Webster Financial Corp (WBS) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Webster Financial Corporation's Fourth Quarter 2017 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 Financial's condition, results of operations and business financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the fourth quarter of 2017.

I will now introduce John Ciulla, President and CEO of Webster. Please go ahead, sir.

Thank you, Michelle, and good morning, everyone. Thank you for joining Webster's Fourth Quarter 2017 Earnings Call. CFO, Glenn MacInnes, and I will review the quarter; and then HSA Bank President, Chad Wilkins, will join us to take questions.

We continue to make significant progress against our key strategic initiatives, aggressively growing HSA Bank, expanding our Commercial Banking activities and optimizing and transforming Community Banking. And as we look forward, we remain optimistic for Webster's continued growth and strengthening financial performance, both as a result of our differentiated businesses and because we see a favorable operating environment in 2018. While the various impacts of tax reform on our business, both positive and negative, are not yet fully quantifiable, we do know that profits and our return on capital will be higher in the near term.

In addition, with forecasted global economic growth, an improving interest rate environment, a more favorable regulatory landscape, record-low unemployment and anticipated modest inflation, we are confident that we will continue to deliver significant value to all of our stakeholders, as we are able to increase and accelerate investment in our businesses, employees, customers and communities. Consistent with our established management framework, our investments are guided by a disciplined approach to capital allocation and made in furtherance of maximizing economic profits over time.

Our fourth quarter results were impacted by the passage of federal tax legislation and other significant items, including payment of a onetime bonus to approximately 70% of our full-time employees below the level of -- full-time employees, all of which were disclosed in our 8-K filing last week. Glenn will provide additional perspective in his remarks.

I'll begin on Slide 2. Our underlying business performance continues to generate strong results. In Q4, adjusted earnings per share of $0.71 reflect record levels of net interest income, which allowed us to earn in excess of our cost of capital for the third consecutive quarter and, importantly, for the full year.

Continued loan growth and a 22 basis point year-over-year increase in the net interest margin led to our 33rd consecutive quarter of year-over-year revenue growth. For the full year 2017, total revenue exceeded $1 billion for the first time in Webster's history.

Our favorable deposit mix and ongoing deposit pricing discipline have resulted in a deposit beta of 7% over the past 2 years relative to the 101 basis point increase in the average fed funds rate. We had positive operating leverage in Q4, and our efficiency ratio was below 60% for the second consecutive quarter.

Credit trends remained stable, with nonaccrual loans declining by $37 million or 23% linked quarter. While charge-offs increased in the quarter, the majority of the nonaccrual loan decline came from favorable resolution of problem credits and pay-downs.

Turning to Slide 3. The strength of Webster's deposit growth over the past year has funded all of our loan growth and a significant amount of the reduction in borrowings. The transactional deposit categories of demand, interest checking and health savings accounts have provided more than $1 billion of the $1.7 billion of total deposit growth over the past year. And our strong deposit growth has enabled us to maintain a loan-to-deposit ratio under 90% for 35 consecutive quarters.

I'll now turn to the line of business performance on Slide 4. Year-over-year, Commercial Banking's loans grew 2.8% on a spot basis and 5.7% on an average basis, generally consistent with slower industry loan growth. Full year payoffs contributed significantly to slower portfolio growth and were 28% higher in 2017 than they were in 2016.

Loan growth across segments of the commercial bank varied considerably. While investor CRE was down 3.7% and equipment finance balances were down 13% when compared to 12/31/16, our middle-market C&I business, which includes our differentiated sponsor and specialty business, posted year-over-year loan growth of 13%. Despite modest loan growth, Commercial Banking revenues increased more than 8% on higher noninterest income across all categories, including cash management and net -- as well as net interest income growth.

Consistent with our continued strategic expansion, expenses in the business line grew 15% year-over-year. We are confident these investments in people and treasury and payment technology will continue to drive future revenue and PPNR growth. While Q4 PPNR for the line of business grew 4.4%, we've continued to manage our internal Commercial Banking annual revenue and PPNR growth targets to 10% over the 3-year planning horizon.

Turning to Slide 5. HSA Bank delivered another strong financial quarter. Revenue increased 26% from a year ago, while expense growth was 15%, resulting in pretax net revenue growth of 47% in the quarter. Our planning horizon PTNR growth target for HSA Bank remains at 30-plus percent. Revenue growth was led by net interest income, which increased 35% from a year ago, as a result of increased deposit balances and a higher net credit rate on HSA Bank's deposits.

End-of-period accounts at HSA have increased by 370,000, or 18% from a year ago, while total footings have grown by more than 1 billion or 20% from a year ago. Notably, more than 1.8 million of our almost 2.5 million HSA accounts currently have an average deposit balance of less than $500. This underscores a significant growth opportunity for HSA Bank, as average deposit account balances build over time.

The first quarter of each year is the seasonally strongest quarter for HSA Bank in terms of account and deposit growth. Our investments in sales and relationship management are beginning to pay off, with solid increases in the number and size of new employers and new account growth through our direct channel. This bodes well for our long-term growth prospects as we continue to expand our universe of HSA-eligible employees.

January month-to-date overall new account growth is tracking behind last year due to slower-than-expected enrollments in our TPA and health plan partners channel. On the deposit side, net deposit growth is up $411 million month-to-date, which is slightly ahead of last year at this point.

Moving to Slide 6. Community Banking continued its solid performance and progress along its transformational road map with fourth quarter PPNR growth of 23% compared to a year ago. Revenue growth of 4% was led by net interest income as a result of growth in loan and deposit balances, coupled with improved spreads.

Expenses declined by $2 million as a result of 9 fewer banking centers compared to a year ago and lower direct marketing expenses in the quarter. We expect to see increased expenses in Q1 from the return to a more normal level of marketing expense, along with the customary seasonality in payroll taxes and other items. Our planning horizon PPNR growth target remains in the 5% to 7% range for Community Banking.

Deposits grew by 5% year-over-year, driven by growth in high-value consumer Premier Checking accounts and in small business deposits. Loan balances overall grew by 3%, with business loans and mortgage loans growing by 8% and 2% year-over-year, respectively. Investments, assets under administration grew by 13% from prior year, with revenue from this business increasing almost $1 million compared to Q4 of 2016.

With that, I'll turn the call over to Glenn.

Thanks, John. Slide 7 provides highlights of Webster's average balance sheet. Average loans grew just under 1% linked quarter, at the low end of our guidance, but in line with industry trends.

Deposits were relatively flat linked quarter, as seasonality in public funds was offset by HSA Bank and consumer deposits. Compared to a year ago, deposits have grown by $1.7 billion, or almost 9%, with $700 million of the increase from HSA Bank. Deposit growth funded all of our loan growth and a vast majority of our $1.2 billion reduction in borrowings versus prior year.

With an average short-term borrowing cost of 133 basis points during the quarter compared to 33 basis points on deposits, the pay-down of borrowings provided a net benefit of $3 million. Borrowings now represent 9.6% of assets compared to 10% at September 30 and 15% a year ago. The linked-quarter increase in borrowings funded loan growth. With Q1 being HSA Bank's strongest deposit-generating quarter, we anticipate that the average borrowings will come down further.

As seen on the bottom of the slide, our loan-to-deposit ratio of 83.5% remains favorable relative to regional peers and the industry, and provides us with a competitive advantage. The common equity Tier 1 and tangible common equity ratios continue to improve, supported by the quarter's solid earning performance. And tangible book value per share continued to increase, ending at $21.59 per share for growth of 8.3% from a year ago.

While our capital levels increased, we anticipate higher levels of asset growth going forward. As we continue to evaluate the full business impact of tax reform, we expect to maintain a dividend payout ratio in the range of 40% to 45%.

Slide 8 summarizes our Q4 reported GAAP income statement. Reported net income of $69.9 million corresponds to the reported EPS of $0.73 per share, as John's first slide highlighted. The tax rate of 19.6% primarily reflects the net benefit of $7.8 million from federal and state tax adjustments, as announced in our 8-K last Thursday.

Slide 9 outlines the adjustments to our reported net income. The corporate tax rate reduction included in the federal tax reform reduced the value of our federal deferred tax assets by $20.9 million, as the deferred tax asset was revalued at a rate of 21%. This reduction was offset by an increase of $28.7 million in the value of our state-deferred tax assets, driven by our revised tax planning. This included a review of our multijurisdictional state and local tax structures and related business expansion and growth plans, allowing us to utilize net operating losses that were previously not expected to be realized.

The $3.8 million of preferred redemption cost is not deductible for tax purposes, due to it being related to our capital structure. And the $2.6 million cash payment to employees is tax-affected, representing $1.7 million after tax. All 4 items net to a reduction of $2.3 million, resulting in an adjusted net income of $67.6 million and an EPS of $0.71 per share.

On Slide 10, we provide an adjusted income statement. Revenue growth was led by net interest income growth of almost $20 million from a year ago or 10.6%. This was driven by a 22 basis point increase in net interest margin and interest-earning asset growth of $709 million. In the quarter, net interest income grew $4 million, and NIM increased 3 basis points, both consistent with our guidance.

Noninterest income was flat linked quarter, as we had expected. Reported noninterest income is down from prior year, as it included a onetime $7.3 million gain on the sale of an asset. Absent this, our noninterest income grew 4.4% year-over-year.

Adjusted noninterest expense was up $2.8 million or 2%, both linked quarter and year-over-year. Both reflect increases, driven primarily by HSA Bank and higher compensation and benefits, which were partially offset by lower occupancy expense. The net result is an adjusted PPNR of $106.3 million, up 13% from prior year.

Provision expense was $13 million in Q3. Our Q4 adjusted tax rate was 27.6%, lower than our expectation, as a result of a discrete tax item during the quarter. Our adjusted net income was $67.6 million, up 5% from prior quarter and 17% from prior year.

At the bottom of the slide, you see our efficiency ratio of 59.5% for the quarter, an improvement of 365 basis points from a year ago.

Slide 11 provides additional detail on net interest income. Our $4 million linked-quarter increase reflects a 5 basis point increase in the yield on interest-earning assets, while the cost of interest-bearing liabilities increased just 1 basis point, resulting in a 3 basis point improvement in net interest margin to 3.33%.

The 22 basis point increase in NIM year-over-year reflects a 29 basis point increase in the yield on earning assets and a 7 basis point increase in the cost of liabilities. Both results reflect the benefits of our improving asset mix and asset sensitivity profile in this rising rate environment.

Looking at the linked quarter, the loan portfolio yield increased 6 basis points to 4.2%, while the securities portfolio yield increased 3 basis points to 2.95%. The 1 basis point linked-quarter increase in the cost of deposits reflects our ongoing pricing discipline and favorable deposit mix.

Slide 12 highlights noninterest income. Linked-quarter noninterest income was flat, as we had anticipated. Adjusted for prior year's $7.3 million onetime gain, noninterest income is up $2.7 million. This was primarily driven by HSA Bank, which realized a year-over-year increase of $2.2 million as a result of business growth. The increase was led by account fees, along with interchange revenue. The growth in each reflects 370,000 more accounts. Interchange revenue and debit transactions both increased by 14% from a year ago.

Slide 13 highlights our noninterest expense trend, which had a linked-quarter and year-over-year increase of $9.2 million. The preferred redemption and onetime employee cash bonus represented 70% of the increase, totaling $6.4 million relative to each period.

Linked quarter, HSA represents $1.7 million of the total increase. The remainder is from strategic hires and medical expense, partially offset by lower occupancy expense. Year-over-year, HSA Bank represents $3.7 million of the increase. And again, the remainder is from strategic hires, medical expense, which are partially offset by occupancy expenses.

Slide 14 highlights our key asset quality metrics. Nonperforming loans, highlighted in the upper left, decreased $37 million from September 30, primarily due to the resolution of 3 commercial accounts. NPLs of total loans remained at historical lows with a rate of 72 basis points compared to 94 basis points in the prior quarter and 79 basis points in the prior year.

Net charge-offs increased $7 million from Q3 to $14.8 million, with substantially all the increase in commercial. All other charges are situationally specific and not indicative of any specific themes or trends. The provision was $13 million and resulted in coverage of 114 basis points.

Slide 15 provides our outlook for Q1 compared to Q4. We expect average loan growth to be in a range of 1% to 2%. We expect average interest-earning assets to grow approximately 1%, as securities remain relatively flat. We expect NIM to be up 5 to 7 basis points. This projection incorporates a 25 basis point fed rate hike in late March, which has a positive impact of 1 basis point. We expect the FTE adjustment to be about $2.2 million in Q1 compared to $4.4 million in Q4. The lower amount for the FTE adjustment in Q1 results from a lower federal statutory rate in 2018.

Given our earning asset and NIM expectations, we expect net interest income to increase between $5 million and $7 million. Noninterest income is likely to be approximately $1 million to $2 million higher, driven by HSA Bank and commercial activity. We expect the efficiency ratio to be around 60%.

Our provision will be driven by loan growth, portfolio mix, net charge-offs and our portfolio quality. We expect our tax rate on a non-FTE basis to be approximately 21%, which, of course, takes into account the new lower corporate statutory tax rate. And lastly, we expect our average diluted share count to be approximately 92.5 million shares.

I'll now turn things back over to John for his concluding remarks.

Thanks, Glenn. 23 days ago, I became Webster's third CEO in its 82-year history. Every day represents for me an opportunity to work with our almost 3,500 talented and dedicated bankers across our expanding footprint. It's also a competitive advantage to be able to leverage the cultural foundation established by Harold Webster Smith in 1935 and built upon masterfully by my predecessor, Jim Smith.

Our people, our culture and our differentiated businesses give us confidence in our ability to implement our focused strategies to provide great service to our customers and to deliver increasing shareholder value over time.

We'll now open it up for questions.

(Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JPMorgan.

I wanted to start on expenses. So if we look at 2017, expenses were higher, given the investment pace, particularly around HSA Bank, and I see that you're maintaining the 60% efficiency ratio guidance. Can you help us think about expense growth in 2018?

Yes. So I think, Steve, the guidance that we're giving is relative to Q1, obviously, and that includes the impact of primarily a lot of onboarding activity in HSA. So if you look at the guidance of 60%, included in there is about $3 million of additional expense in HSA quarter-over-quarter, as they have more ongoing onboarding cost, whether it's staffing or collateral. And then, also, going into the first quarter's additional marketing, we're basically dark in some respects on the marketing standpoint, and that'll increase about $1 million going into Q1. And in commercial, we continue the expansion there, whether it's in technology or additional hires, and that's probably worth about $1 million going into Q1 as well.

Glenn, when you think about the lower tax rate and the capacity that it will give you, does that impact your thoughts around -- or maybe for John, too, accelerating some projects or maybe building the expense level in 2018?

I mean, it does, Steve. We're 30 days into this now in terms of exploring what the tailwind and the headwinds are. So we've been doing a lot of work on capital management planning, thinking about where we can accelerate and increase investment, always being careful, as you know, to remain disciplined to our philosophy of making sure that we're putting capital on expense in areas that can maximize economic profits, return in excess of the cost of capital. So I think it'll provide us some additional flexibility. And so when we think about investments or we think about dividends or we think about everything that we're doing from a business perspective, I think we're going to be working through that over the next quarter. And we really also need to see what headwinds the tax legislation might have in some of our businesses, particularly in the states we operate, higher tax states, what might happen with respect to mortgage demand, loan demand and other elements. So the answer is, yes, I think we think we'll have more flexibility, but we've been intentionally not specific on this call to signal what our decisions are.

Okay, that's fair. John, when we think about the loan outlook, so period-end loans were up only 3% year-over-year. You talked about some of the offsets. And I know, Glenn, you're guiding to the average being up 1% to 2% in the first quarter, but how should we think about full year loan growth this year?

I mean, I think if you look at what Glenn's doing for the first quarter, which is a seasonally usually slower quarter, and you think of that as kind of a baseline and roll that out. So maybe there's a little bit of improvement during the course of the year. We did have a bunch of interesting impacts to our loan growth. If you look at our loan growth across both consumer and commercial categories for the full year 2017, we're almost right on top of the all commercial bank Fed H.8 data with respect to growth in 1 to 4 family, in home equity, in C&I and in real estate. But obviously, we're never satisfied with that because we have a history of outperforming the market with respect to loan growth. The story for '17 for us was really around Commercial Banking and 2 elements: A significant higher level of prepays, which I mentioned in my remarks, 28% higher in 2017 than in 2016, we think that's because in our sponsor business, a lot of private equity sponsors were selling their businesses and looking for liquidity and transactions; and there was more competition from debt funds as their cost of funds was relatively low, and there were new competitors into our market. The other thing was, as you know, our commercial real estate, we were actually down spot-to-spot end of 2016 to 2017, which is the first time since I've been here that that's happened. I think it had to do with risk selection and competition. So I think if you take those 2 isolated drivers to mute our loan growth a little and realize that we were still at the market with respect to loan growth, it gives us optimism going into 2018 that we can return to above-market loan growth.

Okay. Maybe if I could squeeze one more in, just on HSA Bank. Chad, can you give us some color how the 1Q enrollment season is shaping up so far?

Chad, why don't you go ahead and take that?

Yes. Okay, Steve. So we're really pleased with the number of employers and the size of the employer groups that we're seeing in the enrollment season. And it reflects where we've been focused in terms of our sales and marketing investments. We're a little disappointed in the enrollments in accounts. It's tracking slightly behind last year at this point, but it's still very early in the quarter. So it's too early to call how that's going to play out for the rest of the quarter and the rest of the year. The good news is, is we're -- yes, the first mission is expand your population of eligible employees, we're going to eventually be able to enroll in HSAs. The second is get them enrolled. And that you do see fluctuations in enrollment trends from year-to-year, but we can't really pinpoint any changes at this point.

Our next question comes from the line of Collyn Gilbert with KBW.

Maybe, Chad, just to follow-up on the HSA comments. Just in terms of a little bit disappointment on the enrollment activity within the accounts, do you have any thoughts as to why that's happening or what could be going on there?

Yes. Collyn, the -- we're seeing some -- we've seen some trends over the year and some data points that lead us to believe there might be a little bit of a slowdown in CDHP enrollments, employers moving to full replacement and that type of thing. So -- but again, it's too early to tell. We're going to have to look at -- as folks report their enrollments, both health plans and HSA competitors out there. It's too early to call any trends, but we are seeing -- in our own channels, we're seeing pretty good growth in our direct-to-employer channels, where we're focused the most, and where we have the most influence over the sales process, and a little bit slower in the health plan and TPA channels.

Okay, okay. Does that affect how you're thinking about growth for the year? I know you guys kind of shifted to talk more about HSA footings, which includes the investment accounts, but how we should think about the growth trends for 2018 within the business.

Chad, I'll let you put some more color on it. But obviously, I mean, I think what we're saying, Collyn, is that we know that the first quarter has an impact significantly on the full year, and we're slightly behind at this point. But I think there's a lot of time to go still in the enrollment period. So I think we're hesitant to move away from our expectations for the full year. But Chad, you can give some more color.

Yes, that's it, John. I think it's -- we're a couple of weeks into the year, so it's a little early to forecast how it's going to play out through the quarter and to the end of the year. That said, I think yes, we're managing the business to the trends that we communicated in -- at Investor Day. And the good news is, as you expand that eligible population, and then our focus is really moving them to HSAs and having them grow their balances. So we're excited that we're continuing to grow the eligible population.

Okay, that's helpful. And then just housekeeping, just want to understand, the drop in fees on a linked-quarter basis, is that -- is there something in particular that went on there within the HSA -- HSA fees?

Yes, it is seasonal. It's interchanged. It's about 400,000 quarter-over-quarter. But if you look every fourth quarter, their spending volume is generally higher in the first couple of quarters, and then it trails down. So it'll pop back up in Q1.

That's right. Okay, sorry. Okay. And then, sorry, Chad, just back to the HSA then. Just thinking about expense growth for the year for the business, any update there? I mean, I know, obviously, 2017 was a big investment year. Is the plan still to kind of have accelerated investments within the HSA business?

I could start that, Chad, if you want. We continue to invest in the business. I think, Collyn, as I highlighted, you'll see a pop in expenses as we go into the first quarter, which is primarily onboarding and collateral, things like that. But the initiatives that Chad outlined in the last couple of quarters, whether it be operational excellence or expanding the sales force or end-to-end sort of seamless processing, are still ongoing. So I think we continue to invest in this business.

Yes. And Collyn, I would just say, from the top of the house, we've made a commitment, obviously, to continue to aggressively grow HSA. So where we see opportunity, we're not going to limit ourselves by not investing. We're excited that we're seeing great PPNR growth and some operating leverage in the business, but we'll continue to invest where we see opportunity to capture more share and strengthen the business overall.

Okay, okay. That's helpful. And then, Glenn, just a question for you on the NIM. Sorry, I know, obviously, linked quarter, you said 5 to 7 basis points. How are you thinking that kind of breaks down between asset yield and on the funding side? I know you -- the trend where you have lower borrowings coming in, in the first quarter just because of HSA, but just trying to think about the first year and the first quarter impact, and then how that may roll through the rest of the year.

Yes. So if we look at the first quarter impact, I think the bulk of that, the NIM expansion is coming from loans, I'd say, 9 basis points. And then you have another 2 basis points that come from the influx of HSA deposits, paying down borrowings. So call that 2 basis points. And then there are some offsets on the securities portfolio yield. You'll probably see that go down in part as a result of tax reform and a lower -- the lower yield on munis, as an example. So those are the 3 key drivers. There's some -- whether it's savings rates or things like that, they're smaller numbers. But that's really how you get to the 5 to 7. And then as you go forward, as we see rates, I mean, I think we continue to see NIM expansion as we go quarter-to-quarter. We have now -- we're factoring in a March increase and a September increase. And so to the extent we get that, we'll continue to see NIM expansion. And I think it will really highlight the value of the HSA business as well, where you know the elasticity is at the low end of the range.

Our next question comes from the line of David Chiaverini with Wedbush Securities.

So I wanted to ask a follow-up on HSA first. So do you think this is an overall market growth slowing issue? Or is HSA Bank kind of losing market share to other players in the space?

Chad, do you want to take that one?

Yes. Thanks, David. I would say that the -- one, it's too early to tell from a market standpoint. We're going to have to -- we're tracking the trends and analyzing what we're seeing pretty closely. But we are seeing some evidence that enrollments in [high deductible] health plans are slowing. And one of the big stats that that is reported is the full replacement, large employers going full replacement HSA. The percentages have kind of dropped down throughout the year. We haven't seen the impact translate dramatically to us at this point. But this year, we're starting to hear a little bit of market noise that CDHP health plans and/or HSAs associated with them are slowing down a bit. But again, it's too early to tell because we're very early in the quarter. And the other point I'd say is that we're seeing, within our own portfolio, the percentage enrollment trends are changing. So we added more employers, we're up close to 20% in the number and over 20% in the size, but the percentages of enrollments are slowing. So I don't think we're losing market share, I think we're just seeing some shift in enrollment percentages and timing as well.

Okay. And then shifting gears to deposit growth. I know your average earning asset guidance is about 1%, and you mentioned about paying down some of the borrowings. But could you give -- update us on the outlook for deposit growth and the footprint, and then also an update on the Boston expansion?

So I'll start with the borrowings that we think we have continued opportunity to reduce our borrowings. We have a couple of upcoming maturities that will obviously roll off, but we think that our borrowings balances could go as low as $1.6 billion or somewhere around 5% or 6% of assets. And when we look at it, the bigger influx is from HSA during the first quarter, and we'll be able to utilize that to pay down borrowings. As far as the Boston franchise...

Was the question specifically on the Boston franchise? Or was the question on overall deposit growth?

A question of both, the overall footprint, and then Boston. I know HSA deposit growth has been pretty strong, but curious about the overall footprint as well as Boston.

Sure. I mean, we've had good, solid deposit growth, both in Community Banking over the past year as well as in Government & Institutional, which is our largest deposit gather in Commercial Banking. And I think we still have kind of a high single-digit expectation in terms of overall non-HSA deposit growth over time. In Boston, I think we report that we are still on plan to achieve our goal of $1 billion in new deposits over the 5-year period and another $500 million in loans, and we're on track to do that. So we're seeing good deposit growth in Boston. The issue in Boston has been the cost of deposits because of fierce pricing competition that we're seeing that's different than the rest of our franchise. But we have good, steady expected deposit growth in the core franchise.

I think to put a finer point on it, as we look out, you would expect both noninterest-bearing deposits and interest-bearing deposits to be growing in the rate of around 6% on an annual basis with a -- and then HSA on top of that growing at double-digit.

And if you have it at your fingertips, do you have the Boston deposits handy?

$425 million, 2 years in, yes.

Our next question comes from the line of Jared Shaw with Wells Fargo Securities.

This is actually Timur Braziler filling in for Jared. Most of my questions have already been asked and answered, but maybe just looking on the lending front. Can you guys provide us an update on how some of the new geographies have been performing, so the office in Philly and D.C., and what the expectation is for growth kind of out of the legacy northeast markets versus some of the newly entered spaces?

Yes, it's a great question and a good quarter to answer that question. We've continued to see trends where our major metro markets, outside of our core Connecticut franchise, are growing at a faster rate. And I can say, specifically, with respect to 2017 and the fourth quarter, our middle-market activities in New York have really taken hold. And that was, from a middle-market regional perspective, our best-performing region over the course of 2017 and towards the end of the year. We also had great momentum. We had a good fourth quarter in commercial real estate originations despite the weakness in the prior quarters, and that came largely in Washington, D.C. and Philadelphia. So I would say Boston is still performing solidly, and we're seeing good growth in New York, Philadelphia and D.C. across asset categories. And so we are doing well, and we continue to be very strategic in our thoughts and adding people selectively in those markets as we continue to get momentum. So we're pleased with our geographic expansion. As you know, we're in Atlanta and Chicago in asset-based lending. We're getting some traction there. There are no robust plans to add any other particular geographies early in 2018, but we continue to look for opportunity.

Okay. And is all that production still being done by the same kind of capacity? Or have you been adding either additional LPOs or personnel to those new businesses and lines?

Yes. This year, interestingly, we haven't added robustly to those new markets, and we're sort of just getting up to capacity. We've been in the markets for somewhere between 2 to 5 years, depending on whether you're in New York, Philadelphia or D.C. So I think we'll look to selectively add revenue-generating people. But we're putting all the credit underwriting, the processing and the portfolio management through the existing platform, and then we'll look selectively to add revenue producers, and then follow on with additional support staff after that.

Okay, that's helpful. And then just lastly from me, just looking at the uptick in net charge-offs during the quarter, the increase in the CRE and then the linked-quarter increase in asset-based lending, were those in footprint or were those out of the new markets?

We don't talk specifically about the specific credits. You're right to identify a modest ABL charge. It had some unique circumstances. And then there was a slightly larger commercial real estate charge on a 10-year-old loan with a sponsor we had done business with for a long time. And as Glenn said, there really aren't any correlated risk aspects to those charge-offs with the rest of the portfolio. They're not in challenged industries or in challenged geographies. They're really borrower-specific, and that's what we can report to you now.

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

Just going to sensitivity around the margin. Perhaps, if we do not get a fed hike in March, should we expect the margin to continue to increase, expand? I think you said that HSA growth should continue to wind down borrowings, perhaps, to the tune of 2 basis points. Would that be more or less the range of margin expansion if we don't get that fed hike in March?

So Matt, if I look at our base case scenario, it says fed hike in March and one in September. So your fed rate would end the year at 2%, and your 10-year swap, we think, would go up to like, say, 2.65% to 2.70%. And that's been volatile lately. If I look at that, and then I say where we are today, and if we just kept rates flat, you would expect to see NIM compression 3 to 4 basis points in Q2, same in Q3. And then for a full year basis, you'd probably be about 5 basis points below if rates stayed where they were. On the other side of it is our base case scenario has NIM expansion quarter-over-quarter.

Okay, okay. And then turning to HSA again, on the expense front, maybe we could just talk about the efficiency of that business. It sounds like with the first quarter enrollment, it might stay north of 60%. I was just curious, I know we've talked about improvement on the efficiency front in that business. Where could it trend throughout the remainder of the year, do you think?

Right, I think despite the fact that we continue to invest in the business, a lot of it's going to be dependent on the movement in the rate curve because they have relatively a low beta. And so they'll be able to harvest a lot of spread as rates begin to increase, and that should offset a lot of the investment on expenses. So all things considered, I think -- we think that the efficiency ratio would probably continue to nudge down.

Okay, okay. And then one item that has been particularly strong for you has been the occupancy item. With some branch closing, it's down meaningfully since the midpoint of the year. Could you give us a sense for what's to come in 2018 as far as branch and occupancy costs go? Is the [$13.5 million] a good run rate? Or can we see it compress?

Yes. I mean, as we mentioned consistently on the calls, Matt, we continue to look at our footprint for opportunities to be more efficient and meet changing customer needs. We closed 9 branches in the course of 2017. We've identified a handful more banking centers that, later in the first quarter and the second quarter, we'll likely make a public announcement on. So we continue to rationalize the footprint, not with just a sure desire -- the sheer desire to close banking centers, but to make sure our banking centers are in the right locations, that they're the right size, and that we've got the right coverage and density in our footprint. So I think you'll continue to see us make progress in reducing square footage across the footprint based on location, square footage, being able to sublease in some of our larger banking centers. So all of that activity will continue, and you'll likely see more of that in the first half of 2018.

And just on a GAAP basis, you might see a pop as we exit some of these facilities as well. And we'll -- obviously we'd reclass that for efficiency purposes. But you might see, if you look at the press tables, for example, ins and outs there. So the line itself, you might see some pops.

Our next question comes from the line of Casey Haire with Jefferies.

Glenn, I wanted to touch on the fee guide up $1 million to $2 million in the first quarter here. What are some of the drivers there?

A big driver of that is HSA and deposit service fees as we onboard additional new accounts and we get both monthly service charges and interchanges. So you come back beginning in the first quarter as well. So that's a big driver of that.

Okay, great. And then just sort of...

I'm sorry. There is more commercial activity, as I said in my script as well. But I would say about 2/3 of it is HSA, 1/3 in -- of commercial.

And we had -- just to [put it into another] context, we had unusually low levels of swap income and modest syndication fees in 2017 in Q4 compared to prior year. So we think that we can make some improvement on those commercial categories as well.

Okay, great. And just sort of a longer-term question on the liquidity profile. The loan-to-deposit ratio continues to grind higher. It sounds like the near-term strategy is to continue to pay down borrowings. And Glenn, if we -- I think you mentioned it's $1.6 billion is probably where you'd want that to settle, which is not all that far away from where we are today. What is -- if the liquidity ratio continues to grind lower, what would be the strategy for that liquidity once the borrowings kind of level out at that minimum that you guys talked about?

Well, we think we feel optimistic about our loan growth to start with. Let me just -- the loan-to-deposit ratio has grinded lower, so at 83.5%. But we think we -- given our outlook, we think we feel good about where loans will grow and the outlook for the year. And then right underneath that would be securities, which we use to manage our risk-weighted asset profile and our asset sensitivity. So we might take a little more duration on the investment portfolio. But we think the loan-to-deposit ratio should continue to be in a range of 83% to 84%. That's where I would peg it.

Right. Okay. So you do think the loan growth does bounce back this year?

Yes.

Okay. And just one last one, a housekeeping on the -- sorry if I missed this, but the FTE adjustment, where does that settle from the $4.4 million under the new tax...

So that was $2.2 million. It's about half -- it goes -- it's about half, given the new [law].

Our next question comes from the line of Dave Rochester with Deutsche Bank.

This is actually Meng Jiao calling on behalf of Dave. Just a couple of quick questions. What were, I guess, securities reinvestment rates now versus where they were in the quarter?

So our reinvestments, I have that here, reinvestment at 3%. That's going into Q1.

Got you, okay. And then, I guess, on securities premium amortization, I think, in Q4, you mentioned there was a -- it was about $1.4 million higher. What were they for fourth quarter?

Let me just backtrack on your first question. So we purchased about $515 million in the fourth quarter at 2.95. And what came off was about $450 million at 3.26. So that gives you a sense of the churn in the portfolio. The reason the yield is up is because we had lower amortization expense on lower CPRs in the portfolio. So the CPRs came down from like 13.5 to 12 and resulted in about $1 million in lower amortization cost. I want to make sure you have that. And your next question?

That was actually -- you answered my question.

I got them all?

Yes.

There are no further questions at this time. I would like to turn the call back over to Mr. Ciulla for any closing remarks.

Thank you very much, and thank you, everyone, for joining us. Have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.