspective?

I think from a deposit standpoint, it is probably about $600 million -- $650 million.

And then there is corresponding loans with that as well.

Okay.

So deposits is most critical, though.

So we are saying -- for example, Casey, we are saying, if you get $1 billion over five years, you are going to front-end a lot of that.

So you would be halfway or more by the end of the second year, and that is the way to look at it.

And then you are going to find loan support coming along.

Private banking is going to be in there generating some revenue.

This is a great opportunity for all of our businesses.

So it is going to be deposits and loans and fee income as well that will get us to breakeven in 2017.

Matthew Kelley, Piper Jaffray.

Just a quick follow-up on the margin guidance for the first quarter.

If the 10 years stays here, sub 2%, will prepay speeds remain low enough to hit that guidance, just in Q1 on the securities portfolio?

I think it would be good with Q1.

It would impact Q2 more.

Okay.

That is why we give them a range.

Yes.

And we give you a range, and I think it generally takes about 90 days to move through.

I think we feel pretty confident in Q1 right now, but Q2 would obviously be the one.

Okay.

And then in the securities portfolio, $7.1 billion, about 30% of assets, just talk about the size of the portfolio going forward.

Are you going to keep it at that type of level, and what are you buying and what types of yields are going into the book?

I think as far as the level, we will probably be flat on the securities.

I mean, our capital ratio suggests that we should be growing more 100% risk-weighted assets as opposed to zero or 20% risk-weighted assets.

From a reinvestment standpoint, generally, what we are buying is NBS, say, a term of four to five years at [250].

Munis to some smaller extent, a term of eight to nine years at kind of [450].

And then floating rates at CLOs and CNBS, which has which has been more of a challenge lately, but those reprice basically one month -- they are about LIBOR plus 200.

And then, some agency MBS, which is -- we've been generally by fixed rate and with a duration of four years at, say, a rate of [275].

That is kind of what we are doing going forward.

Got you.

And then, a question on the HSA business.

There has been a couple of transactions over the last couple of weeks and months here, some large banks getting out of the business: Bancorp, U.S. Bancorp, Citizens.

Have you had a chance to look at some of those transactions, and what are your thoughts on those bigger banks getting out of it?

Is it just an issue of scale, or is there something that they are seeing in terms of profitability and trends there that they don't like compared to what you guys are doing?

Maybe you could comment on that.

Sure.

I will just say we can't speak for why they have made their choices, but we have said before, this is a business of scale.

Unless you have significant scale, it is hard to really make a go of it.

So that is a significant advantage that we have at our size.

We also think that there is lots of institutions that have decided it isn't a strategic focus for them and they are not going to devote the resources that are required to get people into it.

So in some cases, they are an offloading.

We have looked at a couple of transactions.

And we also always keep our eyes open and try to stay on the pulse of the market.

At least one of those recent transactions was based on a long-standing relationship that already existed, whether it was sort of a joint operation there.

And then, in other cases, banks are just saying that that is not their primary strategy, nor can they make it profitable to the extent that we can, and that is what is driving their decisions.

And we think that does represent opportunity for us going forward.

I want to reiterate that -- and we have said this over and over, that our number one responsibility is to make sure that we have a smooth and orderly transition of the JPM acquisition, and that is what is occupying 99.9% of our time.

Now that we are getting through that, we are going to be looking outward more than we were before, and we will be taking a hard look at some of those opportunities.

Okay.

And going back to the question that Mark Fitzgibbon asked there about the outlook for commercial real estate, some of the regulatory commentary that has come out recently, where would the yellow flags be, in your view, in commercial real estate for the types of lending that you do in the regions that you are engaged in?

Where do you see the yellow, orange flags in the system right now in the cycle?

I mean, in terms of what we would see is when, obviously, proceeds get aggressive or amortization schedules or tenors, and we try not to obviously chase out of our underwriting box.

And I think, right now, I think if you look at it -- as I said earlier, if you look at the underlying fundamentals, as long as you are picking the right real estate with the right borrowers, we are not into that red flag warning zone yet.

But I just think you have to really stay disciplined, and that has been our mantra.

And, right now, if you look at the profile of our commercial real estate portfolio under any metric, whether it be LTV, whether it be proceeds, the way we are underwriting and sensitizing our underwriting, we are not stretching the bounds, and I think when you have to do that to compete in the market, that is when you start to raise the red flags.

Hey, Matt.

This is Joe Savage.

Let me just add a little bit to John's comment.

We have worked for decades with certain commercial real estate developers, and they have been pretty prescient in terms of where they are going to step outside of a market.

So in addition to the work we do from a credit analytics perspective, all of that, we really watch our developers.

They have been making a little bit at this for a long, long time.

And, interestingly, while they are pickier in what they are going after, almost to a person they continue to remain looking for transactions.

And we do a lot of business -- a lot of repeat business with them.

So we take that as a bit of comfort.

And then I just want to say one more thing.

When you look at the radar screen here and what the regulators are primarily focused on, they are looking at the growth rate in the portfolio, and they are looking at the portfolio as a percentage of capital.

And we are well under the target ranges that were included in some of that guidance.

And so that gives us a lot of comfort.

But mostly what we are comfortable about is the quality of our underwriting standards.

And when they get in there and say, well, how much I/Os are you doing I/O and what are you doing with your tenors and the like, that we are going to come out in a very strong position.

So however you look at it, we are highly confident in the quality of our CRE operations.

And one last point to put a finer point on that, Matt, is we size our loans using a higher interest rate than actual rates because we understand that that is some risk.

And so we are willing to walk away from deals if we don't have that amortization cushion and that cash flow cushion, and that would be another red flag.

If you are fully sizing the loan to today's interest rates, you are -- potentially could be asking for trouble.

So I hope that is helpful.

Yes, it is.

And then, last question.

Just the shared national credit book, I believe it is $1.5 billion, $1.7 billion, somewhere in that range.

Talk about just the exposure to -- you are beyond energy, just the broader industrial commodity chemical complex, any type of exposures you might have in those industries.

And not just energy specific, but there has been a broader slowdown, clearly, in the industrial type of sector.

Any exposure there or your thoughts on that part of the portfolio?

Yes.

I mean I would say, the good news is, in terms of our expansion and significant originations in the fourth quarter, the percentage of share national credits in our portfolio actually went down period over period.

So it evidences a lot of direct underwriting and bilateral underwriting.

We don't have a concentration in any of those sectors you are talking about, the broader industrials, chemicals, commodities.

Our strategy in shared national credits is really in our footprint to the local companies that we can cross-sell HSA Bank, cash management, private banking to, or in some of our industry specialties, and our industry specialties right now are things like TMT, environmental services, healthcare.

So that is where you would see them.

And, fortunately, in those service companies, they are not being impacted from an industry perspective like some of the ones you are mentioning.

So I would say that it is not an issue for us right now.

Bernard Horn, Polaris Capital.

I just wanted one clarification on the guidance for the Q1 net interest margin.

You said that the floating-rate is contributing about 5 to 7 basis points of added yield.

Is that full 5 to 7 dropping down to the bottom at net interest margin, or is it the 5 to 7 --?

Yes.

No.

Maybe I wasn't as clear as I could have been, but that is the primary driver of the NIM expansion.

So it is dropping down.

Okay.

Great.

And then, the other question I had is just -- I know you commented about the lack -- that you are not seeing any material downturns related to energy and other things, but I guess my question is whether or not you are seeing -- or you can make any observations about what people are doing and what companies are doing, what the energy savings that they are getting.

Because it is pretty clear at the national level, we really -- aside from maybe auto sales -- haven't seen much of a pickup in consumption.

And I am just wondering, because your exposure to the whole industrial and commercial and the consumer-based, do you have any observations as to what people are doing with these savings at this point?

I don't think it has been evident yet.

I mean we have been saying it all along that not only is distributor remediation in that market not impacting us because we don't have a lot of credit exposure, but it surely must benefit most of our other commercial customers.

We really haven't seen changes in behavior or any specific information that indicate that benefits flowed through their P&Ls or that they are investing in other -- those savings in other areas.

We have seen our retail deposits go up, so that could be one offshoot of this.

We haven't seen -- and it might be early.

We haven't seen much of an increase in interchange transaction volume besides the normal seasonality.

It is hard to sort of pull that out because the fourth quarter has holiday shopping and things like that as well.

So we may see it, Bernie, going into Q1 or more of it going into Q1.

Our debit card transactions, if you were to just look at it quarter over quarter or year over year, they are up 4%.

So that may be an early indicator of some -- maybe some additional volume.

But it is too early to tell.

One thing we know they are doing with it is they are buying more cars, but we do think they are saving more.

We have no further questions at this time.

I would now like to turn the floor back over to management for additional or closing comments.

I want to thank you all for joining us, again, today.

We think we have produced a sound report here for the quarter as well as for the year.

It is a tough operating environment, but we are very positive about our position and our potential to generate economic profits.

Thank you all very much.

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.