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Text: This conference is being recorded.
I'll now introduce Webster's Chairman and CEO, John Ciulla.
CFO, Glenn Maclnnes, 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.
As we look back on 2020, a challenging year for all of us in so many different ways, my first thought is how proud I am of Webster bankers as they found a way to deliver for each other, our customers, our communities and for our shareholders.
While increasing COVID cases continue to present real challenges, we are optimistic that 2021 will bring a level of normalization.
As the distribution of vaccines dramatically changes the path of the pandemic, the broader economy, including COVID impacted sectors continue to recover and the peaceful transition of power that occurred yesterday hopefully represents the beginning of a less divisive political environment.
We remain focused on prudently managing capital, credit and liquidity as we also position ourselves for growth and outperformance as the macro environment improves in 2021 and beyond.
Turning to Slide 2.
I'm really pleased with our strong business performance in the quarter.
We originated $1.9 billion in loans, generated strong loan-related fees, continue to grow deposits and HSA total footings approached $10 billion.
Credit trends are favorable and the net interest margin has stabilized.
Our adjusted earnings per share in Q4 were $0.99, up from $0.96 a year ago.
Our fourth quarter performance includes $42 million of pre-tax charges related to the strategic initiatives we announced last quarter.
Glenn will provide additional perspective on these charges in his remarks.
An improved economic outlook with continued uncertainty, along with a flat quarter-over-quarter loan portfolio, supported a $1 million CECL allowance release in the quarter.
Our fourth quarter adjusted return on common equity was 11.5% and the adjusted return on tangible common equity in the quarter was 14.2%.
On Slide 3, loans grew 8% from a year ago or 2% when excluding $1.3 billion in PPP loans.
Commercial loans grew 6% from a year ago or more than $800 million.
Deposits grew 17% year-over-year, driven across all business lines.
Loan yield increased 4 basis points linked quarter, while deposit costs continue to decline.
Slides 4 through 6 set forth key performance statistics for our three lines of business.
I'm on Slide 4.
This is a very strong quarter for Commercial Banking with more than $1.2 billion of loan originations, up solidly from Q3 and down only slightly from a strong 4Q 2019.
Loan fundings of $825 million were also up solidly from Q3.
We continue to benefit from our industry expertise and deep relationships in select sectors, including technology that have not been adversely impacted during the pandemic.
Commercial bank deposits are at record levels, up more than 35% from the prior year's fourth quarter.
The Commercial Banking loan portfolio yield increased 9 basis points in the quarter, driven by better spreads and enhanced by a higher level of acceleration of deferred fees as we saw payoff activity return to more normalized levels.
Non-interest income in Commercial Banking was up linked-quarter due to higher syndication and other fees tied to the strong origination activity.
Now turning to HSA Bank on Slide 5.
HSA Bank total footings increased 17% from a year ago and now total nearly $10 billion.
Core deposits were up 15% and 13%, excluding the State Farm acquisition, which closed in 2020.
The year-over-year increase in balances was driven by continued contributions as well as reduced account holders spending due to COVID-19 restrictions.
The TPA accounts declined from a year ago, reflecting the expected departures that occurred in Q3.
We added 668,000 accounts in 2020, 10% fewer than we added in 2019, consistent with industry trends and due primarily to lower enrollments with existing employers as COVID-19 impacted the overall employment environment.
We expect this trend to continue into the first half of the New Year.
HSA deposit costs continue to decline as we remain disciplined in this low interest rate environment and totaled 9% in the quarter -- 9 basis points, excuse me, in the quarter.
I'm now on Slide 6.
Community Banking loans grew 5% year-over-year and declined 5% excluding PPP.
As indicated on the slide, PPP loans decreased $63 million as we saw repayment and forgiveness activity begin in the quarter.
Community Banking deposits grew 14% year-over-year with consumer and business deposits growing 9% and 31% respectively.
Deposit costs continue to decline and totaled 16 basis points in the quarter.
Net interest income grew $8.3 million from a year ago, driven by overall loan and deposit growth.
The next two slides address credit metrics and trends which continue to be surprisingly stable given all the challenges in the macro environment.
On Slide 7, we show our commercial loan sectors most directly impacted by COVID, overall loan outstandings to these sectors have declined 10% from September 30th and payment deferrals have declined $64 million or 31%.
On Slide 8, we provide more detail across our $20 billion commercial and consumer loan portfolio.
The key takeaway here is the payment deferrals declined by 35% to $315 million at December 31st and now represent 1.6% of total loans compared to 2.4% of total loans at September 30th.
At year-end, $100 million or 32% of the $315 million in payment deferrals are first time deferrals.
And CARES Act and Interagency Statement defined payment deferrals, which are included in the $315 million of total payment deferrals at December 31st, decreased 29% from September 30th and now stand at $201 million.
While challenges related to the pandemic and the overall economy remain, I am pleased with the considerable support we have been able to provide to our customers as they work through these challenging times.
We continue to actively monitor risk, make real-time credit rating decisions and address potential credit issues proactively.
We remain confident about the quality of our risk selection and the underwriting processes, our portfolio management capabilities and our capital position.
I will focus on the key aspects of performance in the quarter, including stable adjusted net interest margin, an increase in non-interest income, ongoing expense control and a favorable credit profile.
I'll begin with our average balance sheet on Slide 9.
Average securities grew $160 million or 1.8% linked-quarter.
Securities represented 27% of total assets at December 31st.
Average loans declined $142 million or 0.6% linked-quarter, primarily driven by a $176 million decline in consumer loans, reflecting higher pay down rates in mortgage and home equity portfolios.
Prepayment and forgiveness on PPP loans during the quarter totaled $98 million.
In Q4, we recognized $7.3 million of PPP deferred fee accretion and the remaining deferred fee balance totaled $27 million at December 31st.
Deposits increased $276 million linked-quarter, primarily driven by growth in Community Banking and HSA.
This was partially offset by a reduction in CDs.
The strong growth in deposits allowed us to pay down borrowings, which were lower by $289 million from Q3.
At $1.9 billion, borrowings represent 5.2% of total assets compared to 7% at September 30th and 11.6% in prior year.
The tangible common equity ratio increased to 7.9% and will be 32 basis points higher, excluding the $1.3 billion and zero percent risk-weighted PDP loans.
Tangible book value per share at quarter end was $28.04, an increase of about 1% from September 30th and 3% from prior year.
Slide 10 highlights adjustments to reported net income.
Aggregate adjustments totaled $42 million pre-tax or $31.2 million after tax, representing $0.35 per share.
Of the $42 million in adjustments, $38 million is related to our strategic initiatives, which John will discuss further.
The remaining $4.1 million is associated with the debt prepayment.
The prepayment expense adversely impacted current quarter net interest income and impacted net interest margin by 5 basis points.
However, we will benefit by approximately $1.3 million in net interest income per quarter and NIM will benefit by 2 basis points.
On Slide 11, we provide our reported and adjusted income statement.
As highlighted on the previous page, the adjustments total $42 million pre-tax.
On an adjusted basis, net interest income increased by $1.3 million from prior quarter.
This was a result of a $4.5 million reduction in deposit and borrowing costs, along with $1 million in additional loan income, which was partially offset by a $4 million decline in securities income primarily as a result of elevated prepayments.
Taken together, our adjusted net interest margin of 2.8% was flat to third quarter.
As compared to prior year, net interest income declined by $11 million.
$47 million of the decline was the net result of lower market rates and was partially offset by interest income of $29 million from earning asset growth and $8 million from a reduction in borrowings.
Non-interest income increased $1.7 million linked-quarter and $5.9 million from prior year.
Loan fees increased $2.5 million from prior quarter as a result of higher syndication, pre-payment and line usage fees.
Other income increased $4.4 million reflecting higher direct investment income and swap fees.
HSA fee income decreased $3.1 million linked-quarter as Q3 included $3.2 million of exit fees on TPA accounts.
Mortgage banking revenues decreased $3 million linked quarter as a result of lower volume on loans originated for sale.
The $5.9 million increase in non-interest income from prior year reflects additional loan fees, higher mortgage banking revenue and HSA fee income, partially offset by lower deposit service fees.
Non-interest expense of $181 million reflects an increase of $2 million primarily due to technology and seasonal increases in temporary staffing to support the HSA annual enrollment.
Non-interest expense decreased $1.5 million or 1% from prior year and our efficiency ratio was 60% in the quarter.
Pre-provision net revenue was $116 million in Q4.
This compares to $115 million in Q3 and $122 million in prior year.
Our CECL provision in the quarter reflects the credit of $1 million, which I'll discuss in more detail on the next slide.
And our adjusted tax rate was 22.1%.
Turning to Slide 12, I will review the results of our fourth quarter allowance for loan losses under CECL.
The allowance coverage ratio, excluding PPP loans, declined from 1.8% to 1.76%, with total reserves of $359 million.
The reserve balance reflects our lifetime estimate of credit losses.
A small decline from prior quarter is the net effect of an improvement in the macroeconomic forecast partially offset by additional qualitative reserves.
The increase in qualitative reserves is driven by uncertainty around the resolution of a pandemic and the pace of the recovery.
The total reserves provide a more adverse scenario than shown in the baseline assumptions at the bottom of the page.
Slide 13 highlights our key asset quality metrics as of December 31st.
Non-performing loans in the upper left increased $3 million from Q3.
Commercial, residential mortgage and consumer each saw linked quarter declined, while commercial real estate increased.
Net charge-offs in the upper right decreased from the third quarter and totaled $9.4 million after $1.9 million in recoveries.
The net charge-off rate was 17 basis points in the quarter.
Commercial classified loans in the lower left increased $30 million from Q3 and represented 352 basis points of total commercial loans.
Slide 14 highlights our liquidity metrics.
Our diverse deposit gathering sources continue to provide us with considerable flexibility.
Deposit growth of $414 million exceeded total asset growth and lowered the loan-to-deposit ratio to 79%.
Our sources of secured borrowing capacity increased further and totaled $12 billion at December 31st.
Slide 15 highlights our strong capital metrics.
Regulatory capital ratios exceed well-capitalized levels by substantial amounts.
Our common equity Tier 1 ratio of 11.35% exceeds well capitalized by $1.1 billion.
Likewise, Tier 1 risk-based capital of 11.99% exceeds well-capitalized levels by $895 million.
Our guidance will continue to be impacted by the pace and duration of the pandemic over the next few quarters.
That being said, we anticipate modest loan growth, excluding the timing of PPP forgiveness and Round 2 originations.
NIM will also be influenced by the rate environment and PPP forgiveness.
Assuming today's rates, we would expect net interest income to be around Q4's level.
Non-interest income will be modestly lower linked quarter, driven by lower loan-related and mortgage banking fees.
The provision for credit losses will continue to be impacted by credit trends, the macroeconomic environment, government stimulus and the duration of the pandemic.
Core operating expenses will be lower as we begin to recognize the benefits of our strategic initiatives.
With that, I'll turn things back over to John for a review of our strategic initiatives.
I'm on Slide 16.
As we discussed on the October earnings call, we've been working through a comprehensive, strategic and organizational review since before the onset of the pandemic.
And while today we'll provide more detail on our progress in some shorter-term financial targets, I want to stress that the work we've done over the last year and the actions we are taking are transforming our company and the way we do business.
We believe that we will continue delivering incremental value to our customers and shareholders for years to come, consistent with our overarching objectives of maximizing economic profits and creating long-term franchise value.
Importantly, these actions afford us the capacity to invest in the future and provide better customer experiences through improved products, services and digital offerings, all in the furtherance of our mission to help individuals, families and businesses achieve their financial goals.
We are investing in revenue growth drivers that leverage our differentiated businesses.
These include accelerating growth in new and existing commercial banking segments, improving sales productivity, enhancing non-interest income through treasury and commercial card products and driving deeper relationships across all lines of business.
While we anticipate short-term benefits from these initiatives, they will contribute meaningfully to our financial performance in 2022 and beyond.
Additionally, we continue to invest in technology to provide better digital experiences for our customers and bankers to further improve customer acquisition and retention rates.
As shown on Slide 17, we have made significant progress on our efficiency opportunities.
We remain on track to deliver an 8% to 10% reduction in core non-interest expense.
We expect this to be fully realized on a run rate basis by the end of the fourth quarter of 2021.
Our efficiency initiatives fall into three areas of focus that we discussed last quarter: rationalizing retail and commercial estate, simplifying the structure of the organization and optimizing our ancillary spend.
We've taken actions to simplify our organizational structure, including combining like functions, automating manual processes and selectively outsourcing commoditized activities.
A portion of the project-related expense adjustments that Glenn discussed relate to these actions and the associated severance costs result from a targeted reduction in the overall workforce.
We announced in December the consolidation of 27 banking centers and we have targeted actions aimed at reducing corporate office square footage over time.
The real estate optimization plan reflects our response to changes in customer preferences and the shift in workplace dynamics that have only accelerated during the pandemic.
The remaining quarterly cost benefits will be driven by a more disciplined approach to ancillary spend, redesigning and automating internal critical processes and leveraging back office synergies.
Slide 18 provides an overview of the cost savings and an expense walk to our fourth quarter target run rate.
Achieving these efficiencies will allow us to continue to invest in our franchise and improve the customer experience.
The last slide for me is an important one.
We've updated it from prior quarters.
It aggregates our activities during 2020 related to helping our employees, our consumer and business customers and the communities we serve navigate an extraordinarily challenging time.
This is what the Webster Way is all about.
The commitment to our customers, our shareholders and to each other has enabled Webster to continue to differentiate itself.
And before we go to Q&A, I'd like to take a moment to share with you all that today is Terry Mangan's last earnings call as he will be retiring on March 31st.
Many of us and many of you have had the pleasure of working with Terry over his 18-year career at Webster.
Terry's efforts have been recognized at the national level by institutional investor as a top investor relations professional.
With that, Daryl, Glenn, Chad, Jason and I are prepared to take questions.

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q4 adjusted earnings per share $0.99.

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