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Text: This conference is being recorded.
I'll now introduce Webster's Chairman and CEO, John Ciulla.
CFO, Glenn MacInnes, and I, will review business, financial and credit performance for the quarter after which, HSA Bank President, Chad Wilkins; and Jason Soto, our Chief Credit Officer, will join us for Q&A.
We remain focused on managing capital, credit and liquidity as we continue to deliver for our customers, communities and shareholders.
We're positioning ourselves for growth and outperformance.
Our differentiated businesses and our engaged bankers, who I'm so proud of, help us win in the marketplace every day.
In a challenging environment, we generated meaningful business activity in the third quarter.
Our bankers are working with our customers and prospects and we are generating new relationships, loans and deposits.
Loan originations were higher than a year ago and our pipelines are solid.
HSA Bank is winning more direct-to-employer relationships than a year ago.
Our operational execution remains strong and we continue to manage credit and enterprise risk effectively.
Turning to Slide 2.
Pre-provision net revenue of $110.4 million increased 2% from Q2 as revenue grew in excess of expenses.
Earnings per share in the quarter were $0.75 compared to $0.57 in Q2 and $1 in the prior year's third quarter.
Our $23 million provision resulted in a reserve build of $11 million.
Glenn will walk you through the assumptions underlying the CECL process and resulting provision for the quarter.
Our third quarter return on common equity was 9% and the return on tangible common equity was 11%.
As I mentioned last quarter, we remain confident in our ability to again sustainably generate economic profit even in this more economically challenging and lower interest rate environment.
I'll provide further perspective in a few minutes.
Loans grew 12% from a year ago on Slide 3 or 5% when excluding $1.4 billion in PPP loans.
Commercial loans grew more than 10% from a year ago or by almost $1.2 billion, led by growth of more than $900 million in high-quality commercial real estate loans.
The decline in floating and periodic rate loans to total loans compared to a year ago reflects the $1.3 billion of fixed rate PPP loans added in the second quarter.
Deposits grew 16% year-over-year driven across all business lines.
Core deposits exceeded $4.3 billion and represent 90% of total deposits compared to 86% a year ago, while CDs declined $685 million from a year ago.
Slide 4 through 6 set forth key performance statistics for our three lines of business.
Commercial Banking is on Slide 4.
Loan balances increased to almost 10% from a year ago, excluding PPP loans.
Both investor CRE and C&I businesses in middle market banking and sponsor and specialty saw a double-digit loan growth year-over-year.
Deposits, up 32% from a year ago, are nearly $6 billion at September 30th as our commercial clients maintain liquidity on their balance sheets.
Commercial deposits were up 11% linked quarter on seasonal strength in our treasury and payments solutions business, which includes government banking.
HSA Bank is on Slide 5.
Core deposit growth was 15% year-over-year or 12.6%, excluding the impact of the State Farm transaction, which closed in the third quarter and added 22,000 accounts and $132 million in deposit balances.
We continued to see strong increases in new direct-to-employer business opportunities throughout the quarter, winning more new HSA RFPs than we did last year, specifically in the large employer space.
COVID-19 has impacted the HSA business with new account openings 28% lower from prior year when adjusting for the State Farm acquisition.
This is consistent with the industry and is due to slower hiring trends across our employer customers.
HSA consumer spending increased in the quarter, a trend we expect to continue as elective medical services continue to open up across the country.
This spending rebound had a favorable impact on interchange revenue when compared to Q2.
TPA accounts and balances declined 41,000 and 64,000,000, respectively linked quarter, continuing the outmigration of accounts that we disclosed a year ago.
In the quarter, we recognized approximately $3 million of account closure fees related to the outmigration.
Performance fundamentals of HSA Bank and the broader HSA market remains strong with ample opportunity for continued growth.
And while it's too early to forecast the upcoming January 1 enrollment season, we're pleased with the large direct-to-employer wins we recorded in this challenging 2020 selling season.
I'm now on Slide 6.
Community banking loans grew almost 10% year-over-year and declined slightly excluding PPP.
Business banking loans grew 5% from a year ago when excluding PPP.
Personal banking loans decreased 3% from a year ago as an increase in residential mortgages was offset by declines in home equity and other consumer loans.
Community banking deposits grew 12% year-over-year with consumer and business deposits growing 6% and 32% respectively.
The total cost of community banking deposits was 24 basis points in the quarter, that's down 48 basis points from a year ago.
Net interest and non-interest income both improved 3% from prior year driven by increased loan and deposit balances and by mortgage banking and swap fees, respectively.
Self-service transactions declined slightly linked quarter as we expanded and opened banking centers with enhanced safety protocols but grew year-over-year, reflecting the continued shift in consumer preference to digital channels.
The next two slides address credit metrics and trends.
Our September 30th reported credit metrics remained favorable and actually improved modestly, which Glenn will review in more detail.
While pleased with the reported metrics, we, nonetheless, remain appropriately cautious on credit as we continue to operate through the considerable uncertainties presented by the pandemic.
On Slide 7, we've updated our disclosure on the commercial loan sector as most directly impacted by COVID including payment deferral information.
The key points on this slide are that overall loan outstandings to these sectors have declined 5% from June 30th and the payment deferrals have declined $282 million or 57%.
On Slide 8, we provide more detail across our entire $20 billion commercial and consumer loan portfolio.
The key takeaway here is that payment deferrals declined by 65% to $482 million at September 30th and now represent 2% of total loans compared to 7% at June 30th.
Consistent with industry trends, we have had meaningful declines in payment deferrals in every loan category from June 30th to September 30th.
Of the $482 million of payment deferrals at September 30th, $251 million or 52% are first time deferrals.
CARES Act and Interagency Statement payment deferrals, which are included in the $482 million of total payment deferrals at September 30th, decreased to 62% from June 30th and now total just $283 million.
While pandemic-related challenges remain, we are pleased to have been able to provide considerable support to our customers and communities under our mission to help individuals, families and businesses achieve their financial goal.
As I stated last quarter, we are actively monitoring risk, we are making real-time credit rating decisions and addressing potential credit issues proactively.
We continue to feel good about the quality of our risk selection, our underwriting, our portfolio management capabilities and the strength of our capital and credit allowance positions.
I'll begin with our average balance sheet on Slide 9.
Average securities grew $184 million or 2.1% linked quarter and represented 27% of total assets at September 30th, largely in line with levels over the past year.
Average loans grew $262 million or 1.2% linked quarter.
PPP loans average $1.3 billion in Q3 and grew $403 million from Q2, reflecting the full quarter impact of loans funded last quarter.
We had no forgiveness activity on PPP loans during the quarter and therefore no acceleration of deferred fees.
During the quarter, we had $5.5 million of PPP fee accretion and the remaining deferred fees totaled $35 million.
Apart from PPP loans, commercial real estate loans increased $124 million or 2%, while asset-based and other commercial loans decreased $108 million and $38 million, respectively.
The $119 million decline in consumer loans include $62 million in home equity and $32 million of residential mortgages.
Deposits increased $1 billion linked quarter, well in excess of the combined growth of $446 million in loans and securities.
We saw increases across all deposit categories except CDs, which declined $280 million or nearly 10%.
The cost of CDs declined 36 basis points and was a significant driver of our reduction in deposit cost.
Public funds increased $599 million in a seasonally strong third quarter, while the cost of these deposits declined from 35 basis points to 18 basis points.
Borrowings declined $744 million from Q2 and now represent 7% of total assets compared to 8.5% at June 30th and 10.5% in prior year.
Regulatory risk-weighted capital ratios increased due to growth in equity.
The tangible common equity ratio increased to 7.75% and would be 34 basis points higher, excluding the $1.4 billion in 0% risk-weighted PPP loans.
Tangible book value per share at quarter end was $27.86, an increase of 1.7% from June 30th and 4.8% from prior year.
Slide 10 summarizes our income statement and drivers of quarterly earnings.
Net interest income declined $5.1 million from prior quarter.
Lower rates resulted in a quarter-over-quarter decline of $16.7 million in interest income from earning asset.
This was partially offset by $7.9 million due to lower deposit and borrowing costs and $3.7 million as a result of loan and security balanced growth.
As a result, our net interest margin was 11 basis points lower linked quarter.
Core loan yields and balances contributed 14 basis points to the decline with PPP loans contributing another 2 basis points to the NIM decline.
Lower reinvestment rates on our securities portfolio resulted in 3 basis points of NIM compression, while higher premium amortization resulted in an additional 4 basis points of NIM compression.
This was partially offset by a 10 basis point reduction in deposit cost, reflective of reduced rates across all categories, which benefited NIM by 10 basis points and fewer borrowings contributed another 2 basis points of NIM benefit.
As compared to prior year, net interest income declined $21 million, $65 million of the decline was the net result of lower market rates, which were partially offset by $44 million in earning asset growth.
Non-interest income increased $15 million linked quarter and $5.2 million from prior year.
HSA fee income increased $4.1 million linked quarter.
Interchange revenue increased $1 million, driven by a 12% linked quarter increase in debit transaction volume.
We also recognized $3.2 million of exit fees on TPA accounts during the quarter.
The mortgage banking revenue increase of $2.9 million linked quarter was split between increased origination activity and higher spread.
Deposit service fees increased $1.5 million quarter-over-quarter driven by overdraft and interchange fees.
Consumer and business debit transactions increased 16% linked quarter.
Other income increased $5.7 million, primarily due to a discrete fair value adjustment on our customer hedging book recorded last quarter.
The increase in non-interest income from prior year reflects higher mortgage banking revenue and HSA fee income, partially offset by lower deposit service and loan-related fees.
Reported non-interest expense of $184 million included $4.8 million of professional fees driven by our strategic initiatives, which John will review in more detail.
We also saw a linked quarter increase of $4.3 million from higher medical costs due to an increase in utilization.
Non-interest expense increased $4.1 million or 2.3% from prior year.
The efficiency ratio remained at 60%.
Pre-provision net revenue was $110 million in Q3, this compares to $108 million in Q2 and $131 million in prior year.
The provision for credit loss for the quarter was $22.8 million, which I will discuss in more detail on the next slide.
And our effective tax rate was 20.9% compared to 21.8% in Q2.
Turning to Slide 11, I'll review the results of our third quarter allowance for loan losses under CECL.
As highlighted, the allowance for credit losses to loans increased to 1.69% or 1.8%, excluding PPP loans.
We have summarized the key aspects of our macroeconomic scenario, which reflect the gradual improvement in employment with real GDP returning to pre-COVID levels in 2022.
The forecast improved slightly from prior quarter, but was offset by commercial risk rating migration resulting in a provision of $23 million.
The $370 million allowance reflects our estimate of life of loan losses as of September 30th.
We will continue to assess the effects of credit quality, loan modifications and the macroeconomic conditions as we move through the pandemic.
Slide 12 highlights our key asset quality metrics as of September 30th.
Nonperforming loans in the upper left, decreased $10 million from Q2.
Commercial real estate, residential mortgage and consumer each saw linked quarter decline, while commercial increased $3 million.
Net charge-offs in the upper right decreased from second quarter and totaled $11.5 million after $4.3 million in recoveries.
C&I gross charge-offs declined slightly and totaled $12 million, primarily reflecting credits that were already experiencing difficulty prior to the onset of the pandemic.
Commercial classified in the lower left represented 332 basis points of total commercial loans, this compares to a 20-quarter average of 315 basis points and the allowance for credit losses increased to $370 million as discussed on the prior slide.
Slide 13 highlights our liquidity metrics.
Our diverse deposit gathering sources continue to provide us with considerable flexibility.
Deposit growth of $565 million exceeded total asset growth and lowered the loan-to-deposit ratio to 81%.
Our sources of secured borrowing capacity increased further and totaled $11.7 billion at September 30th.
Slide 14 highlights our strong capital metrics.
Regulatory capital ratios exceeded well capitalized levels by substantial amounts.
Our common equity Tier 1 ratio of 11.23% exceeds well capitalized by more than $1 billion.
Likewise, Tier 1 risk-based capital exceeds well capitalized levels by $870 million.
Looking to the fourth quarter, we expect stable loan balances with modest PPP forgiveness.
Assuming a flat rate environment with an average one-month LIBOR in the range of 15 basis points and an average 10-year treasury swap rate around 70 basis points, we believe we are near the bottom of core NIM compression.
Non-interest income will likely be lower linked quarter due to reduction in mortgage banking income and lower HSA fees on TPA account.
Core non-interest expense will remain in the range of Q3 and our tax rate will be around 21%.
With that, I'll turn things back over to John for a review of our strategic initiatives.
I'm now on Slide 15 and 16.
As I've mentioned on recent earnings calls, we have been and remain focused on revenue enhancements and operational efficiencies across the organization.
Well before the onset of the pandemic, our management team recognized that we would be operating in a low interest rate and more challenging business environment for an extended period of time.
In January, we began an enterprisewide assessment of our organization to identify revenue opportunities and cost savings using a very thorough and systematic process.
The onset of the pandemic in March further impacted the operating environment and accelerated changes in customer preferences and shifting workplace dynamics.
This not only made our commitment to this process that much stronger, but it also expanded the opportunities we have to rationalize and align our expenses with our business line execution.
We've identified and begun to implement dozens of initiatives across the bank, a handful of which are set forth on Slide 16, that will result in driving incremental revenue, reducing our overall cost structure and enhancing our digital capabilities to meet our customers' needs and to reduce our cost of delivery of products and services.
Our focus remains, first, on key revenue and asset growth drivers, including accelerating growth in commercial bank by building on our proven track record in select specialized industries, driving HSA Bank growth through improved sales productivity and customer retention and continuing to grow in community core markets through product enhancements.
We are also focused on efficiency and organizational alignment, simplifying our org structure, capturing targeted back office synergies and redesigning and automating critical processes.
We also are rationalizing and consolidating our retail and corporate real estate footprint.
Through this process, we will continue to improve the customer experience by enhancing digital capabilities, modernizing foundational systems and improving analytical capabilities.
We've begun executing on many of these initiatives and we recently made a series of organizational changes to position us for success over the next year and well beyond.
We plan to provide more detailed information on these initiatives, including additional financial details and timing on realization on our fourth quarter earnings call in January, as we are continuing to work through all of the final decision.
What I will say is that with respect to efficiency opportunities, we anticipate reducing our current expense base by 8% to 10% fully realized on a run rate basis by the fourth quarter of next year.
We see considerable opportunity above and beyond that as revenue initiatives and further efficiency gains are realized late in 2021 and in 2022.
As we stated last quarter, we remain confident that even if the current operating environment persists with low interest rates and economic uncertainty that execution on our identified revenue enhancements and efficiency opportunities will allow us to sustainably generate returns in excess of our estimated 10% cost of capital by the end of 2021.
Our vision remains consistent and is to strengthen our position as a major regional bank in the Northeast that leads with a distinctive and expanding commercial business and aggressively growing and winning national HSA Bank business, a strong community bank franchise in our core markets, all supported by an efficient and scalable operating model.
With that, Maria, Glenn, Chad, Jason and I are prepared to take questions.

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compname reports q3 earnings per share $0.75.
compname reports third quarter 2020 earnings of $0.75 per diluted share.
q3 earnings per share $0.75.
provision for credit losses was $22.8 million in the quarter.

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