Webster Financial's (WBS) CEO Jim Smith on Q4 2015 Results - Earnings Call Transcript

| About: Webster Financial (WBS)

Webster Financial Corp. (NYSE:WBS)

Q4 2015 Earnings Conference Call

January 21, 2016, 9:00 am ET

Executives

Jim Smith - Chairman & CEO

Glenn MacInnes - CFO

John Ciulla - President

Joe Savage - Executive Vice Chairman

Analysts

Steven Alexopoulos - JPMorgan

Timur Braziler - Wells Fargo

Collyn Gilbert - KBW

Martin Terskin - FBR

Dave Rochester - Deutsche Bank

Mark Fitzgibbon - Sandler O'Neill

Casey Haire - Jefferies

Matthew Kelley - Piper Jaffray

Bernard Horn - Polaris Capital

Operator

Good morning and welcome to Webster Financial Corporation's Fourth Quarter 2015 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 are contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the fourth quarter of 2015.

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

Jim Smith

Thank you, Christine, and good morning, everyone. Thanks for joining Webster's fourth quarter 2015 earnings call. CFO, Glenn MacInnes, and I will review business and financial results and then take questions along with recently promoted President, John Ciulla, and Executive Vice Chairman, Joe Savage. Congratulations to both John and Joe.

Webster produced solid fourth quarter results, and as you can see on Slide 2 with record pre-tax earnings and record net income. Our results showcased sustained progress in executing our well articulated growth strategies designed to add value for customers and maximize economic profits for shareholders.

We haven't yet attained our overarching financial goal to earn in excess of our cost of capital but we're gaining on it. Strong loan growth remains a common denominator across all of our businesses. Record quarterly loan originations, coupled with net interest margin expansion, drove higher net interest income, and help produce year-over-year core revenue growth of 9%, the 25th consecutive increase. Record full-year loan originations of $5.6 billion were 19% higher than in 2014. Robust linked quarter loan growth drove the quarterly loan loss provision higher, representing a $2 million billed in the allowance for loan losses after net charge-offs.

Our reserve to loans ratio of 1.12% is comfortably within our current desired range. I'll note here that we have virtually no direct exposure to the oil and gas sector.

All my further comments will be based on core operating earnings. Turning to Slide 3 you can see the full-year trend for loans and deposits. This slide underscores Webster's balance sheet growth and transformation and that loans have grown by $4.5 billion or almost 9% compounded annually. Commercial loans have led the growth with a 15% compounded annual growth rate, and now comprise 57% of total loans compared to 47% four years ago. This shift in loan mix has favorably altered our asset liability profile, as floating rate and periodically adjusting loans now represent 68% of total loans.

Deposits have grown by $4.3 billion, all of it in transactional and HSA accounts, which now represent 55% of total deposits. Given the strength of our deposit profile, our loan to deposit ratio remains highly favorably at 87%, even with strong loan growth over this period, and the borrowing to assets ratio has declined to 16%.

On Slide 4 you can see the quarterly trends for loans and deposits over the past year, as the pattern continues with strong loan growth, more than fully funded by growth in transactional and Health Savings Account deposits. The true value of our low cost funding advantage will be more fully realized as interest rates rise.

On Slide 5 that loan growth, and a higher net interest margin, contributed to another quarterly record for net interest income. All key loan segments again posted year-over-year and linked quarter growth, with all but consumer in double-digits compared to a year ago. In addition to record net interest income, non-interest income rose 12% year-over-year, reflecting HSA Bank's strong fee income stream.

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

Much of the remaining increase came from investments in our growth strategies, including cost related to recruitment and support of commercial bankers, investing in more sophisticated treasury and cash management systems as we move up market, implementing Salesforce.com as our lead CRM system, and investing in mobile and digital banking capabilities, while simultaneously making serious investments in our risk infrastructure, including enhanced compliance systems, and cyber security tools. Again, our strong revenue growth enables us to invest in our future, while keeping our efficiency ratio at 60% or better for 11 straight quarters now, and producing record PPNR again in Q4.

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

Before reviewing the business units performance, I'll spend a minute to discuss the strategic overview of our exiting expansion in Greater Boston announced last month. In effect, this transaction is a turnkey to NOAH addition of 17 banking centers to our Boston flagship that gives us instant critical mass in the economic engine of New England, and the marketing power that goes with size. The expansion advances our goal to the New England's leading homegrown bank, while achieving a compelling financial outcome.

Since last week, 15 former Citibank locations have opened as Webster banking centers. In the coming days, two more will formally open, bringing our total for Greater Boston to 18, when you include our Franklin Street flagship. Seven offices are in the city, and 11 are in the immediately surrounding suburbs, all but inside Route 128. These banking centers are prominently located in bustling neighborhoods with high valued consumers and businesses.

The undisclosed terms of our agreement involve leases, all of which have long-terms or include renewal options, and fixtures, but do not include deposit accounts or loans. Importantly, we successfully recruited about 80% of the Citibank staff ensuring that we have familiar faces in the market from the very start. Many moved as a team to Webster because they identify with our values and brand promise. Once again, you can see the advantage of the unshakable core.

We are supporting these new banking centers with an intensive, integrated, sales and marketing campaign, built on the Webster foundation of surprisingly good service. The remarkable success of our commercial banking business in Boston, since we put our flag down in the old Boston Stock Exchange in 2009, gives us a high degree of confidence in the success of our new banking centers. The Boston commercial loan portfolio has grown fourfold to more than $1.4 billion today. We see Boston as a $1.5 billion deposit opportunity in the next five years, including about $500 million in the market today, as well as an important source of loans and assets under management. All business units will benefit from the expansion.

As most of you know, we've long plan to expand in Boston but until the Citibank opportunity arose there were no alternatives that satisfy both our strategic and financial criteria. Stepping into Citi's shoes as tenant in these prime locations provides a far more attractive return on investments in either building out our network piecemeal or making an expensive pullback acquisition. We expect the transaction will be about 4% to 5% dilutive to EPS in 2016, breakeven in 2017, and economically profitable in 2018. It has a positive three-year NPV and a compelling five-year NPV. Glenn will provide more details in his report.

My performance slides begin on Slide 8 commercial banking continues to perform extremely well growing loans, revenue, and economic profits, while executing on its strategic initiatives of geographic expansion, leveraging industry expertise with a strong emphasis on new client relationships, and maintaining local presence in few. Solid loan growth is reported in each business unit with record setting originations in the quarter.

Commercial banking closed on more than $1 billion in commitments for the first time and loans grew at a double-digit pace once again, as our bankers continue to win over well-established commercial businesses across every geography and every line of business. Commercial banking is a major driver of EP and we expect it will remain so as our successful expansion continues.

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

Moving to community banking, Slide 9 reflects positive momentum in business banking with loan and deposit balances up smartly year-over-year. Full-year loan originations set a record. Our straight through processing initiative to reduce loan processing time has begun to generate higher volumes and lower withdrawal rates and lower unit cost for smaller size loans.

Strategic focus on high value relationships pushed average balances per checking account higher by 12% year-over-year. Strong momentum in swaps and credit cards drove fee income of 14%.

Slide 10 highlights the steady growth in loan and deposit balances for personal banking. Loan growth was accompanied by improving yields and strong transaction account deposit growth drove down the cost of deposits. The concentration of high balance, premier checking among new accounts continued to increase driving up average checking balances by 6% year-over-year.

Our response to changing customer preferences is very improved as active mobile users increased by 14% year-over-year, and mobile deposit transactions increased by 47%. So service deposits rose 9% year-over-year to 39% and banking center transactions declined 7%.

Slide 11 reflects the trends in mortgage originations with notably 85% of portfolio loans coming from high value jumbo mortgage relationships that typically have much higher than average products and services per household. Gain on sale income grew 58% linked quarter and over 130% year-over-year.

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

Slide 12 presents the results of HSA Bank. We're pleased to have many of you join us in Milwaukee in November for HSA Bank's Investor Day. Chad Wilkins and the HSA Bank team did a great job in bringing to life why HSA Bank is the industry leader.

HSA deposits more than doubled for the year growing about $2 billion, much of that due to the mid-January 2015 acquisition of JPM Chase's HSA accounts. Excluding the acquisition, in order that we could get a look at organic growth, deposits grew 4.3% linked quarter, and 27% year-over-year, and accounts grew a little over 1% linked quarter, and 27% for the year.

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

During the quarter, we completed our third migration of the acquired JPM accounts, the phased account migrations have gone well to-date and we're on target to complete the final migration and end the transition agreement this quarter.

As most of you know, we onboard the majority of our new accounts during our peak enrollment period between October and January with fundings mainly in January. We expect it will open about 320,000 new accounts this quarter, up 19% from last year's record and HSA deposits should grow about $400 million in the quarter.

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

As we look out now over the 2016 to '18 planning period, we expect the growth in PPNR to be in the range of 35%, as we continue to benefit from account growth and economies of scale.

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

Experts expect growth to continue at a rate of better than 20% for years to come, as employers gravitate to high deductible health plans to control cost and reward their employees for taking responsibility for their healthcare decisions. We don't expect the delayed implementation of the Cadillac tax to diminish these growth expectations.

Slide 13 summarizes results for Webster private bank, highlighted by loan growth and increasing momentum in producing non-interest income. Revenue grew both linked quarter and year-over-year, as did assets under management and administration, and the AUM pipeline is twice what it was a year ago.

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

Glenn MacInnes

Thanks, Jim and good morning, everyone. I will begin on Slide 14 which summarizes our core earnings drivers. Average interest-earning assets grew $438 million compared to the third quarter all in loan portfolio where we experienced growth across all loan categories.

Net interest margin was 308 basis points for the quarter driven by higher loan and security yields and no change in deposit cost. Linked quarter earning assets grew 2% coupled with a NIM increase this resulted in record net interest income of over $173 million.

Core non-interest income decreased by $1.2 million or 2% on a linked quarter basis consistent with our expectation. Recall that third quarter included a high level of commercial activity. While core expenses were up $3.4 million, we once again demonstrated the discipline of investing in our business, while maintaining a 60% or lower efficiency ratio.

Taken together, core pre-provision net revenue totaled a record $90.3 million, up 1% linked quarter and 4% from prior-year. Asset quality remained stable during the quarter and the loan loss provision of $13.8 million is primarily reflective of loan growth.

Pre-tax GAAP reported income totaled a record $76.7 million; up modestly linked quarter and 3% over prior-year, and reported net income of $52.6 million also a record includes an effective tax rate of 31.5%.

Slide 15 highlights the drivers of net interest margin versus prior quarter. Starting at the top, while the securities portfolio balances were relatively flat quarter-over-quarter, we enjoyed a seven basis point increase in the yield primarily due to lower premium amortization and higher yields on floating rate securities.

Total premium amortization of $13.5 million was $700,000 lower in Q3 and is a result of a reduction in prepayments fees from 15.1% to 12.9%, coupled with a 20 basis point higher yield on approximately $800 million of floating rate securities the investment portfolio interest income increased by $1.4 million. Cash flows totaled $248 million with the yield of 320 basis points; purchases totaled $286 million at a yield of 304 basis points.

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

Commercial loans grew 3.5%, while the yield improved two basis points, and consumer loans grew 2.1% and the yield improved three basis points. As we highlight, the combined interest income generated by our loan portfolio increased $5 million quarter-over-quarter.

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

Average borrowings increased $330 million due to seasonality in government deposits and in support of loan growth. The average cost decreased three basis points to 134 basis points, as the additional funding was primarily short-term FHLB borrowings at 31 basis points.

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

On Slide 16 we provide additional detail on core non-interest income which decreased $1.2 million or 2% linked quarter. Mortgage banking revenue, the top box increased by $835,000 on settlement volume of $98 million, and a preload comp spread of 177 basis points which compares to a volume of $142 million in the third quarter, and a spread of 162 basis points. Loan fees highlighted in light blue decreased $2.4 million as Q3 benefited from higher commercial activity. Other income increased due to commercial customer related transactions and corporate items. Wealth and investment services highlighted in grey increased as a result of a slight pickup in our retail brokerage.

HSA fee income decreased reflecting seasonality in interchange revenue but grew 133 basis points over prior-year. And deposit service fees saw a linked quarter decrease primarily as a result of an 8% drop in NSF volume, reflecting recent adjustments to check processing order. We expect that as previously reported NSF fees will be about 10% lower going forward.

Slide 17 highlights our core non-interest expense which was up $3.4 million. Compensation and benefits expense increased $5.9 million driven by $2.3 million increase in group medical claims due to seasonality and unanticipated large medical claims, a $1.7 million increase in deferred compensation driven by the increase in Webster's stock price in the quarter and we also had an increase in sales incentive payments of $700,000 related to higher volume. Partially offsetting the $5.0 million increase in comp and benefits expense was a decline of $2.1 million in technology and equipment expense primarily attributable to a reduction in the TSA transition services agreement as acquired JPM accounts migrated on to the Evolution 1 platform.

Slide 18 highlights our efficiency ratio; we are pleased to report 11 straight quarters with an efficiency ratio at or below 60%. This has been achieved while we continue to invest in our business and despite the prolong challenging economic environment. We expect the Boston expansion to increase the efficiency ratio above 60% during the first half of the year. I will discuss the financial aspects of the Boston expansion in more detail in a few moments.

On Slide 19 we highlight our PPNR sensitivity for 100 basis point increase in short-term interest rates, combined with a 50 basis point increase in long-term interest rates. Given the recent global economic developments, financial volatility, and continued low domestic inflation, our interest rate views are more in line with the market than the FED. Our current assumption is for only one additional 25 basis point increase to occur in 2016. Consequently, we are targeting a slightly asset sensitive interest rate risk profile. We do of course retain the flexibility to make adjustments should conditions change.

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

Turning now to Slide 20 which highlights our asset quality metrics, non-performing loans in the upper left decreased by $19 million to $140 million and represents 0.89% of total loans. The decrease was led by reductions in commercial non-mortgage and commercial real estate loans. Residential mortgages and consumer loans combined posted a small net decline and our allowance for loan losses improved to 125% of NPLs at year-end.

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

Commercial classified loans in the bottom left increased by $36 million and have been in the range of 3% and 3.5% or so over the past year. Our commercial classified asset levels remain well below the five-year average of 5.8%.

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

Our annualized net charge-off rate was 31 basis points or $11.8 million. The increase from prior quarter reflects charge-offs in the commercial segment. The net charge-off rate remains well below the five-year average of 52 basis points over average loans.

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

Slide 21 highlights our capital position. Ratios remain in excess of Basel III well capitalized levels. The tangible common equity ratio decreased 12 basis points from September 30, primarily as a result of our strong loan growth and a reduction in unrealized gain in our AFS portfolio.

The common equity Tier 1 ratio decreased by seven basis points to 10.7% also as a result of loan growth. We recently completed a review of our capital levels and established modestly lower operating ranges. We intend to operate between 6.75% and 7.25% on TCE and between 9.25% and 9.75% on common equity Tier 1 ratio.

Before I hand it back to Jim, a few comments on our outlook for Q1. Overall average interest earning assets will grow approximately 1% to 2% and we expect average loan growth to be up approximately 2% to 3%. We expect another five to seven basis points of NIM expansion in Q1 given the FED's rate hike and assuming a continuation of the stability we've seen in deposit rates. I'll emphasize any upward movement in deposit rates or continued downward pressure on the long end of the curve would pressure NIM in Q1 and beyond. Reflecting a loan growth and NIM expansion we expect an increase of $5 million to $6 million in net interest income in Q1.

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

Regarding non-interest income, we expect to be about the same in Q4 with increases in deposit related fees, partially offset by lower mortgage gain on sale. Regarding our expense outlook, as Jim highlighted, the Boston expansion will be modestly dilutive to earnings per share in 2016, breakeven in 2017, and accretive thereafter. We believe there is significant loan and deposit growth opportunity in the region and we are focused on capitalizing on it.

Our expected annual operating expense per banking center is between $800,000 and $1 million. Together with marketing and facilities related cost, we estimate additional expenses associated with the Boston expansion to be between $5 million and $6 million in the first two quarters.

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

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

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

Jim Smith

Thank you, Glenn and I'll conclude my acknowledging Glenn along with Terry Mangan and Webster's overall Investor Relations effort for their continued high recognition under Institutional Investor Magazine's 2016 company rankings of pretty much a clean sweep gentlemen, congratulations. I think you all know how much we value our dialogue and relationships with the investment community and we appreciate knowing that we're serving your needs and meeting your expectations.

Congratulations to Glenn and Terry and all the individuals at Webster who contribute to our investor communications efforts. Let's open it up for comments and questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions].

Thank you. Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steven Alexopoulos

I want to start, Jim, regarding the 10% expected growth in PPNR that you cited over the next three years you did say that it was based on rising rates. What will that number look like if rates don't rise from here?

Jim Smith

So I did say, 10% I was referring specifically to the commercial banking group, and assuming that we get gradually rising rates. We are less optimistic about the rise and a lot of people have expressed. So I will ask Glenn to comment on that. But obviously if rates don't rise as fast that it's going to put a damper on the PPNR at least, early along the way.

Glenn MacInnes

Yes, and Steve, I'll just jump in I mean we used -- obviously we used the forward curve, lot of volatility in the market, and we used the forward curve even in respect to our guidance as of two weeks ago, and you know that 10-year swap is at 2%, now down at 1.80%. So but that's generally the curve that we use when we looked out three years. So I don't have the number if the rate stays at 1.80% going out. But obviously as Jim pointed out, it would be downward pressure on PPNR.

Steven Alexopoulos

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

Glenn MacInnes

Yes, I mean it's based on the forward as of two weeks ago.

Jim Smith

The forward of two months or so ago, right?

Glenn MacInnes

Yes, two weeks.

Steven Alexopoulos

Yes. Okay. That's helpful. I wanted to just ask on the HSA, Jim, I think you said you expect 35% PPNR over the 2016 to 2018 horizon. Could you just give us what are the balance and account growth assumptions that are underlying that? Are they just unchanged, essentially?

Jim Smith

We balance and the growth assumptions are very similar to what we had in the 2015, 2017 --

Glenn MacInnes

Day.

Jim Smith

Investor Day.

Glenn MacInnes

Yes, they are. And I think the nuance there is that the acquisition of JPMorgan increased or showed from a period of 2014 up to 2017 a higher PPNR. And when you normalize for that and then you push it forward, that's where we come to 36%. So it is just an adjustment, there is no difference in how we're thinking of the scalability of the platform of the profitability of the PPNR on a per account basis.

Steven Alexopoulos

Okay. That's helpful. And then, I think you referenced 320,000 new accounts expected in 1Q 2016. What would be the total annual enrollment if you include what's already opened in the fourth quarter, and is it just that the planning process pushes most of these into the first quarter?

Jim Smith

It's enrollment process actually that when the plans in effect start taking the funding is generally in January even though the enrollment period, as you know, all companies they sent out their enrollment forms and you enroll in the fourth quarter and it goes live in Q1. So a lot of the deposits rolling in January and the first quarter probably more than half of the deposits will come in at that time and a big chunk of the overall accounts are opened in that period.

See we might actually get, if you look at the number of accounts that actually get opened, its well over 600,000. Then there is some natural attrition that goes with that. So you net it out down in the 3 to 400 range.

Steven Alexopoulos

Okay. Perfect. And then, just one final, if I could sneak it in. You commented on the Boston expansion. That helped. Any need to add any additional branches, or are you guys basically done now? Thanks.

Glenn MacInnes

We are very happy with the Boston footprint, it is possible we might add a branch or two as we get more used to the location. But we think that these 17 locations plus our flagship right there in the financial next to the retail center gives us a great footprint in that market. So maybe one or two over some period of time to make sure we're driven the entire market. No immediate plans for that.

And we will continue to look at our overall footprint for opportunities to optimize. You probably should expect to hear something over the next few months.

Operator

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

Timur Braziler

Hi good morning, it's actually Timur filling in for Jared. How are you?

Glenn MacInnes

Good morning.

Jim Smith

Good morning.

Timur Braziler

May be just following up on one of Steve's questions, in your NIM outlook, I appreciate the color on the one expected raise this upcoming year. What's your expectation for these steepness of the yield curve, are you assuming that that 25 basis points kind of go across all points or you assuming additional flattening from here on?

Glenn MacInnes

Yes, we're assuming flattening.

Timur Braziler

Okay.

Glenn MacInnes

Right, in our assumptions.

Timur Braziler

Okay.

Glenn MacInnes

So I think Timur, what you're hitting on is that there will be -- we are benefiting from the initial rise in the first quarter. But if you look at the yield curve right now, the forward curve even as of two weeks ago, it's flattened out a little bit, right.

So if you wouldn't expect to see that kind of rise going forward, if I'm talking about NIM going up five to seven basis points, I would not count on that over the next three quarters given the current forward curve.

Timur Braziler

Okay, great. May be switching over to the increased linked quarter and comp expense, what portion of that was driven by the acquisition of the Boston branches and kind of what was coming from these sign on bonuses of new acquired teams?

Glenn MacInnes

That's not in there at all. To the extent where sign-ons, they don't show in the first quarter when we closed on a deal. The comp expenses as I indicated was we did get a bit of an upside surprise on expense on Group Medical and you can characterize it as episodic but these are claims catastrophic claims that are filed and they're large. So that in conjunction with the seasonality people hit the deductible in the first two or three quarters and then we're self-insured. So we have to fund that in the third and fourth quarter those combine to drive that number up.

Timur Braziler

Okay. Great. And then so the $5 million to $6 million in additional expenses that's just from the Boston acquisition alone, that doesn't include anything like your typical first quarter payroll tax?

Glenn MacInnes

Now see what happens so if you look quarter-over-quarter. So then your Group Medical is offset by higher FICO and tax expense, employee tax expense in the first two quarters right until people hit their maximum. So there is a natural that washes out there. The $5 million to $6 million on Boston for the first two quarters is if you look at it and the guidance I gave on cost to operate per branch $800 million to $1 million, the difference between that and the 17 branches that we're highlighting is all marketing and facilities related cost which are upfront. We're going out with a pretty high profile marketing campaign in the first two quarters. So there is expenses associated with that and the revenues in the backend of it.

Jim Smith

So I think you're saying that excluding the $5 million to $6 million for Boston in Q1 that expenses will be pretty flat.

Glenn MacInnes

Relatively flat, yes.

Timur Braziler

Okay, great. And then one more if I can. Just looking at the HSA platform, what portion of the acquired JPMorgan deposits have yet to migrate on to the Webster platform?

Glenn MacInnes

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

Timur Braziler

And is that remaining portion or is it still going to be some lingering?

Glenn MacInnes

That is the remaining portion.

Operator

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

Collyn Gilbert

Glenn, just to go back, if we could, and talk about fees for a minute. I know you obviously gave indication of what you thought could occur in the first quarter. But just kind of a bigger picture, how should we think about that the fee to revenue ratio over the next year or two, mindful of the HSA competitive strategy with what you're seeing in your own -- you had said NSF fees down 10%. But just trying to get -- and then the volatility and perhaps the private banking wealth business -- just trying to get a sense of where you think that fee trajectory can go over the next year or two.

Glenn MacInnes

So I think we get closer to a 28% range on a full-year, and this is we don't typically give out full-year guidance. But if you just look at it and you say what it would look like, how does the growth look like going out for the rest of the year given it's flat in the first quarter. I would expect it to be close to 28% of total revenue on a full-year 2016 basis.

Collyn Gilbert

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

John Ciulla

Hey Collyn, it’s John. How are you?

Collyn Gilbert

Hey John, good. Thanks.

John Ciulla

I don't think that there was anything in specific is our normal resolution cycle and so we had a couple of commercial credits that were resolved during the period naturally. That is slightly higher charge-off level in the quarter as referenced earlier was the result primarily of one commercial loan account that we've had since 2010 and that certainly did help reduce the NPLs. And as I said, it was a long relationship, it's not in a challenged industry the issues around the credit were unique to the specific companies. So we don't see any trend there and the resolution is just in the normal course.

Collyn Gilbert

Okay. Okay. And then, just one sort of follow-up to that. And, again, I know, Glenn, you had indicated that the reserve will likely -- or provisional will be mostly loan growth driven. Any sort of insight into the quality of the portfolio if we start to see some economic stress? I mean is there any migrations that you're seeing or any segments that you guys are looking at on a more cautionary basis?

John Ciulla

Collyn, we're fortunate given our geography and where we've chosen to specialize that we don't have lot of exposure to the energy space. The short answer is no, we're not seeing any specific points of weakness obviously to the extent that this market turmoil lasts a longer period of time, we go into a credit cycle, we'll be obviously looking at the performing of all of our industries but we don't see anything in particular right now. We don't see a lot of lost content of horizon in the short-term.

You heard Glenn earlier say our view is that we are confident that we'll remain relatively stable if the current economic conditions continue but that we're also always aware that with higher single point exposures in commercial banking that we can have choppiness any quarter-to-quarter. But we don't see any trends and we're not particularly concerned about any industries right now.

Operator

Our next question comes from the line of Bob Ramsey with FBR. Please proceed with your question.

Martin Terskin

Good morning, it's Martin Terskin for Bob.

Glenn MacInnes

Good morning, Martin.

Martin Terskin

Most of my questions have already been answered. But I just want to follow-up on the trend that I'm seeing in mortgage banking. It seems like it has been in an upward trajectory over the past year. Are you seeing continuing that into 2016?

Glenn MacInnes

I'll say going out into the first quarter we see on origination volume whether it's on portfolio that we sell or we book about a 12%, 13% reduction at this point going leading into the first quarter. And that's what we saw and again rates have come down. So we might see that pop backup but that's what we saw say, as of couple of days ago. So some of that pipeline might be rebuilt as we enter into the quarter but that's where we are right now. I think the boxes to the MD&A -- MBA studies as well.

Martin Terskin

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

John Ciulla

No, performance across geographies has been relatively consistent. So I would say both from an industry perspective and a geographic perspective, it's pretty stable.

Operator

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

Dave Rochester

Hey, Glenn, you had mentioned the change in check orders this quarter. I guess you changed the processing order. Can you just talk about why you made that change this quarter, and do we have a full quarter impact of that in Q4?

Glenn MacInnes

You have as of November, so you don't have a full quarter, we did it in response to our customer and we think it's the right thing to do and it's really timestamp if you think it that way, its passion and timestamp. So even though it's say 10% hit going forward on fee income which is anywhere from $2.5 million around $2.5 million, we think it's the right thing to do. And we've talked about it before and so I think from a retention standpoint, customer satisfaction standpoint although it's a negative financial we think it's the right thing to do.

Dave Rochester

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

Glenn MacInnes

Yes, so we peaked in on total service cost in Q2 where we were running both the EV1 platform and the TSA cost and that peak was at $5.3 million. If you were to go into the fourth quarter that came down to $3.7 million, as we run off the last piece and convert the last piece on to EV1 the normalized run rate is about $2.6 million. So it depends on what quarter you're working off of, Dave, if you're looking at the fourth quarter, it's about $1 million that comes off beginning in the second quarter per quarter.

Dave Rochester

Perfect. And then, I guess just bigger picture, seeing all the moving parts you talked about with the new branches coming online and some seasonal items rolling off for Q4 and some coming out of Q1, can you give us a rough dollar range for where you see expenses going in Q1 as a starting point? I know you talked about the efficiency ratio guide is may be around a 61% handle, but what does that equate to on a core expense basis?

Glenn MacInnes

Yes, I said, I think if you just look at it the 5% to 6% is all inclusive. So we think our expenses right.

Dave Rochester

Oh, okay.

Glenn MacInnes

Right. So if you back that out you know that that would be relatively flat right and --

Dave Rochester

Yes. Okay. Got it.

Glenn MacInnes

And the efficiency ratio will improve ex-Boston would be probably 59 right. So we can look at it that way if you want to go on a core bank basis or pre or post excluding acquisitions.

Dave Rochester

Got you. Okay. And then just one last one on the NIM. I appreciate the outlook for 1Q. I guess, if you are expecting a flatter curve going forward, should we expect to see NIM pressure beyond 1Q, or are you thinking that can remain somewhat stable through the end of the year?

Glenn MacInnes

There is given today's curve and if there is more downward pressure on the long end, you would see more pressure on NIM, going forward, beginning even in the second quarter, I mean we haven't seen it all flow through yet. So the first quarter we feel pretty good about. But there is still the impact of the current curve is not fully impacted or is not fully factored into Q2 to three and four.

Operator

Our next question comes from the line of Mark Fitzgibbon with Sandler O'Neill. Please proceed with your question.

Mark Fitzgibbon

Just to follow-up on that margin question, Glenn, what are the major items sort of driving the NIM up so much in 1Q, in your view?

Glenn MacInnes

So floating rate assets, which we've talked about a lot, so C&I, CRE, home equity. Those were big part of the expansion. Growth in our consumer personnel portfolio is another component. No lift in deposits, we've seen some pressure on only the government side but for the most part all our retail deposits are still at the same cost. We do have slightly higher borrowing cost and on the wildcard, Mark, as you know, is always going to be the betas on the retail side and how the market reacts to it. But what's encouraging is no one is moving right now.

So the bigger drive, the biggest driver is -- comes from our floating rate assets. So for five to seven basis points that's the bulk of that expansion. And then obviously, it assumes no move on retail deposits.

Mark Fitzgibbon

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

John Ciulla

Yes, sure Mark, this is John. First of all we're sort of underweight when you look at our commercial real estate exposure against our capital base. And I think you know our portfolio on the commercial real estate side tends to skew institutional. So we have sort of larger higher quality buildings with strong sponsors and that's always been our modus operandi. And our portfolio credit asset quality is in pretty good shape. If you talk to Bill Wrang, who runs our CRE Group and you try and get out of him a comparison to pre-Great Recession to now, he still thinks that the underlying fundamentals as long as you're dealing with good real estate and strong sponsors are much stronger than they were heading into the last cycle.

So I think we're cautious but we're bullish and optimistic that we're now in the pressure of another bubble in real estate and we underwrite, for instance, we love apartments, we love multifamily, but we're not a participant in a lot of the broad metro multifamily programs. So we look at specific sponsors, specific properties, and specific real estate and underwrite to those circumstances.

So I would say we're aware, we're cautious, we kind of are aware where we are in the credit cycle but we are not too nervous about the underlying fundamentals in real estate right now.

Mark Fitzgibbon

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

John Ciulla

It's a loaded question, Mark. I think -- I think competition is fierce and so I think when you go from the very top in the sort of corporate space and the institutional space all the way down to community bank and real estate and where values have been a lot of people are putting a lot of money to work in the real estate space. And obviously just thinking, I have to be careful about the quality of the portfolio where rents are going, what the tenancy looks like. So I'm sure people are being more aggressive than we are. But I can't really comment on seeing significant trends in the market.

Operator

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

Casey Haire

Just one question for me. On the Boston branches, you guys are targeting breakeven in 2017. Just curious, what kind of critical mass are you guys -- what kind of critical mass is needed to hit breakeven from a loan and deposit perspective?

Glenn MacInnes

I think from a deposit standpoint, it's probably about $600 million, $650 million, and then there is corresponding loans with that as well.

Casey Haire

Okay. So deposit is most critical though?

Glenn MacInnes

So we're saying, for example Casey, we're saying, if you get $1 billion over five years, you're going to front-end a lot of that. So you would be halfway or more by the end of the second year and that's the way to look at it. And then you're going to find loan support coming along, private banking is going to be in there generating some revenue; this is great opportunity for all of our businesses. So it's going to be deposits and loans and fee income as well will head us to breakeven in 2017.

Operator

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

Matthew Kelly

Yes, hi, just a quick follow-up on the margin guidance for the first quarter. If the 10 years stays here, sub 2%, will prepay speeds remain low enough to hit that guidance, just in Q1 on the securities portfolio?

Glenn MacInnes

I think it would be good with Q1, it would impact Q2 more.

Matthew Kelly

Okay.

Jim Smith

And that's why we give them a range.

Glenn MacInnes

Yes, we give you range and I think generally it takes about 90 days to move through. I think we feel pretty confident in Q1 right now. But Q2 would obviously feel like that.

Matthew Kelly

Okay. And then in the securities portfolio, $7.1 billion, about 30% of assets, just talk about the size of the portfolio going forward. Are you going to keep it at that type of level, and what are you buying and what types of yields are going into the book?

Glenn MacInnes

I think as far as the level we're probably flat on the securities. I mean our capital ratios suggest that we should be growing more 100% risk weighted assets as opposed to zero or 20% risk weighted assets. From a reinvestment standpoint generally what we're buying is MBS say a term of four to five years at 250, Munis to some smaller extent, a term of eight to nine years at a yield of 450, and then floating rates CLOs and CMBS which has been more of a challenge lately but those reprise basically one month, they're about LIBOR plus 200, and then some agency MBS which is we generally by fixed rate and with the duration of four years, at, say a rate of 275. That's kind of what we're doing going forward.

Matthew Kelly

Okay. Got it. All right. And then, a question on the HSA business. There has been a couple of transactions over the last couple of weeks and months here, some large banks getting out of the business: Bancorp, U.S. Bancorp, Citizens. Have you had a chance to look at some of those transactions, and what are your thoughts on those bigger banks getting out of it? Is it just an issue of scale, or is there something that they are seeing in terms of profitability and trends there that they don't like compared to what you guys are doing? Maybe you could comment on that.

Jim Smith

Sure. I'll just say we can't speak for why they had made their choices. But we have said before this is a business of scale, unless you have significant scale, it's hard to really make a go of it. So that's a significant advantage that we have at our size. We also think that there is lots of institutions that have decided it isn't a strategic focus for them and they're not going to devote the resources that are required to get deeper into it.

So in some cases they're in offloading. We have looked at a couple of transactions. We always keep our eyes open, try to understand the pulse of the market, at least one of those recent transactions was based on longstanding relationships that already existed where there was a sort of a joint operation there, and then in other cases banks are just saying that that's not their primary strategy nor can they make it profitable to the extent that we can and that's what is driving their decisions. And we think that does represent opportunity for us going forward.

I want to reiterate that and we said this over and over that our number one responsibility is to make sure that we have a smooth and orderly transition of the JPM acquisition and that is what's occupying 99.9% of our time. Now that we're getting through that we're going to be looking outward more than we were before and we will be taking a hard look at some of those opportunities.

Matthew Kelly

Okay. And then going back to the question that Mark Fitzgibbon asked there about the outlook for commercial real estate, some of the regulatory commentary that's come out recently, where would the yellow flags be, in your view, in commercial real estate for the types of lending that you do in the regions that you're engaged in? Where do you see kind of the yellow, orange flags in the system right now in the cycle?

John Ciulla

I mean in terms of what we would see is when obviously proceeds get aggressive or amortization schedules or tenors, and we try not to obviously chase out of our underwriting box and I think right now, I think if you look at it, as I said earlier, I think if you look at the underlying fundamentals as long as you're picking the right real estate with the right borrowers, we're not into that red flag warning zone yet. But I just think you have to really pay discipline that's has been our mantra.

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

Joe Savage

Hey Matt, this is Joe Savage. Let me just add a little bit to John's comment. We've worked for a decades with certain commercial real estate developers and they've been pretty pressing in terms of where they're going to step outside of the market. So in addition to the work we do from a credit analytic perspective lot of that we really watch our developers, they've been making a little bit at this for a long, long time and interestingly while they're pickier in what they're going after almost to a person they continue to remain looking for transactions and we do a lot of business, lot of repeat business with them. So we take that as a bit of comfort.

Matthew Kelly

Okay.

John Ciulla

And then I just want to say one more thing, Matt. When you look at the radar screen here and what the regulators are primarily focused on, they're looking at the growth rate in the portfolio and they're looking at the portfolio as a percentage of capital. And we're well under the target ranges that were included in some of that guidance. And so that gives us a lot of comfort but mostly what we're comfortable about is the quality of our underwriting standards. And when they get in there, and say, well how much IOs you are doing and what are you doing with your tenors and the like that we're going to come out in a very strong position. So however you look at it, that we're highly confident of the quality of our CRE operations.

Joe Savage

And one last point to put a finer point on that Matt is we size our loans using a higher interest rate, the natural rates because we understand that's some risk. And so we're willing to walk away from deals if we don't have that amortization cushion and that cash flow cushion. And that would be another red flag if you're fully sizing a loan to today's interest rates you're potentially could be asking for trouble. So I hope that's helpful.

Matthew Kelly

Yes, it is. And then, last question. Just the shared national credit book, I believe it is $1.5 billion, $1.7 billion, somewhere in that range. Talk about just the exposure to -- you're beyond energy, just the broader industrial commodity chemical complex, any type of exposures you might have in those industries. And not just energy specific, but there has been a broader slowdown, clearly, in the industrial type of sector. Any exposure there or your thoughts on that part of the portfolio?

John Ciulla

Yes, I mean I would say the good news is in terms of our expansion and significant originations in the fourth quarter, the percentage of shared national credits in our portfolio actually went down period over period, so it evidences a lot of direct underwriting and bilateral underwriting. We don't have a concentration in any of those sectors you're talking about the broader industrials, chemicals, commodities. Our strategy in shared national credit is really in our footprint to local companies that we can cross sell HSA Bank, cash management, and private banking too or in some of our industry specialties. And our industry specialties right now are things like TMT, environmental services, healthcare, so that's where you would see them unfortunately in those service companies they're not being impacted from an industry perspective like some of the ones you're mentioning. So I would say that it’s not an issue for us right now.

Operator

Our next question comes from the line of Bernard Horn with Polaris Capital. Please proceed with your question.

Bernard Horn

I just wanted one clarification on the guidance for the Q1 net interest margin. You said that the floating rate would -- is contributing about five to seven basis points of kind of added yield. Is that full five to seven dropping down to the bottom net interest margin or is it the five to seven --?

Glenn MacInnes

May be I wasn't as clear as I could have been. But that is the primary driver of the NIM expansion. So it is dropping down.

Bernard Horn

Okay. Great. And then, the other question I had is just -- I know you commented about the lack -- that you're not seeing any material downturns related to kind of energy and other things, but I guess my question is whether or not you're seeing -- or you can make any observations about what people are doing and what companies are doing, what the energy savings that they are getting. Because it's pretty clear at the national level, we really -- aside from may be auto sales haven't seen much of a pickup in consumption. And I'm just wondering, because your exposure to the whole kind of industrial and commercial and the consumer-based, do you have any observations as to what people are doing with these savings at this point?

John Ciulla

I don't think that it’s been evident yet and then we’ve been saying it along that not only is distributor remediation in that market not impacting us because we don't have a lot of credit exposure but it surely must benefit most of our other commercial customers. We really haven't seen changes in behavior or any specific information indicate that benefits flowed through their P&Ls or that they're investing in other those savings in other areas.

Glenn MacInnes

May be we've seen our retail deposits go up, so that could be one offshoot of this. We haven't seen and it might be early, we haven't seen as much of an increase in interchange and transaction volume beside the normal seasonality. It's hard to sort of pull that out because the fourth quarter has holiday shopping and things like that as well. So we may see, if any, going into Q1 or more of it going into Q1.

Our debit card transactions if you were look at it quarter-over-quarter or year-over-year they’re up 4%. So that may be an early indicator of some may be some additional volume. It’s too early to tell.

John Ciulla

One thing we know they're doing was is to buy more cars.

Glenn MacInnes

Yes.

John Ciulla

Right. But we do think that they're saving more.

Glenn MacInnes

Right.

Operator

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for additional or closing comments.

Jim Smith

I want to thank you all for joining us again today. We think we produced a sound report here for the quarter as well for the year. It is a tough operating environment but we're very positive about our position and our potential to generate economic profits. Thank you all very much.

Operator

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

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