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Webster Financial Corp (Conn) (NYSE:WBS)
Q4 2019 Earnings Call
Jan 23, 2020, 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 Fourth Quarter 2019 Earnings Call.

I will now introduce Webster Director -- excuse me, I will now introduce Webster's, Director of Investor Relations, Terry Mangan. Please go ahead, sir.

Terrence K. 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 provisions 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 forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the fourth quarter of 2019.

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

John R. Ciulla -- President and Chief Executive Officer

Thanks, Terry. Good morning, everyone. Thank you for joining Webster's fourth quarter 2019 earnings call. CFO, Glenn MacInnes and I will review business and financial performance for the quarter, HSA Bank President, Chad Wilkins is here with us in Waterbury and will be available during Q&A.

I'll begin my comments on Slide two. Webster's fourth quarter results demonstrate our ongoing commitment to strong execution on our strategic priorities. Earnings per share were $0.96 in Q4, this compares to $1.1 in both Q3 and Q4 of 2018 when each period is adjusted for one-time items. The decline resulted from a reduced level of net interest income relative to each prior period, primarily driven by the full impact of three Fed interest cut rates during the second half of 2019, a lower than expected LIBOR rate in Q4 and a mix shift in the loan portfolio to lower yielding high quality CRE loans.

Assuming no further Fed action in 2020, our net interest income is expected to grow beginning in Q1 and continuing throughout the year. We anticipate full-year 2020 net interest income will meet or exceed the $955 million generated in 2019 based upon our current asset growth forecast. All other metrics in the quarter were favorable, loan growth was strong as commercial loans grew 10% from a year ago or by more than $1.1 billion.

Total footings at HSA Bank increased 18% from a year ago for growth of almost $1.3 billion during the year. Disciplined expense control resulted in flat linked-quarter, non-interest expense and credit metrics remained remarkably strong contributing to our lowest quarterly provision in more than seven years. In Q4, non-performing loans net charge-offs and classified assets were all lower as a percentage of total loans, when compared to both the prior quarter and the prior year. The overall portfolio weighted average risk rating improved as well.

Tangible book value now exceeds $2.5 billion and increased 15% from the end of 2018. Tangible book value per share is also 15% higher than last year. Glenn will dive deeper into the quarter, but I'd like to make a few comments related to full-year 2019 performance.

I'm on Slide 3. Reported PPNR totaled almost $525 million and increased 8% from 2018. This was driven by positive operating leverage as revenue grew more than 4%, while expenses increased only 1.5%. Despite the lower interest rate environment in the second half of the year, the net interest margin for full-year 2019 was 3.55%, compared to 3.6% in 2018. The efficiency ratio for the full-year improved one full point to 56.8% and the provision totaled $38 million and was it -- added to lowest annual level since 2014.

Our performance resulted in a full-year return on common equity of 12.8% and a return on tangible common equity of 16%. The net result was full-year EPS of $4.06, up 6.5% from 2018. This represents our 10th consecutive full-year of EPS growth, which puts us in select company within the banking industry. Also full-year common dividend of $1.53 per share increased 22% from 2018.

Slide 4 highlights the strength of our loan and deposit performance since the end of 2017. A little over $2.5 billion of loan growth has been accompanied by more $2.3 billion of deposit growth. Our loan to deposit ratio of 86% continues to provide us with significant flexibility. We believe that our ability to consistently generate organic loan and deposit growth year in and year out it's a differentiator. Our five-year loan and deposit growth CAGRs were both around 8%.

Turning to Slide 5, I'll comment briefly on our lines of business. Commercial Banking's loan portfolio has increased more than $1 billion over the past year for end-of-period growth of 10% and deposits were also up 8.7% in that business line. HSA Bank opened 744,000 new accounts in 2019, representing its third consecutive year with production above 700,000 accounts. Community Banking's loans and deposits each grew by approximately 6% from a year ago with continued strength in business banking and mortgage banking.

I'll now turn it over to Glenn for the financial review.

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

Thanks, John. I'll begin on our average balance sheet on Slide 6. Average loans grew $335 million or 1% linked quarter growth continues to be led by the commercial business. In the quarter, we had significant growth in commercial real estate, which increased $355 million versus the third quarter and more than $800 million from a year ago.

Commercial loans now represent 64% of total loans, compared to 63% in prior year. Consumer loan performance was led by growth in residential mortgages with some offset from continued reduction in home equity, versus prior year our $1.4 billion of total loan growth was fully funded by deposit growth, combined low cost transactional and HSA deposits have increased more than $1 billion from last year and now represent 58% of total deposits. Their combined cost was 13 basis points in Q4 and 12 basis points in prior year. The Q1 seasonal inflow of HSA and public funds deposits will fund loan growth and reduced short-term borrowings.

Slide 7 summarizes our Q4 income statement and drivers of quarterly earnings. Net interest income was $9 million lower than prior quarter. This was primarily due to a 38 basis point reduction in average one month LIBOR contributing to a reduction in interest income of $18 million. This was partially offset by lower deposit costs of $3 million, reflecting a reduction of 5 basis points and we also realize the benefit of $6 million from loan and security balance growth.

Likewise, net interest margin was 22 basis points lower than Q3. The drop in loan yields reduce NIM by 23 basis points, which was primarily driven by lower LIBOR rates. Growth in loan and securities also compress NIM another 6 basis points, this was partially offset by 7 basis points due to the reduction in rate on deposits and borrowings.

Net interest income in Q4 was about $5 million lower than our outlook and NIM was about 8 basis points lower. This was primarily the result of lower deferred fees from prepayments, the timing on deposit rate reductions, which came in 2 basis points higher than our forecast and the mix shift from C&I to commercial real estate and lower-than-expected LIBOR rates. Versus prior year net interest income declined $6 million, $21 million of the decline was due to lower rates with a partial offset of $16 million from additional volume. Asset sensitivity, has been reduced over the past year under short end down 50 basis point scenario, our PPNR would be lower by 3.8%, this compares to 4.4% at the end of Q3 and 5.4% a year ago.

Non-interest income increased $1 million linked-quarter and decreased $2 million from prior year. The linked-quarter increase primarily reflects a higher level of revenue from client hedging activities. The decrease from Q4 of 2018 reflects a $4.6 million gain on the sale of banking centers in that period. Reported non-interest expense of a little under $180 million was flat linked quarter and up $5 million year-over-year.

Pre-provision net revenue of $122 million declined $8 million from Q3 and $13 million from prior year. Loan loss provision for the quarter was $6 million and essentially matched net charge-offs. The efficiency ratio was 58%, the increase from Q3 and a year ago were driven by lower net interest income and partially offset by continued expense discipline. Our effective tax rate was 22.3%, up from 21.3% in Q3. The increase was due to a discrete tax expense associated with the state and local tax position recognized in Q4.

Beginning with Slide 8. I'll highlight the line of business results. Commercial banking loan growth was led by investor commercial real estate, which grew 12% linked-quarter and 23% versus prior year. C&I balances were flat linked-quarter with fundings offset by pay-offs, but grew 5% versus prior year. Net interest income grew $1.1 million from last year, primarily reflecting average loan growth of $926 million or 9%. This was partially offset by lower loan spreads driven by mix and a lower credit on deposits. Non-interest income and non-interest expense were essentially flat from prior year, combined ongoing loan growth resulted in a 2% increase in PPNR versus prior year.

Slide 9 highlights HSA Bank, which delivered a solid quarter, led by the production of 126,000 new accounts. Our 3 million accounts have $8.5 billion of total footings. Footings were $1.3 billion or 18% higher than prior year, while accounts were 9% higher. Net interest income was 6% higher from prior year, reflecting growth of 12% in average deposits and the impact of our lower net credit rate. The cost of deposits was 20 basis points and has remained flat for 12-quarters. Non-interest income increased 6% from prior year, driven by an 11% increase in interchange revenue and flat account fees primarily due to reduction in statement fees as we move account holders to e-statements. Total revenue for the quarter grew 6% from a year ago, while expenses increased 12% resulting in flat pre-tax net revenue. January month-to-date deposits are up approximately $400 million from year-end, with new accounts tracking to last year's levels.

Slide 10 highlights Community Banking. Total loans grew by over 6% year-over-year with growth coming equally from business banking and personal banking. Business in consumer deposits grew 10% and 4% resulting an overall deposit growth of nearly 6% from prior year. Net interest income was adversely impacted by the declining rate environment. Adjusting for a $4.6 million one-time gain on the sale of six banking centers in the fourth quarter of 2018. Non-interest income increased 5% year-over-year, led by higher mortgage banking revenue. Expenses grew by less than 1% as investments in technology and people were offset by efficiencies in other areas.

Slide 11 highlights our key asset quality metrics. Non-performing loans in the upper left declined $12 million from Q3, asset based lending represented $9 million of the decrease. Net charge-offs in the upper right declined $7.7 million from Q3 and totaled $6.1 million in the quarter. Commercial classified loans in the lower left decreased modestly and now represent 260 basis points of total commercial loans. This compares to a 20-quarter average of 17 basis points. Our allowance for loan loss remains at $209 million, with a provision of $6 million and a coverage ratio of 104 basis points. The $6 million provision reflects the strong credit profile, which John outlined.

We're on track with our CECL adoption, which will be recorded on our balance sheet effective January 1st. We expect the day one impact to increase our current allowance by approximately 30% in line with the range disclosed last quarter. The impact will be recorded as a charge to capital and will reduce common equity Tier 1 capital between 20 basis points and 25 basis points, but increased total risk-based capital by about 5 basis points. Regarding the day two impact our quarterly CECL allowance will be based on loan growth and mix, asset quality and the macroeconomic environment, given stable metrics we would expect our allowance coverage ratio to remain around 30 basis points higher than Q4s level.

Slide 12 provides our outlook for Q1, compared to Q4. We expect average loans to increase 1% to 2%, driven primarily by commercial real estate and residential loans. We expect average interest earning assets to grow around 1%. We expect net interest margin to increase up to 3 basis points assuming stable market rates. As a result, we expect net interest income to increase $2 million to $4 million. Non-interest income is likely to increase $1 million to $3 million.

We expect our efficiency ratio to be in the range of 58%, and our provision for loan and lease loss under CECL will be driven by loan composition and forecasted economic conditions. We expect the tax rate on a non-FTE basis to be approximately 22% to 23%. And lastly, excluding any share buybacks, we expect our average diluted share count to be approximately 92 million shares.

With that, I'll turn things back over to John.

John R. Ciulla -- President and Chief Executive Officer

Thanks, Glenn. Webster entered this new decade and our 85th year from a position of strength, based on our efforts and accomplishments in the decade just ended. We will continue to focus on executing against our strategic priorities, always with a long-term view of maximizing economic profits and continuing to build franchise value.

We are fortunate to be guided in our strategic direction by an accomplished Board of Directors. I'm pleased to say four of Webster's Board members, Liz Flynn, Carol Hayles, Karen Osar, and Lauren States for their recent recognition among Women Inc's 2019 most influential corporate for directors. As always, I'd like to acknowledge our 3,400 values based bankers for their outstanding contributions and their unwavering commitment to our customers, our communities and to each other.

And finally before we open it up for questions, I'd like to take a minute to comment on the announcement we made this morning that consistent with our well planned multi-year transition Jim Smith has announced that he will be retiring from Webster's Board of Directors effective at our April Annual Shareholders Meeting at which time I will become Chairman of the Board. On behalf of our Board of Directors and all Webster bankers, I'd like to again acknowledge and thank Jim for his incredible contributions to Webster and the communities we serve over his distinguished 44-year career. I'd also like to thank him personally for his guidance support and friendship during my time at Webster and particularly during the period of transition. He is truly a remarkable person.

With that, Michelle, I'm happy to open up for questions.

Questions and Answers:

Operator

Thank you. We will now 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

Hey, good morning, everybody.

John R. Ciulla -- President and Chief Executive Officer

Good morning, Steve.

Steven Alexopoulos -- JPMorgan -- Analyst

To start, first, looking at the guidance on NIM, the up 1 basis points to 3 basis points of 1Q '20 is a very favorable trend. For Glenn what are you seeing that leads you to think NIM will expand in the first quarter?

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

So part of that Steve is the inflow of both HSA and public funds, which will allow us to paydown some FHLB borrowings. So that will help NIM. And then we also have CD maturities and promotional savings repricing, which will also favorable -- be favorable both net interest income and NIM.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. And then once we get beyond the first quarter Glenn, how are you thinking about NIM for the rest of 2020?

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

So it's sort of flattish for the next couple of quarters.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. Got you. And then -- thank you for Chad on HSA Bank. Can you talk about how the enrollment season went for HSAs and how you're feeling about 1Q '20 account and deposit growth based on what you saw?

John R. Ciulla -- President and Chief Executive Officer

Yes, Steve, it's John and I'll let Chad obviously provide some color. Obviously, we say the same thing at this time of the year, which is it's too early to make a firm call, but the guidance will provide is kind of to-date in January. We're tracking really almost on top of the range as we had last year, both in inflow of deposits and new account openings. So if you think of those numbers that's about $400 million in new deposits and in the ballpark of 250,000 accounts. So we're tracking, kind of, where we were last year and obviously we'll be able to give you a much better indication at the next earnings call when the enrollment period wraps.

Charles L. Wilkins -- Executive Vice President and Head of HSA Bank

Yes, the only thing I'd add John is that we continue to see the strongest performance in the channels where we have the most influence on growth activities. And we're going to have the Devenir study coming out between now and the end of the first quarter, and we'll have full results to report on when we get there as well.

John R. Ciulla -- President and Chief Executive Officer

And one comment I'll make Steve maybe to anticipate other questions on the call too, there was no impact in Q4 of any of the account movements that we talked about in Q3. So we didn't receive any compensation from some of those accounts leaving and none of those accounts left during the quarter. So fourth quarter was not impacted by the information we guided that group to in Q3.

Charles L. Wilkins -- Executive Vice President and Head of HSA Bank

Okay and then -- thank you. And then just final question, so if we look at full-year loan and deposit growth for 2019 they were each running above the two-year CAGAR. Do you think you can continue pacing above that historical in 2020? Thanks.

John R. Ciulla -- President and Chief Executive Officer

So you may have noticed, I said in the beginning of my remarks, which was important point I wanted to make that I thought we would meet or exceed our total net interest income for the year based on our current asset growth forecast. And I think that's a great question. Right now, our loan growth forecast is slightly below what we did between '18 and '19. So I think we're relatively confident we can keep running at that relative pace, maybe slightly below on loans and when you factor in growth in the securities portfolio. We don't think that our asset growth metrics or aspirations are too aggressive.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay, thanks. Before I sign off. John, congratulations on the Chairman role and best of luck to Jim Smith on retirement. Thanks for taking my questions.

John R. Ciulla -- President and Chief Executive Officer

Thank you very much.

Operator

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

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Thanks, good morning everyone. My first question just is around the growth that you saw this quarter, and how you guys are sort of seeing that trend in 2020, because obviously as you guys indicated the mix this quarter of higher CRE versus C&I impacted the NIM. So number one, just where did the extraordinary growth from CRE come from? And then maybe just some commentary on -- as how you see that playing out in 2020? And then also maybe just some of the dynamics within C&I as to why that growth didn't necessarily materialize perhaps to what you were thinking?

John R. Ciulla -- President and Chief Executive Officer

Sure. Happy to do that, Collyn, and thanks for the question. Yes, it is an interesting underlying story, I always talk about the fact that we've got these great -- this diverse source of loan growth, right, both geographically and product set and in business line and I wish, I could say that we could just simply pull levers and have growth in certain areas. And so I think this quarter just happened to be a quarter of light pay-off in commercial real estate, I'll provide some detail on that and because I think it's also important to know that we're not sort of being too aggressive in any one area.

We had extraordinary growth in our investor commercial CRE book, but that was on about $375 million in new fundings, that compares to $360 million in new fundings fourth quarter of last year. So really our origination levels were not materially higher. The difference in the story in CRE was we had $132 million in pay-offs this Q4 as opposed to $290 million in pay-offs, the year before. There doesn't seem to be a trend line or any dynamics that are driving that. But I think it's an important point to make that we didn't have outsized CRE originations, we had significantly lower pre-pay-offs.

And the story is similar in C&I and sponsor and specialty business for instance, which you know have been a big driver of high-yielding loan growth for us. We had originations of something like $240 million in Q4, as opposed to around $200 million last Q4, but we had $296 -- almost $300 million in pay-offs in that Sponsor & Specialty business, resulting in an actual decline in the second half of the year. So it's really a pay-off story more than outsized originations. And as you heard me talk about the net result is a slightly lower yield on the loans and a slight improvement in weighted average risk rating and credit quality in the portfolio. So I think you'll see more of that going forward, you'll see a different mix in different quarters just depending on with our -- I think the disciplined credit choices where we have opportunities across our footprint.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. And do you have a sense of -- or maybe as you -- as within the guidance that you're offering. What you think paydowns will do this year. I mean, do you think they'll slow?

John R. Ciulla -- President and Chief Executive Officer

We don't -- I think if you looked at our expectations again and it's hard to predict in the various categories. But I think we anticipate similar origination volumes and similar paydown metrics, obviously that could change quarter-to-quarter, but if we look back over history, if you look at it on kind of a trailing four-quarter basis, you get a pretty good sense. So the short answer to your question is we are not anticipating sort of -- some sort of macro change that would either lower prepays or drive them higher.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, OK, that's helpful. Thank you. And then, Glenn just on the -- the comment on the timing on pushing through some of these lower deposit costs in the first quarter. Just, yes, I was just curious kind of where your head is and how you're pricing some of your CD rates now and just how aggressive you think you could be on some of those. Assuming I know all your guidance assumes no more Fed cuts. So just kind of getting a sense of what -- where you think ultimately some of those deposit cost can go?

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

So if I look at total deposit cost for Q4, I think we're somewhere around 54 basis points, we think on average in the first quarter that could drop down to 47 basis points. And a lot of that is like I indicated shortening the term of CDs, which is also our asset sensitivity, but it's also pulling back on some of the promotional rates that we have out there.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. That's helpful.

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

I've said -- just said it for context, our seven-month CDs at 160 and our -- and we have a savings promotion that's out there at 180 right now.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. Okay, alright, thank you for that. And then, Chad a question for you, an obvious question that maybe you don't necessarily here. But -- so when we talk about HSA and John you had indicated that kind of you're tracking similar to where you guys tracked in 2019. I guess the simple question is why is growth not higher given all that you've done, all the investments you've made within the sales force and infrastructure. Just curious as to why growth isn't coming on higher?

John R. Ciulla -- President and Chief Executive Officer

Yes, Collyn. In 2019 we saw -- we actually saw higher growth rates in our new accounts with new employers. It's a little bit lower with our existing employers and as you know, large portion of our new accounts come from is in employers. So it's really was enrollment base. The -- and then there's a lot of factors that impact enrollments in our -- in health plans and consequently in HSAs. I do believe we have the opportunity to influence back to a greater extent and as we go into 2020, we've conducted a lot of pilots and programs in 2019 that were targeted at providing decision support tools and programs to our employers, which showed really positive results in terms of both penetration and deposit rates with customers. So we're looking to accelerate that as we go into 2020. But again a lot depends on the macro environment and how that influences enrollment as well.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. All right, thank you. I will leave it there. Thanks guys.

John R. Ciulla -- President and Chief Executive Officer

Thanks, Collyn.

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

Thanks, Collyn.

Operator

Thank you. Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please proceed with your question.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Hey guys, good morning, and let me echo what's already been said, congratulating both John and Jim in their new roles.

John R. Ciulla -- President and Chief Executive Officer

Thanks, it's good to hear from you.

Mark Fitzgibbon -- Piper Sandler -- Analyst

First question, I'm curious, John, could you give us a little update on, sort of, how things are going in Boston, and also help us maybe size your business these days in Philadelphia and D.C. markets?

John R. Ciulla -- President and Chief Executive Officer

Yes, sure. Boston continues to track. We've made no secret that it's probably the most competitive market we have with respect to cost of customer acquisition and deposit pricing, and that really hasn't abated much. You've all read that JP Morgan is there as well, which continues to make the market competitive. We continue to make progress. I think we're on track to hit our goal in terms of asset growth in loans and deposits, and again it's been probably more costly than the rest of our footprint.

We are past breakeven for a year now. I think we had about $700,000 in just retail bank contribution there, which we try and track to be honest with ourselves and honest with you. Obviously our profitability in the market, overall market is pretty strong, because that's really the epicenter of our Sponsor & Specialty business, a lot of our sponsor relationships. We've got a great commercial real estate book there, a couple of billion dollars in loans.

So we're happy with where the market is. We continue to need to reduce square footage -- you know, our banking centers there are big and they don't need to be that big, so we're making some progress on that front. But all in all, we think it's a critical market, it's a fast growing market, there are more cranes in the sky in that city than you could imagine, and so we do think that our physical presence there and our retail presence there helps our wealth management and all of our commercial banking. So I would say good, not over-performing and not under-performing, kind of right on our expectations.

With respect to the other markets, Mark, obviously we don't have any retail footprint in those other markets, in Philadelphia or in D.C. We've got good traction. We've been in the Philadelphia market from a commercial real estate perspective for over 10-years now. We've had a lot of growth in that market. Our total loans in Philadelphia in the south Jersey, Philadelphia, Pennsylvania area approached $2 billion, excellent asset quality, full relationships with middle market customers. The vast majority of those outstandings are commercial real estate and we had ABL there.

So again, you've heard our philosophy -- we don't look at it as a loan production office, we look at it as a core market. We expect cash management and other relationships with our borrowers there, and we're OK with growing at a modest pace, because we don't want to be the lender of last resort. And I'd say D.C., which is not as critical to us right now, we've got asset-based lending and commercial real estate, but we're talking a couple of hundred million dollars in exposure there and it hasn't been really a significant growth market for us recently.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Okay. And then secondly John, the market seems to be enamored of MOEs these days. I guess I'm curious, are there banks out there that you could see a combination with would make sense to you?

John R. Ciulla -- President and Chief Executive Officer

Do you want me to give you the specific names, Mark?

Mark Fitzgibbon -- Piper Sandler -- Analyst

Sure.

John R. Ciulla -- President and Chief Executive Officer

It's -- look obviously there's a lot more chatter, and there are some compelling reasons, I think, why banks are choosing to gain scale. We think gaining scale over time is important. We really haven't shifted our focus or made a significant pivot in that regard. Obviously as I said, there's a lot more discussions, CEOs are talking with each other. There are compelling reasons, both from a technology investment perspective, higher capital scale, access to data, all the reasons why it's better. You know, we were three times the size, we'd probably spend the same amount on AML BSA as we do now. So I understand the compelling rationale. We would never say never, but we are very much focused on continuing to grow and exploit our differentiated capabilities. But I'll leave it at that, to say we're not focused on M&A as a primary strategic goal right now, but we would never say never.

Mark Fitzgibbon -- Piper Sandler -- Analyst

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. A couple questions for you. So first on expenses, I was just curious, is there anything on the expense front you could do to offset some of the recent NIM pressure as we look to 2020? And the reason I ask, it looks like based on the efficiency guidance of 58%, it looks like some of the operating leverage could reverse a little bit.

John R. Ciulla -- President and Chief Executive Officer

David, great question. I'll let Glenn provide some fuller context. And I think it's the appropriate question to ask. I think we've demonstrated to the market over a sustained period of time that we have good expense discipline and expense control. We have not been aspirational about really aggressively reducing expenses because we've talked about how important it is to continue to invest in our organic growth and our differentiated businesses, particularly in commercial and HSA, and we've done that. And I think it will set us well over the long-term.

The short answer is yes, we have opportunities and we're working on many of them right now; business process automation in the middle and back office, we've got a lot of things rolling there. We have fewer people in operations this year than we did last year, and we'll continue that trend, so we think we can really start to bend the curve with the use of technology automation, middle office efficiency. And so yes, we do have tools available to us and not all of that is layered in our forward forecast. We want to make sure that we're not hurting our organic growth and our long-term franchise build, but we do have levers to pull with respect to expense control.

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

Yes, and I would just say you have to keep in mind the first quarter has a couple things. You have the higher FICO costs which somewhat offset some of the medical costs, so there's some ins and outs there, Dave. But to John's point, I think we have opportunity both in the middle and back office, as well as optimizing as we continue to do with community bank.

David Chiaverini -- Wedbush Securities -- Analyst

Great, thanks for that. And then shifting to the NII and some of the NIM commentary, well the leverage strategy that you guys kind of spoke about last quarter, where you had purchased, I think it was about $640 million of securities funded by FHLB borrowings, do you plan to unwind that with the deposit inflows in the first quarter, or conversely, do you plan to add to that leverage strategy?

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

So I can tell you we're likely not unwinding it, and if you look at our earning asset growth, to John's earlier comments, you have both loan growth and proportionate security growth.

David Chiaverini -- Wedbush Securities -- Analyst

Great, then the last one -- go ahead?

John R. Ciulla -- President and Chief Executive Officer

No, I'm sorry, David. Go ahead.

David Chiaverini -- Wedbush Securities -- Analyst

So and then just continuing with the discussion on NIM, so your interest rate sensitivity, you mentioned about how it was reduced this quarter. How low would you like to take that interest rate sensitivity?

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

So we'd like to move closer to neutral. I think the only caveat to that is we want to preserve some of the upside as well. So I think if you look at our slide deck back on Page 20, you can see the progress we've made, particularly in a short end down scenario, on the falling rate scenario, you can see the progress.

So part of adding investment securities, part of the balance sheet positioning we did in the second and third quarter certainly helped that. Also, the fact that we have absorbed three Fed cuts as well, and if you look out, at least as far as we're looking at, more stability in both Fed funds, one-month LIBOR and three-month LIBOR, which will sort of keep that constant, and then actions we take on top of that, whether it's adding more fixed rate assets in the form of residential or equipment finance, investment securities portfolio, or shortening as we have our borrowings and some of the CD promotions and things like that will have a positive impact going forward.

David Chiaverini -- Wedbush Securities -- Analyst

Thanks very much.

John R. Ciulla -- President and Chief Executive Officer

Thank you.

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, good morning everybody.

John R. Ciulla -- President and Chief Executive Officer

Hey, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Just also wanted to give my congratulations to you, John, and Jim for a great career. As a Connecticut resident, I certainly hope Jim stays fully engaged in the opportunities to help improve the financial situation and fiscal situation here in the state.

John R. Ciulla -- President and Chief Executive Officer

Sure, thanks for that comment, and I think I can -- even though Jim is not here, I can tell you, rest assured, that he will continue to be involved in policy around the state.

Jared Shaw -- Wells Fargo Securities -- Analyst

That's great to hear. Maybe just circling back on the HSA, Chad or John, any of the -- have you noticed any of the rhetoric around the political environment right now in Medicare-for-all impacting any of the employers' decisions to adopt a high deductible healthcare plan, or is that really not flowing into their internal HR discussions at this point?

John R. Ciulla -- President and Chief Executive Officer

It's interesting. So some of what I'll tell you is speculation and others obviously what we know. I think on a macro level, obviously the chances of full Medicare-for-all, single payer seem to have gone down with changes in the various polls, and that rhetoric seems to have gone away a little bit. And we think -- as we've said, we've always been confident that, given our current healthcare system, that that wasn't a real risk in the short-term.

There has been more discussion in various state capitals around high deductible health plans and so on and so forth. We actually don't think that that is the dialog that could be driving maybe lower adoptability. As we've said all along, we think that there is a bit of a compression across the industry based on a 3.5% or 3.4% unemployment rate, where when companies are having to be more and more aggressive in competing for talent, that they are optically trying to provide richer, more fuller benefits, and that may have slowed the whole industry down over the last couple years, as you've seen.

We are not seeing, and I'll let Chad put a finer point on it, the dialog around the virtuous nature or lack thereof of high deductible health plans actually impacting employers' decisions not to offer them or encourage their employers to adopt them.

Charles L. Wilkins -- Executive Vice President and Head of HSA Bank

Yes, I totally agree, John. That was spot on.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, great. Thanks. And then capital management, I hear what you said around M&A and focusing organically, but when you look at capital, you continue to build it here. It looks like that's going to continue as we go forward. Outside of M&A, should we expect to see Webster be more active in trying to, either through the dividend or through a buyback again, return more capital?

John R. Ciulla -- President and Chief Executive Officer

Yes, good question. I'll be really transparent here. Obviously our primary desire is to use capital to grow the balance sheet to support above market loan growth, to look and try and make some key investments or acquisitions in the HSA space or portfolios or people in commercial banking as we continue to expand those. And we've obviously been working diligently in those areas and looking at opportunities.

Absent that, you saw in the third quarter we had an increase in our authorization to $200 million for stock repurchase, so if those internal strategic things don't work, we'll then look at other capital actions, either another increase in the dividend -- you know, we had a significant increase in the dividend, and if none of those are available to us, I think what you'll see is us being more likely to buy back shares over the next couple quarters.

Jared Shaw -- Wells Fargo Securities -- Analyst

That's great color, thanks. Then just finally for Glenn, what's the percentage of the loan book now tied to one-month LIBOR and prime? Has that changed?

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

So we have about $8.3 billion tied to one-month LIBOR and another, say, $2.5 billion tied to prime.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thank you.

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

On a total book of $20 billion.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks.

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

Sure.

Operator

Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Please proceed with your question.

Laurie Hunsicker -- Compass Point -- Analyst

Yeah, hi, thanks. Good morning and...

John R. Ciulla -- President and Chief Executive Officer

Good morning, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

John and Jim, I just want to also echo what others have said -- congratulations. Going back to HSAs, can you help us think about -- we saw a drop, I guess if you will, in HSAs -- rather an increase in HSA efficiency ratio, so it'd been previously running 50%, 51% and it was 55%. Can you help us think about how that is going to look going forward?

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

Sure. I think a lot will depend on the enrollment period, as Chad highlighted, and the balances that we get. I think one of the factors that is driving that, Laurie, is the reduction in the credit rate. If you just look from year-over-year, fourth quarter versus prior year's fourth quarter, the credit rate that we apply to the deposits is down 15 basis points, so on a base of $6.5 billion, that has an impact. So that's one of the things you see driving that. The other side of it is on the expense side, as Chad pointed out, we continue to invest in the front end, customer experience, things like that, all for the longer view of capturing more market share.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, that's helpful. Do you all have any goals with respect to what you would like HSA PPNR to be relative to Webster's PPNR as you roll forward? And again, that had been tracking closer to 25%, it came in at 23% this quarter. How should we be thinking about that next year? Thanks.

John R. Ciulla -- President and Chief Executive Officer

Yes, I mean it's a very interesting question, Laurie. We've always managed it as, and you've heard Jim say this before me so this is about a five-year consistent message, is that we want to maximize the value of HSA given it's growth potential and it's unique characteristics. So we don't look at it as what is the optimal level of contribution. Our real focus is at some point, if it got to be too big a concentration risk or other elements, we might think about other strategic alternatives. But right now in this -- you know, if you look at it from round numbers, the commercial bank is contributing about 50% of PPNR. For the full-year 2019, Chad's group is about 25% to 30%, and then the balance in community banking. We think that's a really good mix and, based on our forecast going forward, Chad will be a bigger contributor relative to community banking, but it certainly won't get to a place where we think we need to make adjustments in our strategy.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, that's great. And then can you just update us on the relationships you flagged last quarter? You had the likely departure of two custodial HSA relationships from the third-party administrator wholesale portfolio. I think one was being acquired and one was becoming a non-bank custodian. Can you just help us think about where we are in seeing that reflected in the balances?

John R. Ciulla -- President and Chief Executive Officer

Yes, and I can answer that question, I think really easily and clearly. So the guidance doesn't change, meaning over the next six quarters that whole activity will result in financial neutrality, given the fact that we get exit fees and some other income as those accounts leave. In 4Q 2019, no accounts moved and we received none of that compensation, so there was no noise in the 4Q numbers either in balances or in the P&L related to those, and we believe that will start impacting us in the first quarter when we report to you on our full enrollment period.

As we said last quarter, we will provide in each quarter growth dynamics of HSA with and without those two custodial accounts, and we'll let you know what's moved out and what portion of income is also related to exit fees and others. We'll be very careful and very transparent, but in Q4 there was no impact at all.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then would you just remind us what those two relationships constitute, just in terms of HSA deposits as well as investments?

Charles L. Wilkins -- Executive Vice President and Head of HSA Bank

Yes, what we reported that in the last quarter. I'm looking up the notes.

Laurie Hunsicker -- Compass Point -- Analyst

I think we had an estimate last quarter that put it around--I backed into $700 million, but I just didn't have anything specific and I didn't know if you had anything that was more tightened down.

John R. Ciulla -- President and Chief Executive Officer

We're just grabbing the number for you.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, OK great. One other question while you're looking at that, Glenn -- go ahead?

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

390,000 accounts and 550.

John R. Ciulla -- President and Chief Executive Officer

Right, 390,000 accounts, roughly 550 in balances related to two accounts.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And that's 550 in deposits or in total footings?

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

In deposits.

Laurie Hunsicker -- Compass Point -- Analyst

In deposits, OK, perfect. Super helpful. Okay, and then just -- Glenn, two more quick questions. Number one, you're lending club balance, and then number two, if you could just help us think about tax rate. I think you said in your comments 22% to 23%, which is a slight change, I think, from where we were previously at 21%, and I just wanted to understand that change? Thanks.

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

I'm sorry, your first question, I didn't get.

Laurie Hunsicker -- Compass Point -- Analyst

I was just looking for the balance on the lending club loans.

John R. Ciulla -- President and Chief Executive Officer

It's $177 million, flat to last quarter. No issues, no changes in asset quality.

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

And then the only thing I would say about our full-year forecast on taxes, it's primarily driven by lower tax credits and other discrete benefits that we received in 2019.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great. Thanks. Thanks very much.

John R. Ciulla -- President and Chief Executive Officer

Thank you, Laurie.

Operator

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

Matthew Breese -- Stephens Inc -- Analyst

Good morning, everybody.

John R. Ciulla -- President and Chief Executive Officer

Hey, Matt. Good morning.

Matthew Breese -- Stephens Inc -- Analyst

Just curious, I was hoping you could talk a little bit about new commercial real estate and C&I loan yields and spreads, and how that compares to what's on the average balance sheet today.

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

Sure, I'll give you a little bit of data. So if you think about -- I'll give you a perspective on originated 4Q CRE. The average spread was 152, so if you think about the LIBOR plus 152 in our CRE as opposed to LIBOR plus mid-3s in sponsored specialty, that kind of gives you the delta in spreads and what mix can do ultimately when we have a mix change. What else can I answer for you?

Matthew Breese -- Stephens Inc -- Analyst

How those spreads evolved over the past year?

John R. Ciulla -- President and Chief Executive Officer

I would say they're about -- in CRE in this quarter, they're about 25 basis points to 30 basis points lower than they were a year ago, and I think as I look at all of the transactions that came in, I think it's just a result of asset quality, less a result of competitive nature. We had a lot of high quality, low LTV, high debt service coverage deals come in, in 4Q, and so again I don't think that tells me anything about the competitive landscape as much as it does the quality of the transactions we brought in the fourth quarter.

Matthew Breese -- Stephens Inc -- Analyst

Understood. My last question is around the growth outlook -- still very strong. If you go to the middle or high end, you're still looking at mid to high-single digit loan growth, and versus some of your peers, including in-market peers, it's strikingly higher. What do you attribute that to?

John R. Ciulla -- President and Chief Executive Officer

Sp I think we looked internally at our momentum. We have the highest 12/31 pipeline in commercial bank that we've had over the last 10-years, and obviously we had a really good fourth quarter with respect to growth, and so I think we go into the year with some good momentum on our average loan balances, which is what drives net interest income and a pretty strong pipeline. And some of the areas that generally are good growth drivers for us had slower second halves of the year, and just where we are, we think that given, as I said to Collyn earlier in the call, given our wide portfolio of geographies and different business lines and expertise in certain industry segments, we think that that mid-single digits, if you will, on a total portfolio basis is a good number. Our commercial loan growth, including investor CRE, is probably going to be slightly higher than that with our consumer lending categories being slightly lower.

Matthew Breese -- Stephens Inc -- Analyst

Okay, and as we think about commercial real estate growth this quarter versus perhaps the past two or three, was there a change in where you lent geography-wise, and if so, where were you more focused this quarter than in prior periods?

John R. Ciulla -- President and Chief Executive Officer

It's a great question, Matt. Our chief risk officer is here in the room, came in before and had given me the data that there's actually really almost no geographic disparity from prior quarters, so it really was a question, as I mentioned earlier, of significantly fewer pay downs. So our originations in CRE were about the same dollar size in fundings as they were a year ago 4Q, it was just payments were down significantly. And I took a look at the data with respect to property type, geography, weighted average loan to value, and debt service coverage, and none of those metrics really changed, so I would say it's blocking and tackling, business as usual, no change in strategy, not different dynamics, just significantly fewer paydowns.

Matthew Breese -- Stephens Inc -- Analyst

Understood, OK. Just one more, if I could sneak it in. You mentioned potential portfolio opportunities in your capital management commentary, and I'd never really considered that for you before, never thought it was on the radar. Can you just be a little bit more specific as to what you meant? I'm assuming loan portfolios, but could you clarify; and if so, what types of asset classes and geographies are you looking for? If you've looked at opportunities in the past, could you just give us a sense for how many?

John R. Ciulla -- President and Chief Executive Officer

Sure. We've been consistent. We have talked about it, Matt, and it is referring to commercial loan portfolios in particular. So I would say we look for areas where we have expertise. We've looked at equipment finance portfolios, some secured loan portfolios to kind of offset some of our Sponsored & Specialty enterprise reliant exposure. We look for good yielding, economically profitable portfolio acquisitions that will either enhance an existing specialty or an existing line of business, or provide us with an inroad into something that we find attractive at the current period of time.

The truth of the matter is we have not in the last, at least eight quarters, besides the residential mortgage portfolio acquisition that we did up in Boston for strategic purposes, we have not successfully acquired a commercial loan portfolio over the course of the last eight quarters.

Matthew Breese -- Stephens Inc -- Analyst

Understood. Okay, that's all I had. I appreciate taking my questions. Thank you.

John R. Ciulla -- President and Chief Executive Officer

Anytime. Thank you for the questions.

Operator

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

John R. Ciulla -- President and Chief Executive Officer

Thank you. We appreciate everybody's participation this morning and have a great day.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Terrence K. Mangan -- Director of Investor Relations

John R. Ciulla -- President and Chief Executive Officer

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

Charles L. Wilkins -- Executive Vice President and Head of HSA Bank

Steven Alexopoulos -- JPMorgan -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Mark Fitzgibbon -- Piper Sandler -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

Matthew Breese -- Stephens Inc -- Analyst

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