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Webster Financial Corp (Conn)  (NYSE:WBS)
Q1 2019 Earnings Call
April 18, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Webster Financial Corporation's First Quarter 2019 Earnings Call. I will now introduce Webster's Director of Investor Relations, Terry Mangan. Please go ahead, sir.

Terry Mangan -- Director of Investor Relations

Thank you, Michelle. Welcome to Webster. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the first quarter of 2019.

I'll now introduce Webster's President and CEO, John Ciulla.

John R. Ciulla -- President and Chief Executive Officer

Thanks, Terry, and good morning, everyone. Welcome to Webster's first quarter 2019 earnings call. CFO, Glenn MacInnes and I will review business and financial performance for the quarter; HSA Bank President, Chad Wilkins is with us here in Waterbury and will join us for Q&A.

I'll begin on Slide 2. We are pleased to report our first quarter 2019 financial results. This quarter may well have been Webster's strongest on record. Quarterly net income was slightly below $100 million with net income to common shareholders of $97.5 million, after $2.2 million of preferred dividend expense. Earnings per share of $1.06 in Q1 compares to $1.01 in Q4, when that quarter is adjusted for one-time items and $0.85 a year ago. The EPS growth from a year ago is 25%. Pre-provision net revenue in Q1 grew 21% from a year ago. Loan growth and a higher net interest margin led to our 38th consecutive quarter of year-over-year revenue growth. In Q1, total revenue was just under 10% higher than a year ago, while expenses increased approximately 2% demonstrating disciplined expense management. This resulted in the 8th consecutive quarter of positive operating leverage. The efficiency ratio dropped below 56% enabling us to continue to invest confidently in our future. Credit quality remained strong. We've now posted three consecutive quarters with return on common equity above 14%, and return on tangible common equity above 17% consistent with our goal of maximizing economic profits over time.

Turning to Slide 3, I'll touch on a few line of business highlights. Webster's performance continues to be the outcome of our purposeful execution of our long-term strategic priorities; namely to expand Commercial Banking, aggressively grow HSA Bank and optimize and transform community banking. After reporting double-digit PPNR growth in each of our lines of business for 2018, we've now posted our 5th consecutive quarter with consolidated PPNR growth above 15%, when compared to the prior year.

Commercial Banking led Webster's overall loan growth with compound growth of almost 12%, since the end of 2013, and we expect Commercial Banking to drive Webster's loan growth going forward. By continuing to invest in people, process and technology, we were able to leverage our deep industry expertise in select Commercial Banking segments. While investments muted bottom line results in Q1, we continue to drive year-over-year PPNR growth in this business line. Our focus remains on building long-term franchise value and what we believe is a differentiated Commercial Banking business.

At the leading bank administrator of health savings accounts with almost $8 billion in total footings and $3 million accounts, HSA Bank remains a strategic priority and key differentiator for Webster. In a quarter, where Fed H.8 data shows that US Commercial Banks increased total deposits by less than 1%, Webster reported 4% deposit growth, driven significantly by a $468 million increase in HSA Bank deposits. The HSA team delivered robust account. deposit and total footings growth and posted strong year-over-year pre-tax net revenue.

Community Banking continues to make progress optimizing distribution channels and processes, investing in digital offerings and capabilities and focusing on high value consumers and small businesses. We have 10 fewer banking centers than a year ago, a reduction of 6% and banking center square footage has been reduced by 7% overall. We've made multi-year investments in our self-service channels, our products and our digital offerings. Our efforts to transform community banking are delivering results, I've seen with Community Banking's PPNR increase this quarter.

Turning to Slide 4. On a consolidated basis loans increased $1 billion, or 6% from a year ago. Commercial loans grew just under 10% and consumer loans were essentially flat. Adjusting for a $242 million mortgage portfolio purchase late in the quarter, consumer loans declined 4%. The adjusted consumer decline was led by a decrease of $177 million and home equity line of credit outstanding consistent with broader industry trends.

With a $1 billion increase in loans over the past year coming from the commercial categories, commercial loans now represent 63% of total loans compared to 61% a year ago and 47% in 2011 coming out of the financial crisis. Deposits increased $1.4 billion, or 6% from a year ago, health savings accounts represent 53% of the deposit growth and at 19 basis points were essentially flat in terms of cost from a year ago. Our loan portfolio yield was 59 basis points higher than a year ago, while the total cost of deposits increased only 22 basis points over that period.

Looking forward, we are confident about our businesses and the opportunities for continued growth. Despite mixed signals on broad economic indicators and recognized pockets slower global growth, we are pleased to see solid economic growth in our key markets, including our home state of Connecticut. Overall business activity in the communities we serve remains robust, as evidenced by loan and deposit originations and solid asset quality across individual, small enterprise and large commercial customers.

I'll now turn the call over to Glenn for the financial review, including performance in the quarter for our three lines of business.

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Thanks, John. Slide 5 provides more detail on our balance sheet. The securities portfolio grew by $165 million linked quarter and is up by $150 million over prior year. We use this portfolio to manage interest rate risk, liquidity and risk-weighted assets. The modest increase in the quarter is in part driven by our efforts to reduce asset sensitivity. Loan growth continues to be led by the commercial categories, which were up $141 million linked quarter and $1 billion versus prior year. Deposit growth was $610 million linked quarter and was led by a seasonally strong first quarter in HSA Bank. As we highlight deposits increased $1.1 billion from a year ago. The linked quarter increase in deposits funded all our loan growth and a $420 million reduction in borrowings.

During the quarter, we concluded a successful issuance of $300 million in 10-year senior notes. The issuance represented a cost effective way for us to increase capital at the bank in support of ongoing growth. The notes were priced to yield 4.14% and the proceeds were initially used to pay down short-term borrowings at 2.65%. After factoring in the benefits from reduced FDIC premiums, due to higher bank level capital, the all-in, after tax incremental cost of the issuance was less than 1%. The impact to our net interest margins will be around 2 basis points beginning with Q2.

Slide 6, summarizes our Q1 income statement and drivers of quarterly earnings. Net interest income totaled $242 million and increased $4 million, or 2% from Q4 versus prior year net interest income grew $27 million, or 13%. Non-interest income declined $4.6 million, as Q4 included a gain on sale of banking centers. On a year-over-year basis, non-interest income was flat. Non-interest expense increased a little under $1 million linked quarter and $4 million versus prior year. The linked quarter increase reflects seasonal benefit costs, higher technology costs, and was partially offset by lower marketing expense. The increase versus prior year was primarily driven by annual merit and other benefit costs.

Pre-provision net revenue of $135 million was just below Q4, which included the gain of sale from the banking centers versus prior year pre-provision net revenue increased $23 million, or 21%. Loan loss provision for the quarter was $8.6 million, reflective of loan growth and stable credit quality. Effective tax rate was 20.8% and our efficiency ratio of 55.9% improved modestly from Q4 and 383 basis points from a year ago.

Slide 7, provides additional detail on year-over-year, pre-provision net revenue growth. Net interest income grew by $27 million, or 13%; $17 million driven by rate and $10 million by volume. The rate component is the net result of a 59 basis point improvement in loan yield and a 22 basis point increase in deposit costs. When measured against the 97 basis point increase in average Fed funds rate, the result is a loan beta of 61% and a deposit beta of just 23%. The combination resulted in a 30 basis point increase in net interest margin to 3.74%. I will note that Q1's net interest margin is higher than what we view as the run rate going forward. I will discuss in more detail, when I provide the outlook.

Starting on Slide 8, I'll review the line of business results. Commercial Banking reported first quarter loan growth of 1.8% linked quarter and 10% year-over-year. C&I loan growth was $604 million year-over-year, led by Sponsor & Specialty Finance. And investor CRE loans grew $339 million from prior year. We will continue to see loan growth in all commercial business units.

Loan yields are up 15 basis points linked quarter and 78 basis points from prior year as the majority of the portfolio reprices on a floating basis. Loan fundings in the quarter were $492 million, down $397 million from Q4. The decrease reflects lower CRE fundings from a solid Q4. As you'll see on the bottom right, PPNR growth was 2% year-over-year. Net interest income grew $5.9 million reflecting average loan growth of nearly 10%. Non-interest income was lower by $1.3 million from a year ago, primarily due to a lower level of swap revenue. And non-interest expenses increased $3.4 million versus prior year. The increase reflects our continued investments in the business.

Slide 9, highlights HSA Bank, which delivered another solid quarter led by production of 348,000 new accounts. We finished the quarter with 2.9 million accounts, comprised of $6.2 billion and low-cost long duration deposits and $1.7 billion in linked investments. Account growth was strongest in our direct to employer channel, which is an area of strategic focus. This channel experienced greater than 20% year-over-year growth. Total accounts were 11% higher than a year ago and total footings were up $1.1 billion, or 15%. Net interest income was 27% higher from a year ago. The increase reflects growth of 13% in average deposits and a higher net credit rate. The cost of deposits was 19 basis points compared to 20 basis points a year ago. Non-interest income increased 13% from higher account fees and interchange revenue, each driven by growth and accounts. Total revenue for the quarter grew 21% from a year ago. Year-over-year expense growth was 7%, as a result of account growth over the past year and ongoing disciplined expense management, combined this result in an positive operating leverage and a pre-tax net revenue growth of 40%.

Slide 10 highlights Community Banking. Loans grew modestly year-over-year with growth in business loans and residential mortgages offset by continued decline in our home equity portfolio. Quarter-end balances included a $242 million residential mortgage portfolio purchase in the Eastern Massachusetts, which closed at the end of the quarter. Consumer deposits grew 6% year-over-year and business deposits grew 7%. Net interest income grew 2.5% year-over-year driven by deposit growth and increased deposit spreads. Non-interest income was essentially flat. Total revenue growth was 2.1% from a year ago and non-interest expense declined 1.8% from ongoing optimization of our expense base. The net result was positive operating leverage and a 16% growth in PPNR.

Slide 11 highlights our key asset quality metrics. Non-performing loans in the upper left remained flat at 84 basis points of total loans. Net charge-offs in the upper right were $9.6 million in the quarter. The annualized net charge off rate was equal to our 20 quarter rolling average of 21 basis points. Commercial classified loans remained at 2.75% of total commercial loans. Our allowance for loan loss was $211 million with a provision of $8.6 million and a coverage ratio of 112 basis points. The provision was slightly less than net charge-offs due to a modest improvement in consumer and commercial portfolio quality.

Slide 12 provides our outlook for Q2 compared to Q1. We expect average loans to increase between 2% and 3%, led by commercial loans and our portfolio purchase late in the quarter. We expect average interest earning assets to grow around 2%. Regarding net interest margin, recent volatility in both the short-end and long-end of the rate curve make it challenging to forecast net interest margin and net interest income. As I indicated on our January earnings call, if the Fed were to stay on hold and the 10-year swap remained at 2.75% (ph), we'd likely see quarter-over-quarter reduction of 1 basis points to 2 basis points in NIM.

At this point, we expect net interest margin to be 6 basis points to 8 basis points lower in Q2, which in close around 2 basis points for the senior notes issuance in late March, another 2 basis points for the mortgage portfolio purchase and around 2 basis points from higher securities for premium amortization as a result of the 10-year swap driving around 25 basis points from January. Given our earning asset NIM expectations, we expect net interest income to be up modestly from Q1. Non-interest income is likely to increase between $2 million and $3 million as a result of higher deposit fees and investment revenue. We expect our efficiency ratio to continue to be below 58% and our provision will be driven by loan growth, mix and quality. We expect our tax rate on a non-FTE basis to be approximately 21%. And lastly, we expect our average diluted share count to be similar to Q1s'.

I'll turn things back over to John at this point.

John R. Ciulla -- President and Chief Executive Officer

Thanks, Glenn. I'll conclude our prepared remarks by probably mentioning how we recently issued Webster's second second annual environmental, social and governance report, which is available on our website. Our ESG report highlights Webster's commitment to being a good corporate citizen and our leadership on responsible lending, sustainability, diversity and ethical governance. I want to recognize and thank our nearly 3,400 bankers for their continued efforts and outstanding performance. Together you are making a positive difference for our customers, our shareholders, the communities we serve and for each other.

We'll now open it up for questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steven Alexopoulos -- JPMorgan -- Analyst

Hi, everybody.

John R. Ciulla -- President and Chief Executive Officer

Good morning, Steve.

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Hi, good morning.

Operator

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

John R. Ciulla -- President and Chief Executive Officer

Michelle, I think something went wrong with Steve's line.

Collyn Gilbert -- KBW -- Analyst

Yeah, that was weird. I'm here.

John R. Ciulla -- President and Chief Executive Officer

Okay. Okay, Collyn. Good morning. We're waiting for Steve to rejoin, why don't you go ahead?

Collyn Gilbert -- KBW -- Analyst

Alright. Good morning, guys.

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Good morning, Collyn.

Collyn Gilbert -- KBW -- Analyst

Okay. I guess -- sorry, I wasn't prepared quite so quickly. To speak specifically about the resi portfolio purchase, if you could just talk about sort of the strategy behind that how you're sort of seeing kind of longer term loan growth migration and if there's more portfolio purchases that you intend to do?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

So, I'll take that maybe, John would like to add some color, but from a financial perspective, the loans were acquired at a discount and the returns will exceed our cost of capital. We saw it as an opportunistic acquisition. I would note that the yield on the portfolio exceeds our total residential portfolio, which is at 3.72%, so it will be accretive to net interest income for the year. And it's also fits nicely and is consistent with our strategy to decrease some of our asset sensitivity. On a qualitative side, it allows us -- it's 500 high-quality customers in and around the Boston area. And will allow us the opportunity to develop additional banking relationships with these customers.

John R. Ciulla -- President and Chief Executive Officer

So, Collyn, I think, Glenn gave you the details. I think from a strategic perspective, the word opportunistic is probably the right way to describe it. It's economically profitable as Glenn mentioned and for us, we've talked about looking to acquire portfolios. We certainly weren't out looking for a residential mortgage portfolio, but when this opportunity came about in, in the market it came about, it was an effective way on an economically profitable basis to acquire customers in Boston, where we're making a lot of good progress and so everything kind of came together from an economic and strategic perspective.

Collyn Gilbert -- KBW -- Analyst

Okay. And what's the duration of the book, Glenn?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

It's four years.

Collyn Gilbert -- KBW -- Analyst

Okay. And I mean, do you see potentially pursuing this more as an offset to grow in the securities book, or how do you balance those two?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

No, I mean, we like the asset and that we purchased at a discount. It came to us. It's a -- we're not out there eagerly trying to buy additional portfolios, but we're opportunistically, as John said. And if we have the economics work for us, we would take advantage of it.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay, that's helpful. And then Glenn, just on the NIM.

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Yes.

Collyn Gilbert -- KBW -- Analyst

So obviously the guidance for the second quarter you laid that out pretty clearly. Can you just talk about sort of the outlook a little bit longer term, if we stay in this shape curve and just in this rate environment curve for a long period of time?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Yeah. Sure. So, if I assume Fed funds are going to be at the 2.50% for the rest of the year, and I assume that 10-year is going to be at 2.60%, I think what you'd see -- the short answer is 1 basis points to 2 basis points from the second quarter to third quarter, and the third quarter to the fourth quarter in NIM compression. But that being said, I would also expect net interest income to go up from the second quarter to third quarter and the third quarter to fourth quarter anywhere from $3 million to $4 million, which is a result of continued growth. While we'll have NIM compression of 1 basis points to 2 basis points you still have net interest income up $3 million to $4 million.

Collyn Gilbert -- KBW -- Analyst

Okay. I'll leave it there and then just hop back in the queue. All right. Thanks, guys.

John R. Ciulla -- President and Chief Executive Officer

Thanks, Collyn.

Operator

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

Steven Alexopoulos -- JPMorgan -- Analyst

Hey, can you guys hear me?

John R. Ciulla -- President and Chief Executive Officer

We can. See, we want to let you know that we did not hit the dump button here.

Steven Alexopoulos -- JPMorgan -- Analyst

You might want to after I asked my questions, John. So two issues that I want to address is first, the Cigna contract with one of your competitors in this space, making quite a bit of noise that they plan to go after the contract, which they say is up this year. Can you help us think about how much risk is there to Webster that you could lose the contract? How aggressively will you compete for it? That's my first question.

John R. Ciulla -- President and Chief Executive Officer

Steve, I'll take it, and then let Chad provide some color. Obviously, everybody is competing with everybody in the space aggressively. We think we've been doing a terrific job. We don't comment specifically on the Cigna contract or any other material contract with our partners with respect to terms and conditions and renewal dates. I will tell you that we've got a strong technologically integrated contractual relationship with Cigna. We worked together and continue to grow together. And in fact, Chad and the team are working on a number of initiatives to enhance that relationship for the benefit of both Cigna and HSA Bank. And so we don't see anything that would change that outlook for that relationship going forward. I don't know, Chad, if you want to provide any...

Chad Wilkins -- Executive Vice President and Head of HSA Bank

I think that you did really well, John. We both invested heavily in this relationship and we continue to invest in the relationship. We've added resources as well, and think we can actually influence the growth rates by using some of the tools and resources that we have at our disposal and Cigna has been a lot more open to us participating helping them with the sales process and growth process. So, we like where we are with the relationship. So not sure where that competitors getting their information from.

Steven Alexopoulos -- JPMorgan -- Analyst

Got you. Could you guys give a sense how much of the business is coming from Cigna?

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Here we haven't really commented to the extent. It's not something we've commented on.

John R. Ciulla -- President and Chief Executive Officer

It isn't. And our concentration is lower as we've grown, since the acquisition.

Steven Alexopoulos -- JPMorgan -- Analyst

So it has that declined, since the deal.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Yeah. Our direct-to-employer business is growing faster than any other channel. So that's increasing as a percentage of the portfolio and our partner channels are decreasing and we're seeing the same thing in the industry as well.

Steven Alexopoulos -- JPMorgan -- Analyst

Alright. Okay. And then to shift direction, so healthcare stocks have been feeling the burn over the past week on fears of better care for all, which could potentially eliminate private healthcare, insurance and HSAs. You guys are, obviously connected in Washington. Where are your views on the restoratives, HSAs could go away? And is there a plan B here?

John R. Ciulla -- President and Chief Executive Officer

Yes, Steve, I'll take that one first again, and let Chad fill in any of the gaps. I'm not going to comment obviously on the market performance over the last couple of days. I think, we have obviously thought about this in the context of legislative and policy changes over time. We feel pretty strongly that the probability remains remote that the system would be changed enough with the single payer or Medicare for all program to really disrupt what we're doing. I mean, you think about a cost of a full replacement on a program like that, you think about where the political will and the support really is in aggregate for it and the fact that the current employer paid and insurance paid healthcare system works for most of America. We think that the probability is pretty remote that you're going to get something. Some of the -- Senator, Sanders and others have talked about in town hall forums.

I'd also say specifically the HSA is that there's 25 million plus HSA accounts now. We're reaching critical mass and it's embedded in kind of the process and you think about it like akin to a 401(k) that the more it's embedded the less likely it is to be legislatively eliminated or driven away. And I think lastly, if you think about bipartisan support that we've talked about, when you guys have asked us questions on specific legislation, it is a product that has bipartisan support. I think largely because it provide more transparency into the system. It let's people manage their own healthcare and ultimately drive down healthcare costs. So our view from where we sit here in Waterbury is that any modification or enhancements or changes to the overall healthcare system should and will likely include HSAs as part of the solution. So like that's kind of where we feel from a high level.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

I agree.

Steven Alexopoulos -- JPMorgan -- Analyst

I don't know, Chad, you have anything to add to that, but I do have one specific for Chad. So at the end of the year, interestingly enough cae out with a recent forecast and you kept the outlook for asset growth at 19% this year. And can you guys, so far grow a little over 15%. How do you think about growth for the rest of the year? And do you think the industry could be 19% this year? Thanks.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Yeah, I think, historically, the Devenir results are the estimates of how the participants are going to grow, is always higher than what the actual results end up being. So I think that there will be a little less than what folks are predicting. Our growth rates, as you mentioned there a little bit behind what the revenue results came out at the end of 2018. We have -- if you look across to our different channels, but obviously the growth rates fluctuate. And we're having the best results in our direct as Glenn mentioned earlier at -- of over 20% both accounts and deposits. And that's where we're actually investing the most. We have the most influence over sales and marketing efforts. I do think that we can influence growth rates across the rest of our portfolio because of the results that we're seeing in direct and the conversations we have with our health plan partners and the interest they have in leveraging some of the tools and processes that we have in those channels. So, I think we'll see -- we'll be able to influence that growth rate.

John R. Ciulla -- President and Chief Executive Officer

And then, Steve, I would just add, I'm not sure what their market assumption is either. I mean, we saw some of our increase is a result of the increases in the market.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay, great. Thanks for answering my questions.

John R. Ciulla -- President and Chief Executive Officer

Thanks, Steve.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Thank you.

Operator

Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Please proceed with your question.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. I have a couple of follow-up questions on HSA. So looking at Slide 9 of your deck, the pre-tax net revenue per account has increased very nicely by about $10 per account over the past year to $47 per account. Could an insurance carrier customer of yours point to that increase and say, "We want a piece of those increased economics as part of a revenue-share agreement?" Does that happen at all?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Yeah, I'd say that the -- it depends on our partner, depends on the volume, the dynamics of the account. We price based on fees and the average balance of the accounts and things like that. So, it just depends on the relationship with the carrier and the amount of integration, the investment and so on. So our pricing fluctuates depending on all of those factors.

David Chiaverini -- Wedbush Securities -- Analyst

Hopefully, that's -- it reflects the rate environment, too that we're seeing the benefit of.

John R. Ciulla -- President and Chief Executive Officer

Right. When you look at that, obviously, included in that is a higher net credit rate that's gone to the business year-over-year-over-year in a rising interest rate environment too. So, if you look at the PPNR year-over-year as an example, 40% improvement, about half of that is driven by rate, Dave. And to Chad's point, if you look at the financials and you break it down, so you have an interest income of about $42 million for the quarter, non-interest income about $26 million. And then you peel that back, we highlight the interchange fees, but the remaining fees, the account fees, so $14 million. I think the part that's most sensitive and Chad can jump in here, of the account fees, say $14 million is the 40% or so that's paid by the employers, right, the companies. And so when there is negotiation that's sort of the first area that's negotiated. So, it's 40% of the $14 million that's really subject to negotiations. So then, $5 million, or $6 million.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Yes, that's right. And that's where we're seeing the pricing pressures on the fees.

John R. Ciulla -- President and Chief Executive Officer

Right.

David Chiaverini -- Wedbush Securities -- Analyst

So there are some revenue you already have in place some revenue share agreements that incorporate some of the fee rate or credit rate from rising interest rates already kind of...

John R. Ciulla -- President and Chief Executive Officer

No, I think it's more of the fee side less of the credit side, right. And on the fee side, what I was trying to highlight is, it's that portion that's paid by the employer for the most part.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Yeah. And we're going to base our pricing, our fee pricing on the maturity size and performance of the overall portfolio.

John R. Ciulla -- President and Chief Executive Officer

And a lot of that is driven by scale of the new business, the size of the new business coming in, obviously.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. And sticking with the HSA, is it fair to say that there are better economics in the direct-to-employer channel versus the insurance carrier channel?

John R. Ciulla -- President and Chief Executive Officer

Well, that depends. It depends on how deep the integration is. What pricing is with the carrier? And how involved they are in driving the performance. For instance, the penetration within the employer, the average balance in the accounts, encouraging folks to save. So, I think we have some health plan partners that performed really well, and some that don't, but I'd say in general, yeah, we do -- normally we will experience better dynamics in the direct channel.

David Chiaverini -- Wedbush Securities -- Analyst

Great. And then shifting gears, the loan growth that you've highlighted looking out to the second quarter, I know, it's being driven by the portfolio purchase. But in general, how are you guys seeing demand for loans? Do you see any sort of change in the environment, either better or worse for demand for loans on the commercial side?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Yeah. So, I'd say -- on the commercial side, I'd say sort of steady. First quarter was seasonally low, if you look back over the last couple of years, first quarter has been a little bit lower, but we still saw solid growth and solid originations in the first quarter and our pipeline remains robust. So I would say kind of steady as she goes. On the consumer side, we've obviously seen just given general trends and ticks up in interest rate recently and our disciplined view on pricing we've seen mortgage, home equity and other consumer categories, not grow as much and be relatively flat. I will tell you that given the recent decline in long interest rates that we have seen our pipeline increase materially as we head into the second quarter on mortgages. So, what I'd say is BAU in the commercial bank kind of thinking about that 10% annualized growth rate, which drives most of our growth and we will likely see a higher mortgage origination volume in the second quarter based on the pipeline.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thanks very much.

Operator

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

Casey Haire -- Jefferies -- Analyst

Thanks. Good morning, guys.

John R. Ciulla -- President and Chief Executive Officer

Good morning.

Casey Haire -- Jefferies -- Analyst

Glenn, wanted to touch on the efficiency guide for the second quarter. I understand that NIM is going against you this quarter, but you did pretty -- you handily beat your efficiency ratio guide this quarter. I'm just wondering at 58%, what -- is there anything that would drive that meaningfully higher other than the NIM compression?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

No, I think -- look, we continue to be disciplined on our expense, but we also are opportunistically making investments. And I think, if you look full year, you'd probably expect for the efficiency ratio, the balance in the range of 56% and 58%.

John R. Ciulla -- President and Chief Executive Officer

Right. Casey, I'll put a finer point on that, because it's something we've been I think consistent with overtime. We used to talk about 60% of that guidepost and when we were asked why we weren't going to go lower than that we talked about the fact that given our focus disciplined strategic processes that we want to continue to invest in those areas that maximize our ability to generate economic profit. And so, I'll give you an example in this quarter in Commercial Banking investments in treasury and payment solutions in our end-to-end technology around portfolio management in hiring new people. You saw muted year-over-year PPNR growth in the Commercial Bank, that's a perfect example of where we're going to opportunistically invest where we think we can continue to drive long-term shareholder value and franchise value. So, I think Glenn's point is in our forecast. We've got a certain level of expenses, but we give ourselves a little bit of cushion to make sure we can continue to opportunistically invest in our key business lines.

Casey Haire -- Jefferies -- Analyst

Got you. Okay. And then Glenn, just a bigger picture question on the securities portfolio. Obviously, a pretty big asset for you guys at 30% of earning assets and a very nice yield, if we were to keep -- if the curve will remain flat, at what point would those yields start to roll over? And what is the strategy in terms of balances? Is it to keep it at this 30% concentration, or would you think to shrink it?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

No, I think as we look at our positioning from an asset sensitivity standpoint, we want to move more toward neutral. You might see a slight increase in the investment portfolio. And you saw some of that in -- going to the first quarter. That's one of the strategies because the duration is longer on that, that we can, we can add securities and reduce the asset sensitivity of the organization. Obviously, we can do -- we can also lengthen it through hedge floating, floating rate loans or things swaps like received fixed pay floating type of things, but securities is something we can also do.

Casey Haire -- Jefferies -- Analyst

Okay. And from a yield perspective like if the curve were would to hold this shape, at what point would those yields roll-over?

John R. Ciulla -- President and Chief Executive Officer

They stay relatively flat. I will give you some perspective. In the first quarter, our purchases were 3.55% (ph) a 5.4 years duration. That will come down in the -- and as we go in the second quarter probably about 20 basis points, 25 basis points. But -- so I think for this year we're OK as far as the reinvestment rate versus the portfolio, right.

Casey Haire -- Jefferies -- Analyst

Got you. Okay, great. And just last one from me. On the loan growth, obviously a pretty strong result here in the first quarter. How much of that is coming from outside your core footprint markets?

John R. Ciulla -- President and Chief Executive Officer

It's pretty consistent with what the overall portfolio is, we've always talked about kind of that particularly when you attribute the sponsors, the business we do toward the sponsors are located, we're still in that like 80% to 85% within our footprint. So, it's coming across our middle market offices and coming in Sponsor and Specialty with respect to our kind of end-market sponsors.

Casey Haire -- Jefferies -- Analyst

Great. Thank you.

John R. Ciulla -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question.

Matthew Breese -- Piper Jaffray -- Analyst

Good morning.

John R. Ciulla -- President and Chief Executive Officer

Good morning.

Matthew Breese -- Piper Jaffray -- Analyst

Just wanted to follow up on the loan growth question to get a sense for how prepayment activity has been? And how does that change year-over-year? Is that driving some of the increase in loan growth?

John R. Ciulla -- President and Chief Executive Officer

No. Matt, this is the toughest question every quarter, because it's really tough to predict. I think originations were slightly down, as we talked about seasonally prepayments were down as well, so we did get a little bit of loan growth in the commercial side. I don't really see any elements, or items that are driving prepayments right now and it seems to be generally episodic. Fourth quarter was a big origination in a big prepayment, and I think there is a natural cadence to that at year-end as people are trying to get deals done and get refinancings done. We don't really have a line of sight into 2Q with respect to prepayment activity, so it's a tough one. I don't think there are certain market elements or drivers or interest rate impacts or competition that give us a good idea of trending on the prepayment line.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. And then maybe you could talk about the deposit market outside of HSA. We've heard a few of your peers note that competition has leveled off, or perhaps is subsiding just a bit. Has this been your experience as well, since the Fed has gone on pause or how would you characterize it?

John R. Ciulla -- President and Chief Executive Officer

So we have seen it sort of level off that being said in my outlook, I'm thinking 1 basis points or 2 basis points on a total basis. But some of its regional too. For instance, in our Boston Market our deposit costs are higher than our core market. And so that's a phenomenon as well we've seen promotional pricing sort of stabilize in the last couple of weeks with the Fed on hold, but we haven't seen anything going down yet. So I think there is a lag between the Fed funds increase and the natural increase in deposits and we've factored some of them, but it is sort of stabilizing at this point.

Chad Wilkins -- Executive Vice President and Head of HSA Bank

I agree.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And then as we think about your Community Banking centers, John, you noted 10 less this year than last. Is that a good cadence for the next year and the year after that about 10 years?

John R. Ciulla -- President and Chief Executive Officer

It's not. What we say every quarter, which is true as we constantly reevaluate the network. We believe fully the banking centers will be an important channel for us over the medium and long-term. Obviously we've talked about square footage in aggregate coming down overtime, but there actually is nothing on our radar right now in terms of branch consolidation that we've identified. So, I certainly wouldn't say that 10 (ph) and the square footage that we've closed in the last 12 months would be indicative of what we'll do going forward. We can only tell you that we constantly reevaluate the efficacy of the network.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. And then as you look at your past dues there is an increase in C&I past dues up about $16 million quarter-over-quarter. What was that? And could you give us some color on the underlying credit trends NPAs were up slightly again?

John R. Ciulla -- President and Chief Executive Officer

Yes. I'm happy to -- and you know, it's funny. I'm always careful, because I always want to be conservative, but actually our reported results on asset quality didn't reflect how good the quarter was really on an overall asset quality perspective. And what I mean by that is, that one delinquency that you referenced was actually in administrative delinquency, where a $14.4 million of commercial credit was actually current with respect to principal, but there was confusion around a two-month and a three-month LIBOR contract and so a stub piece of interest was not paid at quarter-end. And in the first three days of this quarter that administrative delinquency was resolved. So, if you look at that pro forma that credit is a pass-rated credit that's performing as agreed. It's unfortunate that from a reporting perspective it had to be characterized in that category, but it is what it is. Absent of that, we would have been flat on a percentage basis about 19 basis points in delinquency are up about $1.8 million. So delinquency is really not a story.

Classifieds and non-performers on a percentage of portfolio basis remained flat. And so we think there still a pre-great recession levels and so we're really comfortable with where that is. And in fact the one commercial credit that drove the absolute number up slightly a $15 million credit again subsequent to quarter-end is no longer classified and non-performers. So we're happy with the trends there and then charge-offs were flat with the prior quarter and equal to our trailing 20-month rolling average, a 20-quarter rolling average of annualized net charge-offs. So -- and you saw that our provision level in our coverage went down obviously that reflects that after all of the stuff that I just talked about that the actual quality of the portfolio based on our modeling showed some improvement quarter-to-quarter.

Matthew Breese -- Piper Jaffray -- Analyst

Got it. Okay. And just for clarification, you mentioned the administrative non-performer that paid off. Was there an additional credit that paid off subsequent to quarter-end or are you referring to the same one?

John R. Ciulla -- President and Chief Executive Officer

No, I'm sorry, the delinquency was a single credit that was administrative that the payment was made shortly after and cured. When I talked about the impact on the non-performers and the classifieds, which were flat on a percentage basis, but slightly up on an absolute basis that in those categories, there was a separate credit that has since been resolved and is no longer nonperforming and no longer classified.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. That's all I had. Thanks for taking my questions.

John R. Ciulla -- President and Chief Executive Officer

Understood. That's all I had. Thanks for taking my questions.

Operator

Thank you. Our next question is a follow-up from Collyn Gilbert with KBW. Please proceed with your question.

Collyn Gilbert -- KBW -- Analyst

Thanks guys. Just a follow-up to the credit discussion. So John, just, kind of tying to your conservatism on how you approach the business in credit and all that. Just seeing the reserve ratio drop, and I know you just kind of outlined what the quality of the portfolio looks like, but I still just curious kind of in the broader macro trends or whatever and Glenn this is perhaps for you as well, but just getting a little bit deeper into how you're thinking about the reserve given where we are in the cycle and where that could trend going forward?

John R. Ciulla -- President and Chief Executive Officer

Collyn, I could spend an hour on this with you. As you know well, that the provision is really driven by models and over time the conventions in the rules have allowed there to be kind of less qualitative inputs into that. And I think we -- if you look at our reserve versus our peer group, it's a very healthy reserve and we think that that's a good thing. When you have resolution of credits or impairments or charges obviously then you need to run the model pro forma for all of those and it's based on risk ratings and trending in the portfolio that is very, very much model driven. And so we're not releasing reserve or lowering our reserve because strategically we think it's time to do that. It's -- we want to have the healthiest reserve that we can have within the confines of the process. And so here again once you've dealt with all of your charge-offs and your impairments and things have remediated in a good fashion, your risk ratings kind of dictate where you are on the reserving, so it ended up coming down a couple of basis points.

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Collyn, and just to add a little color. If I do a walk and I'd say, $115 million has been sort of like last couple of quarters. Growth would add about 1.5 basis points and then better asset quality, some of it driven by the impaired loan risk coming down and some of it driven by our outlook on both the commercial and the consumer portfolio, would probably take away the remaining 4. So that's how you -- if you were to do a simple walk, very simple from $115 million to $112 million, how I would think about it, up 1, a little over 1 for growth, and then down 4 for generally a more continued favorable outlook and lower or less impaired loan risk.

Collyn Gilbert -- KBW -- Analyst

Okay, that's helpful. And then just going back to HSA, Chad, you have the split between -- of your HSA accounts, the split of direct-to-employer accounts versus insurance carriers or health plan accounts?

John R. Ciulla -- President and Chief Executive Officer

Yeah, Collyn, I think the -- just roll that our right now. We are at about close to 25% depending on whether you're looking at deposits or accounts in the direct and then about over 50% or actually 45% in health plan channels, so the rest is retail.

Collyn Gilbert -- KBW -- Analyst

Okay. And you're kind of longer-term projections, obviously, I know direct to employer has been where your efforts have been in terms of growth. But just kind of more broadly, how do you see that mix changing over -- I don't know, next three years or whatever some sort of longer term pass?

Chad Wilkins -- Executive Vice President and Head of HSA Bank

Yeah. It's not going to be a dramatic change. I think we're growing our direct channel more quickly. And I think we can continue to do that because we've invested a lot, we've added resources and tools to that to grow that channel. So we expect that to continue to grow faster. So over time, we'll continue to -- that will continue to make up a larger portion of our portfolio. But I don't see that that's over a five-year type of a time frame. So I don't have an exact number for you, but it will be a couple of percentage points per year increase and direct channel.

Collyn Gilbert -- KBW -- Analyst

Okay. And then just one final question broadly, John and Chad, on the HSA business, right, so obviously there's the volatility in healthcare stocks and concern about the healthcare industry right now. And I hear what you're saying in terms of you feel pretty good about the structure of where you sit today. Is there -- would there be any catalysts or what would be the catalysts that would maybe make you rethink sort of your growth investment plans within the HSA business kind of more broadly, right. Is there anything that would occur that would cause you to maybe put the brakes on growth and kind of reinvest some of that capital into just the core bank business?

John R. Ciulla -- President and Chief Executive Officer

I think we're in a good situation right now, because we haven't had to make an either or decision with respect to investment given some of our earnings momentum. I can't think of an inflection point Collyn, or a particular event that would change our view. What I can say, because we've been saying it for a long time and Jim's been saying it before me. We're constantly evaluating HSA in terms of structure, opportunity, changing competitive landscape, partnerships, technology, all the things that you would expect us to be looking at in order to make strategic decisions as we go forward. So as you can imagine we spend a good deal of time on strategic analysis of HSA overtime and what happens with it and how it can operate most effectively within its industry and the competitive landscape. And right now, we're really pleased with how we're executing? What we're doing? But we're not resting on that and we continue to look for ways to make it even strengthen the business and have the growth even accelerate. So I can't think of anything that would really change our fundamental philosophy about the strength of this business right now.

Collyn Gilbert -- KBW -- Analyst

Okay. I'll leave it there. Thanks, guys.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, thanks for taking the questions. One follow-up, I guess, at the dinner you hosted a little earlier, you had said that you'd be OK with HSA comprising up to 50% deposits. Is that still -- I guess it seems like you still would be comfortable with that, is that still the case?

John R. Ciulla -- President and Chief Executive Officer

Yeah. Jared, and obviously it's not a hard and fast rule. We tried to give you some indication, but I think that's exactly right. I mean given the optionality we have over time with respect to deploying those funds or even brokering them out, we have to, I think from a concentration risk perspective that's probably a good indicator.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, thanks. And then Glenn, with the drive to becoming more interest rate neutral, how long do you think that will take? Is that something you're looking at over the next quarter or two, with the Securities purchases and the mortgage purchases or is that more a longer-term transition?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Yeah. It's over a year, maybe even over -- beyond a year, but it's over quarters, not the next two quarters.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, great. And then just finally for me, the capital levels continue to grow here, you've had some success with your loan production offices outside of New England. Any thoughts to engaging in M&A, or having a more robust sort of organic growth focus in these other markets?

John R. Ciulla -- President and Chief Executive Officer

Yeah. First, I have to do it, because I paid (ph) the loan production office context, because I think we really believe that kind of we've established community engagement with local people there. I think that, that plan Jared has worked very well. We would never say never, but given our strategy about expanding Commercial Banking, leveraging our low cost of funds, it's less likely that we do whole bank acquisitions and some of those markets that we would just organically continue to develop our most profitable businesses in those expanded markets. So our story on M&A is the same, while you never say never. We think, we still have runway for organic growth and given where our strategic focus is, it has to be incredibly compelling to look at a whole bank partnership or acquisition and present time.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. So I guess, how should we think about sort of longer-term capital ratios over the last few years you've been steadily growing capital. Where would you like to see that sort of fall out? And then I guess how should we expect to see that controlled whether that's through increased dividends or buyback?

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Right. Yeah. So a couple of things. So I think we feel good about our capital levels. I would expect then to stay relatively flat given our outlook or growth outlook on loans. I think also you've probably -- we look at our payout, we look at our dividend payout, it's something that we spend time with in April and you probably would expect given our parameters that we've talked about in the past that the dividend would increase at the end of this -- during this quarter. So that would be another source -- or use of capital. But generally, we feel good about where our capital levels are.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thanks a lot.

John R. Ciulla -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Ciulla for any closing remarks.

John R. Ciulla -- President and Chief Executive Officer

Thank you, Michelle. And thank you all for joining us this morning and for your continued support of Webster.

Operator

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.

Duration: 59 minutes

Call participants:

Terry Mangan -- Director of Investor Relations

John R. Ciulla -- President and Chief Executive Officer

Glenn I. MacInnes -- Executive Vice President and Chief Financial Officer

Steven Alexopoulos -- JPMorgan -- Analyst

Collyn Gilbert -- KBW -- Analyst

Chad Wilkins -- Executive Vice President and Head of HSA Bank

David Chiaverini -- Wedbush Securities -- Analyst

Casey Haire -- Jefferies -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

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