Webster Financial Corp (WBS) 2016 Q4 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's fourth-quarter 2016 results conference call.

This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of 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 is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the fourth quarter of 2016.

I will now introduce your host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Thank you, Audrey, and good morning, everyone.

Thanks for joining Webster's fourth-quarter 2016 earnings call.

President John Ciulla, CFO Glenn MacInnes, and I will review the quarter and then Executive Vice Chairman Joe Savage and HSA Bank Head Chad Wilkins will join us to take questions.

Beginning on slide 2, Q4 was an extraordinary quarter in many respects.

Record quarterly loan originations were driven by the 18th consecutive quarter of year-over-year double-digit commercial loan growth.

Coupled with an uptick in the net interest margin, year-over-year revenue grew 10%, 29th straight quarter of year-over-year revenue growth.

Credit metrics remained strong, including the lowest level of net charge-offs in nearly a decade.

Record revenue of $256 million resulted in diluted EPS of $0.60, return on tangible common equity of 12.3%, and return on common shareholders' equity of 9.2%.

The quarter benefited from a one-time gain on sale of $7.3 million, which Glenn will describe in more detail.

I want to spend a minute discussing our strategic management framework.

We invest in strategies that maximize value for our customers and shareholders.

We allocate capital and resources and prioritize projects accordingly, while managing expenses with vigilance to achieve top quartile efficiency.

I have noted in recent quarterly calls and investor presentations that we've got a couple of terrific differentiated businesses with strategies that have high economic profit potential, namely HSA Bank and commercial banking.

And the Boston expansion qualifies as having high EP potential as well.

We are committed to investing in those businesses when the opportunity is right, and that means now, rather than phasing investments over time simply for the sake of protecting the efficiency ratio in a given quarter.

This will create some variability in period expenses, as it did in Q4, but in the intermediate term will drive the efficiency ratio sustainably lower and economic profit sustainably higher.

Even as we invest in our future, I can assure you of one thing, we will never lose our expense discipline.

It is embedded in our DNA.

HSA Bank is exhibit A. Elevated Q4 expenses reflect the fact that HSA bank is our highest strategic priority and with good reason: it has the potential to generate more economic profit than any other business, by far.

We continually invest in Evolution1, our industry-leading, scalable technology platform.

We've accelerated the expansion of the salesforce and client services teams and the introduction of 24/7 service.

We've rolled out our live online chat through member and employer portals to streamline and enhance the customer experience.

We have augmented staffing earlier and to a greater degree than usual to smoothly handle the welcome tsunami of new member activity during enrollment season.

And this is reflected in improving service levels and quality.

We are also investing in more sophisticated data analytics, boosting marketing investment and fast-tracking the priority enhancements on our product roadmap.

More investments sooner to maximize the extraordinary opportunity HSA Bank presents to increase shareholder value.

Our obsession with the HSA business and, crucially, our commitment to invest in it have enabled rapid growth and transformation.

One proof point of the early payoff can be seen in the 660,000 new accounts opened by HSA Bank in 2016 that almost equal the 691,000 total accounts that existed at year-end 2014.

It's helpful to remember that this business is still in the landgrab stage as the market leaders scoop up as many health partners, large employers, and members as we can.

The true payoff is down the line as accounts are on-boarded and seasoned.

To underscore that point, 55% of our accounts at year-end had vintages of less than two years.

That's over 1 million accounts with average balances of approximately $1,200, whereas accounts with vintages longer than five years have average balances of $6,500.

We estimate that the newer accounts generate net revenue per account of only 40% of the longer vintage accounts.

Further to that point, we expect to open over 400,000 accounts during the Q1 enrollment season.

Think of the seasoning value and the impact on revenue growth and unit profitability down the line.

And there's more; because the full story of consumer-directed health plans and potential explosive growth in HSAs has yet to be told.

The ongoing 20% compounded annual growth rate in [puddings] confidently predicted by Devenir and other experts could increase significantly given the recent national election results and the increasingly likely reform of the Affordable Care Act.

And while no action has been taken, it's possible that eligibility for HSAs could expand by multiples of previous expectations, perhaps even including Medicare and Medicaid enrollees, and contribution limits could potentially double.

Hundreds of millions of Americans may ultimately qualify for HSA plans versus the 18 million who had them as of midyear 2016 according to Devenir's mid-year report.

As the leading bank administrator in the space, we have the technology, service platform, scale, and expertise to capture a significant share of the market.

HSA Bank is poised to fulfill its mission to lower the cost of healthcare while improving access and quality, and that puts Webster on the launch pad to extraordinarily high performance.

Given the high level of interest in this business, we are planning another HSA Bank investor day later this year.

Moving briefly to commercial banking, this line of business has performed beautifully and is leading the way and generating economic profit.

I commend EVP Chris Motl on his recent promotion to lead all of commercial banking.

Chris has worked closely with John Ciulla and Joe Savage for a dozen years and will oversee the exciting expansion of this business.

It is remarkable the difference an election can make in the economic outlook.

Nearly all of the forecasted policy changes in the Trump administration supported by Republican Congress appear to be positive for our business and our company, from investment in infrastructure to less regulation, spurring faster economic growth, job growth, and loan growth and middle-market businesses and likely higher interest rates.

If proven true, the overall effect should speed the timeline for us to earn in excess of our cost of capital.

I will now turn it over to John Ciulla to report further on the quarter.

Thanks, Jim.

Good morning, everyone.

I will begin on slide 3.

You can see the five-year annual trend for loans and deposits which underscores Webster's balance sheet growth and transformation.

Loans have grown by $5.8 billion, or 9% compounded annually, since the end of 2011.

Commercial loans have led the way with a 14% compounded annual growth rate and now comprise 59% of total loans, compared to 47% just five years ago.

This shift in the mix has favorably altered our asset liability profile as floating-rate and periodically-adjusting loans now represent 69% of total loans compared to 63% five years ago.

Deposits have grown by $5.6 billion, or 7% compounded annually, in the same period.

All of this growth has been in transactional and HSA accounts, which now represent 57% set of total assets compared to 37% five years ago.

Given the strength of our deposit profile, our loan-to-deposit ratio remains favorable at 88%, even with strong loan growth over the period.

Turning to slide 4, loans and deposits each grew $1.3 billion over the past year, demonstrating our clear ability to internally fund our loan growth through transaction and HSA deposits.

Slide 5 shows our revenue, expense, and PPNR growth over the past five years, resulting in an 8% compound PPNR growth over the period.

In 2016, higher expenses were primarily driven by Boston expansion expenses of approximately $22 million and continued investment in HSA Bank, representing a $16 million increase in 2016 expense.

Slide 6 shows growth in net interest income and noninterest income, reflecting revenue growth in all lines of business led by double-digit revenue growth in commercial banking.

Overall, PPNR grew 5% year over year.

I will now turn to line of business performance, beginning on slide 7. Commercial banking continued to deliver strong results, reporting loan growth of 4% in the quarter and 13% year over year.

Deposits grew nearly 10% when compared to last year and, overall, commercial banking activities resulted in 12% and 16% revenue and PPNR growth, respectively, when compared to the prior year.

For the full-year 2016 in the commercial bank noninterest income grew by 26% over 2015, driven by swap fees, syndication and other loan fees, and a 9% growth in cash management fees.

The commercial loan portfolio yield increased 10 basis points linked quarter and 25 basis points year over year.

The quarterly increase primarily reflects higher LIBOR rates and higher fee activity, including FASB acceleration due to prepayment (technical difficulty).

And asset quality metrics in commercial banking remained solid and at cycle lows.

Turning to slide 8 for HSA Bank.

As Jim mentioned earlier, our commitment to accelerate strategic investments in a rapidly growing HSA Bank was reflected by record new account acquisition including 98,000 new accounts acquired in the fourth quarter.

Deposits in the fourth quarter grew 15% year over year while the number of accounts grew 19%.

Adjusting for the anticipated attrition related to the JPM HSA transaction in the prior year, year-over-year deposits grew over 20% and accounts increased 27%, both in line with growth expectation.

HSA Bank's success in 2016 can in part be attributed to an intensified focus on the carrier and larger employer segments.

59% of total new account volume in 2016 came from these segments compared to just 48% in the prior year.

As we look ahead to the first quarter of 2017, we remain confident that account growth will accelerate and exceed the 335,000 new accounts produced in Q1 2016 by more than 20%.

January to date we have opened 295,000 accounts, which represents more than 70% of our Q1 2017 target.

While HSA Bank revenue was up modestly for the linked-quarter and 13% year over year, PPNR growth was slower due to expenses and investments related to operational excellence, the customer experience, and service delivery, as Jim detailed in his remarks, and in preparation for this year's enrollment period.

Enhancements related to these investments have been well received by our partners, employers, and members, leading to a smooth employer on-boarding and member enrollment season to date.

Moving to community banking on slide 9, which reflects another strong quarter in business banking.

Deposit balances were up 9% year over year driven by an 8% growth in transaction deposits.

Loan balances were up 11%, driven by record loan origination.

Business banking continues as an important net funding source for the bank as deposits continue to exceed funded loans in the segment.

Slide 10 highlights growth in the year-over-year loan and deposit balances for personal banking.

Portfolio loan balances were up $168 million, or 3% year over year, with another $132 million in mortgages originated for sale in the quarter.

Total deposits and transaction deposits were up 4% and 5%, respectively, year over year.

Premier checking accounts have grown by 16% over last year, reflecting the ongoing progress in acquiring high-value customers as we continue to leverage our best-in-class net promoter scores.

We continue to build momentum in our strategically compelling Boston initiative as activity grows across all our lines of businesses in that market.

While deposit and loan balance growth has been slower than originally anticipated, we recently crossed the $200 million mark in banking center de novo deposit balances.

The number of new consumer DDA accounts opened has met expectations and our loan pipelines are expanding.

As announced earlier this week, we are consolidating eight banking sectors during the second quarter.

This is part of Webster's long-term banking center optimization program that began in 2011, including the 17 new banking centers that opened in greater Boston in early 2016.

We are purposefully balancing our physical presence with the fast-growing customer preference for digital banking.

Our investments in mobile and online banking coincide with our customers' increasing use of these channels, enabling us to reduce our physical footprint.

In fact, Webster's overall banking center teller transactions have declined almost 40% from 2010 to 2016.

In addition, 47% of Webster's checking account households are now served by mobile banking and self-service deposits now represent 40% of all deposits.

Community banking continues to improve the digital experience, as reflected in a 16% year-over-year increase in active mobile banking users and a 6% increase in active online subscribers.

We are confidently pursuing the transformational strategic roadmap that we've been talking about for the last few years and it is what's necessary in order that community banking earn its cost of capital.

Slide 11 highlights results for Webster Private Bank.

Year-over-year revenue increased 9%, primarily driven by strong loan growth and steady AUM performance.

Our private bankers are focused on serving the core banking, lending, asset management, trust, and financial planning needs of Webster customers, namely the owners and executives of our commercial and business banking clients as well as high net-worth families and individuals in our community bank.

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

Thanks, John, and good morning, everyone.

Slide 12 provides the backdrop of our ongoing business momentum, including our key highlights of the quarter's performance with comparative data for the four prior quarters.

Starting at the top, continued growth in earning assets, combined with an increase in net interest margin, led to neck record net interest income.

1 basis point increase in NIM reflects an 8 basis point increase in the commercial loan yield and flat deposit costs, partially offset by a lower investment portfolio yield.

Noninterest income increased by $4.2 million, driven by a $7.3 million one-time gain on the sale of an asset.

The gain was partially offset by lower commercial and consumer fee revenue.

The majority of the expense increased quarter over quarter is in the deferred compensation due to the impact of the strong performance of Webster's share price.

Combined we reported record pre-provision net revenue of $94 million.

The lower quarter-over-quarter provision reflects a stable credit environment and lower charge-offs, somewhat offset by continued loan growth.

Our coverage ratio increased to 114 basis points, up from 113 in prior quarter and 112 in prior year.

Reported pretax income was $81.5 million and our reported net income of $57.7 million benefited from the favorable tax treatment of the previously mentioned one-time gain, as we were able to recognize a portion of our tax loss carry-forward.

As a result, our effective tax rate was 29.3% in the quarter.

Absent the one-time gain, our tax rate would've been around 32%.

Slide 13 highlights our average balance sheet and drivers of net interest margin.

Growth in average interest-earning assets was driven by higher-yielding commercial loans and an increase in the securities portfolio.

LIBOR and prime rate increases contributed to the 4 basis point increase in loan yield.

The loan yield improvement more than offset a 6 basis point decrease on securities.

Average deposits were relatively flat to Q3 with no change in the overall cost.

Growth in HSA and savings balances offset the seasonal decline in government deposits.

Average borrowings increased $525 million, funding the majority of our interest-earning asset growth in the quarter.

Most of the increase in borrowings was in short-term FHLB advances at around 55 basis points.

We expect to pay down borrowings in Q1 from seasonal deposit strength in both HSA and the government banking.

Combined our cost of interest-bearing liabilities was flat to Q3.

Our municipal bond portfolio and tax exempt commercial lending contributed to an increase in our tax equivalent adjustment.

The net impact from the combination of interest-earning assets and liabilities was a 1 basis point improvement in net interest margin.

To summarize, interest-earning asset growth, along with higher commercial loan portfolio yield and no change in the cost of liabilities, resulted in a quarter-over-quarter increase in net interest income of $5.1 million.

Slide 14 details our noninterest income, which increased $4.2 million from Q3.

The increase was primarily driven by the $7.3 million gain mentioned earlier, which is reflected in other income highlighted in grey.

Other income also benefited from client hedging activity, increasing $1.2 million quarter over quarter.

Loan-related fees, highlighted in dark green, declined $3.3 million from Q3's record level of syndication fees.

The mortgage banking revenue, highlighted in brown, declined $1 million due to lower settlement volumes and spreads.

Slide 15 highlights our noninterest expense trend.

The increase in compensation benefits is primarily attributable to the $2.8 million linked-quarter increase in variable compensation tied to Webster's higher share price in Q4, as well as $1.6 million seasonally higher netable cost.

The increase in occupancy expense was driven by a one-time $1.2 million charge as a result of corporate facilities optimization.

And as John highlighted, we have announced banking center optimization actions which we expect to be reflected in Q2's results.

Slide 16 highlights our efficiency ratio trend.

The results exclude the one-time gain on the sale of the asset previously mentioned, but do include expenses associated with the Boston expansion and the impact of Webster's higher share price.

Excluding these two items, our ratio would be at 60% level.

Slide 17 highlights our key asset quality metrics.

Nonperforming loans, in the upper left, increased $6 million, primarily in commercial loans, and represent 79 basis points of the total.

Past-due loans, in the upper right, increased by $3 million and represent 25 basis points of the total loans.

Commercial classified loans, in the bottom left, increased by $5 million, representing 3.3% of total loans and remain well below our five-year average of 4.4%.

Net charge-offs totaled $6.1 million in the quarter for an annualized net charge-off rate of 15 basis points.

Loan-loss coverage increased to 114 basis points in support of our loan growth and mix.

In summary, our credit metrics remain strong and we maintain a positive core view on asset quality performance.

Slide 18 highlights our capital position.

The tangible common equity ratio was 7.19% at year-end, down modestly from September 30.

This was due to asset growth and a $24 million increase in unrealized losses in AOCI driven by higher rates.

Excluding the AOCI adjustment, TCE was up 1 basis point to 7.49%.

And our common equity Tier 1 ratio was 10.51%, up slightly due to growth in retained earnings.

We continue our strategy to grow primarily with 100% risk-weighted loans.

Risk-weighted assets represented 72% of total tangible assets, compared to 71% a year ago.

Before turning it back to Jim, I have a few comments on our outlook for Q1.

We expect average interest-earning assets to grow approximately 2%.

We expect average loan growth to be in a range of approximately 1% to 2%.

We expect NIM to increase around 6 basis points, driven by higher loan yield and lower securities amortization.

As a result, we expect net interest income to increase by around $5 million linked-quarter, despite having two fewer days than Q4.

Of course, the projected increase is subject to the overall interest rate environment.

We expect the provision to be in the range of Q3 and Q4's provision, driven by loan growth and asset quality.

Noninterest income, excluding the one-time asset sale gain, is likely to be up modestly.

We continue to manage our noninterest expense closely while opportunistically investing in talent and initiatives, as Jim highlighted.

As such, we expect the efficiency ratio to be flat to somewhat lower to Q4's level.

We expect our effective tax rate on a non-FTE basis should be around 30%, but for the full year we expect it to be in the range of 32% to 33%.

And we expect our average diluted share count to be around 92 million shares.

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

Thank you, Glenn.

In summary, our solid strategic choices implemented efficiently are generating faster growth, higher profitability, and more capital and resources to invest in our promising future.

I will now open it up for questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Good morning, everybody.

I wanted to start on HSA Bank.

How should we think about 2017 from an expense view?

Is it another year of investing in that business or should we see stronger operating leverage this year?

Steve, I'm going to ask Chad to add, if necessary, to the comment that I think we look at it that we made clear that we are in the investment stage in the business and we have accelerated a lot of those investments into current periods.

We expect that may continue through the beginning of the year, but that we ought to start seeing a ramp in some unit efficiencies in 2017.

Okay, that's helpful.

Maybe for Chad, of all the potential changes to this business under the Trump administration, what do you see as potentially being the most impactful to Webster at this point?

Yes, I think the -- hi, Steve, by the way.

Good to hear from you.

I think the most impactful would be if some of the suggested changes around increasing the limits on HSA were enacted; that would be obviously positive.

And it's also something that I think is doable and somewhat near term.

The other is the expansions of HSAs to other accounts, so allowing Medicare participants to be able to contribute to their HSAs and perhaps government program participants as well.

So those could have great impacts just from a pure deposit standpoint.

When they talk about decoupling the HSA from high deductible health plans and making them available more broadly, that obviously could have a huge impact on this industry, but that's probably a little bit longer term.

But you never know with all the houses in control.

So I think that just generally -- and the great exposure that we get in the market.

Thank you.

Just totally shifting gears, the commercial bank continues to have good momentum.

Should we read anything into the sharp drop in the pipeline in the fourth quarter?

Do you expect this to have any implications for growth in 1Q?

Steve, it's John; good morning.

I don't at all.

If you look, we are about $10 million above last year's 4Q.

4Q is usually seasonally the biggest origination quarter for us, so the pipeline is always naturally drained.

But if you look -- we have a pretty strong definition in terms of probability to close and dollar amount to put something into the pipeline.

And I also measure, and we can talk about, the activity that is going on and I would tell you that the activity heading into 2017 looks favorable.

Okay, that's great.

Maybe if I could sneak one more in, maybe for Glenn.

I received quite a few questions this morning on the $3 million increase in stock-based compensation, given that many other banks also saw their stocks up pretty big in the quarter.

Glenn, can you just walk through what drove such a big increase and how we should think about that run rate going forward?

Thanks.

Sure.

It is driven by the $16.27 increase in the stock price quarter over quarter.

And what it is, Steve, is that we have some deferred comp plan that are tied to Webster shares and so, as the shares appreciate, the liability is adjusted and reflect the movement in the share price.

For the most part, when you see comp plans they are offset in a Rabbi trust.

Given that this is Webster's stock, we cannot build a hedge against it.

We're not allowed to do that.

So that's why you see this, the volatility in that number.

The number is up -- it's a little -- at 2.8 quarter over quarter incrementally.

And so if you go back, there's always an adjustment quarter over quarter, but you see the steepness in Q3 to Q4.

There's basically a couple hundred thousand shares.

Yes, there's 200,000.

Use about, on average, say 200,000 shares times the $16 movement in the stock price and that's how you get it.

And then you look at the quarter-over-quarter impact; you net those two out and that's where they are.

Okay, that's helpful.

Thanks for all the color, guys.

Steve, I just want to say too that your knowledge of the HSA business and the depth of your research and analytics is extraordinary.

Thanks, Jim.

Jared Shaw, Wells Fargo.

Good morning.

Just staying on the HSA for a minute, when you talk about the 295,000 accounts already opened this quarter, is that a gross number or is that net of [attrition]?

That's a gross number here.

That's gross.

Should we expect attrition to be consistent with what we've seen in the past or is there maybe a bigger impact from last year that may not be repeated this year?

Jared, this is Chad; good morning.

Yes, we should see it be consistent with the past, but with the one caveat that we won't -- last year we had the anomaly with the J.P. Morgan Chase transition related to clawback and that type of thing and we don't expect to see that kind of anomaly this year.

Okay.

Then, Jim, you had spoken about the landgrab in the HSA space and how we're still in the early stages.

When you look out at the group of carriers and TPAs and the large employers that may not yet be on the high-deductible healthcare plan system yet, how far are we through that landgrab?

Would you say we're still in the early innings or have we really got a lot of momentum going from the industry so far and that we are down to the end there?

We would say we are probably in the middle innings and that the -- a lot of the growth in the future will come from tapping into the potential members from the employers and health plans that will be signed up as the shift to consumer-directed healthcare continues.

So there's very significant opportunity to still land new large employers, as well as some carriers.

And then, on top of that there may be an expansion in the eligibility for consumer-directed healthcare and HSA accounts that we expect will augment the opportunity significantly.

Okay, thanks.

Then just shifting over to the Boston side.

With the growth being a little less than you had initially expected, is there -- how much time are you giving yourself to evaluate those 17 locations where maybe if there's one or two that are not performing as much as you had initially expected or you could see some either relocation or consolidation of those 17 branches?

Are you committed to giving it a few years to work out or could we see individual movement earlier?

Jared, we still look at this as a broad, marvelous opportunity.

We are not so much thinking of culling the 17; we actually think of being able to serve all of greater Boston with only 17 offices, where you really wouldn't have been able to do that a few years ago.

There are some of the banking centers that aren't as strong as some others and we're taking a look at them.

We are going to have opportunities, if we choose, as leases mature to move to smaller locations or maybe even to move into locations in Boston where we are not located now, where we might trade to smaller locations in a couple of cases that would allow us to open a new location in an underserved part of that market.

But, basically, we like the position that we have.

We like the offices that we have.

We don't expect there's going to be significant impact there.

To the extent actually that we have -- we've said in the past that some of the offices are pretty large.

We've actually had some success in talking about subletting some of those offices so that we can defray some of that expense and that should help us along the lines to earning economic profit.

I think, most importantly, we have complete confidence that we will achieve our longer-range goals as stated at $1 billion in deposits over five years or so and $0.5 billion in loans.

That this is a great opportunity for us to create value in that market.

Even though we came in a little light on the deposit side, as John indicated, we opened the same number of accounts that we thought.

We've got great relationship development opportunities.

This is a terrific market for us to be in.

Collyn Gilbert, KBW.

Thanks.

Good morning, gentlemen.

Just to follow-up on Jared's question on Boston; John, is there anything that you could point to as to why you think the growth has been slower than what you guys had originally projected coming out of that market?

And are you repositioning the strategy at all or is there anything you guys are doing differently to try to accelerate the production out of that part of the franchise?

It's a good question.

I think a couple things: externally a very competitive market.

When we entered the market a lot of our competitors were offering high interest rates on deposits and a lot of the offers were very competitive, so I think the economics out front were impacted by competition.

I would also say when you think about -- we were able to take possession of the former Citibank banking offices and open them up right away, but it took some time to make sure we had the right folks in the right places.

I think about business banking as being a key part of the strategy and we were really a couple of quarters behind in getting our full complement of business bankers in the market.

And then, obviously, it takes some time to build momentum.

So I would say a combination of competition right out of the box and the impact that has on economics.

And then a little bit more time than we originally anticipated to make sure that we had the right people in the banking centers and that we had our full complement of mortgage bankers and business bankers all set and ready to go.

So we are starting to see the momentum now, Collyn.

Let me just add a little guidance there if I could; that in the last call we said that discretion was the better part of valor and, to John's point, that we had started with promos, but the market was on fire with promos.

And we decided that we would pull back.

So, to some degree, we didn't pull in the amount of deposits we would have from those promotional programs early on because we decided to back off a little bit.

More recently we have gone in and selectively run lower-level promos, which we are finding we are having some success with.

So there are some levers for us to pull without negatively impacting the results there.

We also said that the only difference in looking at Boston now is instead of it breaking even sometime in late 2017 that we figure that we will go to economic profitability by about $0.005 a quarter.

So that means you'll get there sometime in late 2018 at this point.

If we had net expenses for all of Boston of $3.8 million in the fourth quarter, you should expect that to be dropping by about $0.5 million per quarter going forward.

The last thing anecdotally in terms of activity, private banking activity and pipeline is growing.

We have a whole bunch of looks at Bank at Work now where we are trying to leverage our existing commercial customers in Boston that we have obviously been up there since 2009.

We are now able to offer things like Bank at Work to the employees because we have got a local banking center present.

We definitely still see increased activity in the market, too, which is very encouraging for us.

Okay, that's helpful.

Then just on the HSA front, maybe, Chad, you could sort of respond to this.

How are you guys thinking about acquisitions or list outs or anything like that as you look to build the business going forward?

We are still always open to looking at acquisitions.

We obviously go out in the market proactively, talking with other players to see if that's an option.

We're just going to do -- the only deal we will do is one that works for us where we've got potential growth tied to the acquisition and it makes economic sense for us as well.

We also are thinking about other ancillary businesses that might be beneficial to work -- complement the HSA business and the other health account business.

Okay, that's helpful.

Just finally, Glenn, a question for you just on the efficiency.

It looks like, given your guidance, the efficiency is going to track higher than what you all had previously kind of targeted.

Can you just talk a little bit more --?

I don't know if you give us color as to how the efficiency is tracking within the HSA Bank versus the core bank.

But just trying to understand what is driving some of these expense investments and then how quickly you think you may be able to recapture the returns and we can see that efficiency drop back to below the 60% that you will have been targeting.

I think generally the HSA business, because of the investment -- Jim laid it out there; was very articulate about it that we continue to invest in the business.

We think the time is now.

That's what's driving the efficiency ratio.

Obviously, our Boston investment is a big driver of that.

And then for the quarter obviously the increase in the stock price had something to play on that.

But I think generally the HSA business has been running pretty close to about 62%, 63% as they invest in the business and you expect that to come down, as Jim highlighted, during 2017 as we start getting operating leverage.

And I think, in some respects, the bank will mirror that.

We continue to invest not only in HSA though in the commercial bank.

We are optimizing the retail bank; we're optimizing and investing in the private bank as well, so there is things going on.

I think we are at 63% going into the first quarter, but you got to keep in mind there's a lot going on as far as medical costs are up and things like that.

There's some seasonality to that expense as well as we go into the first quarter.

And some of that will wear down as we go through the year.

I'm not going to give you guidance for the full year, but I would expect that we start at 63% and you expect that to temper down over the next couple quarters.

Okay.

And if we just think about it, it sounds like from what you're saying that the reduction in the efficiency may more likely come on the expense side?

Than a ramp in --.

There's some.

There's investment in the business that is nonrecurring.

And whether that is a build out or whether that is operational efficiency type of things that we are doing right today, those won't be repetitive and we will start, in fact, to get some of the leverage associated with doing those activities.

Okay.

Then just one final question; not necessarily asking for guidance, but just targets in terms of EPS growth or ROA.

Do you guys have kind of a range of where you think you can be once these investments are completed, it sounds like maybe by the end of this year, or where you think you should be running from a profitability standpoint?

Well, we think we should be earning in excess of our cost of capital, and we're not.

One of the comments I made is that the environment seems to be improving and that should give us propulsion toward earning our cost of capital.

That is what we focus on: ROE, number one; and return on tangible, number two, ROA.

Basically, it gets back to investing in strategies that maximize value over time and that's why we are investing in cash management systems in the commercial bank and accelerating those and accelerating investments in HSA.

There could be a little bit of lumpiness as we go, but we're highly confident that we are going to generate sustainably better efficiency ratio and higher economic returns.

We would rather not be predicting anything other than that we think we can earn in excess of our cost of capital.

I can't say it will happen in 2017, but that is the road we are on.

Every management decisions that we make is oriented on our goal.

Okay, that's helpful.

Thank you very much.

David Rochester, Deutsche Bank.

Good morning, guys.

Glenn, back on the expense side, you mentioned some one-time expenses in the numbers for buildouts and whatnot.

Could you just maybe frame how much we're talking about there that could eventually come out through the year?

I know you may end up allocating that to something else, but just any sense for how much expense that is now?

I'm not going to go into the detail on that.

I think the efficiency ratio guidance that we give should give you our thought process (technical difficulty).

Okay.

And switching to HSA, you guys had mentioned contribution limits could double in that industry.

Have you guys done any work around that as to what percentage of your existing customer base actually maxes out their contributions each year and then what might that actually due to profitability?

Yes, David, I don't have any information for you on that right now, but it is something we look at.

It is a smaller percentage of our portfolio, under the 5% range, that max out their contributions year over year.

And then extrapolating that to how many of those would actually max out if the limits double is the work we are analyzing right now.

Many of the ones that are maxing out now are also what we call the sweepers, where they move into investment accounts.

But the potential for the base overall, we are looking at those accounts that have a vintage of more than two years have an average balance of $6,500, think of the impact that could have.

Very, very significant.

Got you, got you.

So I guess from a contribution limit boost perspective maybe you don't see it as much of a needle-moving event there, but there are other potentials that could drive the needle more meaningfully.

Is that correct?

No, we think there is a big needle-mover there.

We haven't completely quantified it at this point, but that is a significant potential rocket boost to HSA deposits.

Got you.

But right now I guess there's less than 5% of your customers that are maxing out, is that right?

That's about right.

Okay.

Just switching to NIM, appreciate the color there for 1Q.

I was just wondering how you're thinking about the rest of the year and what kind of rate assumptions you're looking at this point.

We base our assumptions on the forward curve, so we are thinking a 25 basis point increase in June and another 25 in November right now.

We are thinking a 10-year swap goes from, say, 2.25% today up to 2.65% by the end of the year.

All that combined, I think we get the benefit going into Q1 of the lower amortization.

That is a big driver of the 7 basis point increase, about 3 basis points of that.

And then I think NIM will stay relatively flat, for a few quarters anyway.

So you've got the big bump in 1Q and then NIM stays flat for at least a couple quarters; is that --?

Yes, relatively flat.

I think what we are starting to see is we have more than -- what we are putting in the commercial book is exceeding the portfolio balance.

We are not yet there on the investment book.

We think by the end of the quarter or during Q1 the investment that we book will have a yield higher than the portfolio.

So things are starting to turn, but I think it's going to take a couple quarters to find its way through.

And where are reinvestment rates today for the securities book?

I think we're still at like a 2.65% on the investment book and the portfolio -- I would say 2.90% and the portfolio is about a 3%, so we are starting to close the gap there.

And like I said, during the quarter we should be good.

We expect the rates to be somewhere between the 2.90% and 3%.

If you look at (technical difficulty) during the quarter, Dave, we purchased at about 2.61% what came off as 2.93%.

So that gap is tightening.

Got you.

So 2.61% for the quarter, but then you're expecting 2.90% to 3%.

2.90% to 3% for Q1, that's correct.

Got you.

All right, thanks, guys.

Appreciate it.

Bob Ramsey, FBR Capital Markets.

Ted Beechley here for Bob Ramsey.

My first question is what is the expected impact of the HSA, specifically to any repeal of Obamacare?

I'll just say the HSA, a lot of people have been talking, actually on both sides of the aisle, that if there's any change that it will emphasize consumer-directed healthcare, which directly would impact HSA.

So HSA is seen as part of the solution in any kind of repeal or modification of Obamacare and that's one of the reasons that we think there's so much potential here.

I don't know if you heard our comments before, but we were talking about possibly expanding enrollment, possibly even including Medicare and Medicaid.

There are so many things that could happen that are positive as a result of the focus on the Affordable Care Act that it's a real positive for HSA Bank.

Thank you and it looks like all my other questions have been answered.

Thanks, guys.

Casey Haire, Jefferies.

Just wanted to follow up on the NIM.

Any deposit pricing pressures that you guys are seeing post the rate hike last month?

We didn't see any -- besides the government, which is -- public funds are always -- have a high beta, so you always see that; I think that's the whole market.

But we haven't seen it on the rest of the portfolio.

Okay, great.

And just, Jim, question for you.

I know you guys have been pretty consistent with an internally-focused message, but your currency is obviously a very strong one versus the group, which could create some interesting opportunities for you on the M&A prospects.

Just curious if that is of any increasing interest to the strategy given the strength of your currency today.

Actually I think we are being rewarded for focusing internally and focusing on organic growth and on the strategies that we have in place.

So on the one hand, we may be outperforming, but when we look for what our potential is for valuation based on the economic profits we are going to generate from the investments that we're making, there could be very significant upside.

We haven't changed our view.

We're focused internally on an organic growth -- I think we have some great opportunities -- and not really paying much attention to bank M&A.

Okay, understood.

Another big picture question for you, Jim.

On the HSA front, at what point -- I mean the growth is now starting to track some of the targets that you laid out at your investor day a couple years ago, ex the transition of course.

But at what point -- if we do get some continued acceleration in HSA, at what point do you guys look to sort of monetize the excess liquidity generated by HSA, be it in broker deposits or something else?

Sure, it's a great question.

Right now there is nice symmetry between the growth in the HSA deposits on the one hand and the commercial loan growth on the other, where we've got almost a perfect match there.

And our other businesses will be generating assets as well, so we could easily handle additional rate of deposit float.

But we do have the safety valves where, on the one hand, more investors may decide to sweep out so that would become off-balance-sheet items and we could encourage that if appropriate, and we also have the opportunity, as you know, to be able to bundle.

We think we are a ways away from having to consider that, that we easily could handle several billion more of HSA deposits, so that would be a decision we would be looking at down the line.

But a welcome one at that because it would be indicative of the rate of growth.

But I think you helped me make a very important point, which is that we are not constrained in any way in terms of our ability to invest in this business and to harvest the deposits that will come from.

Okay, understood.

Last one, Glenn, just to clarify on the tax rate guide.

I think you said 32.5% for the year, which implies -- with a 30% tax rate in the first quarter, we're looking at 33% in the remaining quarters for the year.

Am I calculating that correctly?

Somewhere around there.

I said between 32% and 33%, so you're right.

Okay, great.

Thank you.

Mark Fitzgibbon, Sandler O'Neill & Partners.

Since your commercial real estate to risk-based capital levels are so low and so many other banks in the Northeast are starting to ease up on their growth in commercial real estate, I'm curious if you perceive there to be a big opportunity for you all to ramp up the CRE growth in coming quarters.

Mark, it's a good question; it's John.

I think we think that opportunity may come, but truthfully we look at it each quarter and so far in 2016 and in the pipeline in 2017 we're not seeing it.

If you talk to [Bill Rang], what he would say is on the high-quality, strong sponsor transactions that we like to play in, there's still plenty of capital from a number of sources chasing those transactions.

So in terms of having a better probability to win or having more pricing leverage because of our relatively low level of CRE exposure versus capital, we've not really seen that come to fruition.

But, obviously, we feel going forward it's going to provide us additional flexibility.

Okay.

And then I know your regulatory capital ratios are well above well-capitalized levels, but given what sounds like the prospect of continued strong growth and the 45% rise in your stock price over the last year, do you think it might make sense to raise some additional capital in 2017?

I think we feel good about our capital levels and I think if you look out -- I guess what we have in the deck is the tangible common equity and the common equity Tier 1. We have excess, so we have the ability to grow, continue to grow our book at 100% risk-weighted assets.

So right now, Mark, we feel pretty good about we are.

We look at our capital stack, too, and so we -- as Jim mentions often, we are EP-driven.

And so we look at our cost of capital, and if you look at the capital stack, your common equity has an implied cost of 9.5%.

You have to measure that against other alternatives, whether it's sub debt or preferred.

We had those conversations, but we are in no need to do something right now.

Okay.

Then, lastly, I was curious; what was the asset that you sold that generated the $7.3 million gain in the quarter?

That was a savings -- SBLI or a savings bank life insurance company that we had received shares in the early 1990s on.

And they were two components to it: one was about 25% of the proceeds were in the form of the dividend and 75% were in the form of a capital loss.

In both cases we were able to offset the tax -- the dividend piece from the DRD reduction and the capital loss from a carryforward that we had.

So we were able to utilize those and book the whole gain almost entirely tax-free.

I think you will find some other banks have the same item.

Matthew Breese, Piper Jaffray.

Good morning, everybody.

Just quickly on new commercial loan yields, both CRE and C&I, how have those yields changed today versus pre-election and the rise in the yield curve?

As I mentioned in the comments, our yields have gone up marginally or modestly due to the interest-rate environment raise in LIBOR.

What's interesting, the underlying credit spreads -- we have seen stabilization over the last year and, as Glenn mentioned, in the commercial bank we're finally getting to that inflection point where the older vintage loans that are paying off and the new stuff that's coming on is sort of more in line.

We haven't seen any real change in credit spreads.

And if you look at all of our asset categories, they've been pretty stable over the course of the last, say, five quarters.

Any of the yield enhancements have really come from changes in LIBOR and obviously we think there is more opportunity there.

As I mentioned, specifically for us in the quarter, when we have payoffs and we are able to accelerate FASB fees, any certain quarters can be enhanced.

And we saw in the fourth quarter a significant uptick in our pre-pay mix which enhanced our yield.

Right, okay.

Then on the eight-branch consolidation plan, what is the expected cost base on that?

Absent the one-time charge in 2017, we think we save about $2.4 million in expenses.

We lose about $1 million or $1.2 million in revenue is our expectation in terms of deposit loss, and so the net gain is about $1.2 million in 2017 and then that increases over time.

Got it, okay.

Then the last one for me is really around PPNR and the HSA business.

Looking year over year, growth has been 2.8%, driving $56 million.

When do we see a ramp in that PPNR growth and what are your expectations for what it could be 2017 to 2018?

Let me just comment that we did cover this in the general comments in the call.

We indicated the level of investment that we are making and the fact that we accelerated investment, so the expenses were running higher than you might've thought.

We expect that to level out sometime in 2017 and to start to ramp and see the unit cost benefits by the end of the year.

That will be augmented by the seasoning of the accounts, including the 1.4 million accounts we have right now that have balances of less than $2,000.

So you get a combination of the revenue growth and then the unit benefits on the expense side that should start to push that up in late 2017.

We will continue and increasingly benefit through the balance of the planning period through 2019 and I don't see why it wouldn't just continue beyond that.

The only thing I would add is that bear in mind that we did change the duration of the deposits from 2015 to 2016, so that in and of itself -- and the rate curve was lower.

So that, in and of itself, on a quarterly basis is worth about $2 million.

If you look annually, let's say round numbers $8 million duration, that would change that year-to-date PPNR from 2.5% up to 18% alone.

And that was something that we arrived at internally; that was an internal mechanism that we adjusted.

Okay, that's all I had.

Thank you.

Matthew Keating, Barclays.

Thank you.

Just sticking on the HSA Bank PPNR trends, I appreciate all the detail you provide around that business in the slide deck, but was hoping that you could disaggregate the $12.5 million in pre-provision net revenue between net interest income, fee income, and noninterest expense, similar as you do in your quarterly 10-Qs and 10-Ks for the fourth quarter.

Thanks.

I can come back to you on that and give you the details.

But it will be in the Q.

It will be in the Q, absolutely.

Okay, that's fine.

Then maybe for Glenn, the NIM expansion of 6 basis points for the first quarter, it's a bit higher than some of the banks have guided to at this point.

So what's the principal drivers there?

Is that going to be coming more from the securities portfolio or do you think loan yields will be rising?

Just a little bit more color on the principle drivers would be helpful.

Sure, so here's the way we look at it.

The securities portfolio, you're right; CPRs go from 16 to 11.

That's our forecast right now, so that's worth about 3 basis points.

I think the combination of CRE and C&I and home equity loans probably add about 5 basis points.

So CRE and C&I are primarily LIBOR-driven, so this would mean that we [don't] see any increase there.

Then in home equity we see the prime increase as well.

And then partially offsetting that would be higher borrowing costs and that would probably take away around 2 basis points.

Then potentially we talked about the government deposits going up.

So I think those are the ins and outs.

But I think you're right; it's about seeing about 3 basis points in the securities portfolio and the rest on the commercial and resi portfolio, home equity.

Thanks, that's helpful.

And maybe a final one for Chad.

I know it's hard to speculate on potential changes to the Affordable Care Act and how that impacts the HSA Bank's business unit, but I guess if there were wholesale or large-scale changes as part of that reform, how do you feel the business is positioned to adjust to that?

Essentially would there be capacity constraints if there is a large-scale change, in terms of whether it's contribution limits rising or including different individuals that are included into HSAs?

How do you think the business might respond and what do you think the competitive dynamic, mainly the industry response, might be; as well if you think some of the bigger banks would get back into that business if there were wholesale changes to the current legislation?

Thanks.

I think we are very well-positioned and probably as well-positioned as anybody in the industry to take advantage of that type of expansion.

And as we have been talking for most of the morning, the investments that we are making in the business today are about being in a position to scale and grow effectively going into the future and to be able to compete more effectively against every -- all of our competitors in the industry.

So not only are we in a good position today, but that's where all of our energy and investment is going is to make sure we can take advantage of that kind of opportunity as we go forward.

I think as -- this is not the kind of investments we're making.

This is not an easy business to enter.

It takes a lot of investment; not just the investment in technology tools, resources, and so on, but you also need to be able to enter the market and sell into it.

You need to position yourself with consultants and health plans and employers and build a reputation, so it's very difficult for anyone to just kind of jump in without acquiring an entity as part of that entry.

Understood, thanks very much.

Ladies and gentlemen, that does conclude our question-and-answer session.

At this time, I would like to turn it back to Mr. Jim Smith for closing remarks.

Thank you, Audrey, and thank you all for being with us today.

Have a good day.

This concludes today's conference.

Thank you for participation.

You may disconnect your lines at this time.