Webster Financial Corp (WBS) 2014 Q1 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's first-quarter 2014 results conference call.

This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of 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 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 first quarter of 2014.

I will now introduce our host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Thank you, Jesse.

Good morning, everyone.

Welcome to Webster's first quarter earnings call and webcast.

I'm joined by CFO, Glenn MacInnes for about 20 minutes of prepared remarks focused on business and financial performance of the quarter.

After which, President Joe Savage, Glenn, and I will take questions.

Results for the first quarter reflect solid performance, continuing the progress we've made in our quest to be a high-performing bank, as measured by growth in chosen customer segments, customer satisfaction, and financial performance.

Beginning on slide 2, quarterly net income exceeded $50 million for the first time ever, aided by net after-tax securities gains of $2.9 million that Glenn will discuss later.

After preferred dividends, net income available to common shareholders was $0.53 per share.

Adjusted for the securities gains and non-core expenses, earnings were $0.50 per share compared to $0.45 a year ago.

Core return on assets was 91 basis points and on common equity was 8.65%; both up a bit from a year ago.

All my further comments will be based on core operating earnings.

Overall performance was driven, once again, by exceptionally strong commercial loan growth, which, coupled with a relatively stable net interest margin, produced record net interest income, up about 1% from Q4 and 6.5% from a year ago.

Other notable trends are further improvement in asset quality and disciplined expense management, leading to another quarter of year-over-year positive operating leverage.

As anticipated, modest economic growth and stubbornly low interest rates remained headwinds, but the most challenging aspect of the quarter was the weather, which wreaked havoc in myriad ways across business units from the high cost of snow removal to its impact on consumer spending patterns, on loan applications and closings, and on banker sales productivity.

There were 29 snow and ice events in the quarter where the volume of traffic in the banking centers and interchange in other revenue from debit card usage were meaningfully lower.

While it's hard to quantify exactly the weather's effect on pretax income, we believe it's well over $1 million.

Despite the challenges, we reported 10% year-over-year growth in core pretax, pre-provision earnings to about $77 million; the 6th straight quarter above $70 million and the 12th straight quarter with year-over-year positive operating leverage.

Overall loan balances reached $13 billion; up over 2% from year-end and over 8% from a year ago.

Balances in every key category are noticeably higher than a year ago, except for a slight drop in consumer, which reflects continued household deleveraging.

Total originations were about $940 million in the quarter or 2% higher than a year ago.

Significantly lower residential mortgage originations from the changed refi environment were more than offset by increased originations in each of our key commercial categories.

The overall pipeline of $720 million at March 31 is largely unchanged from year-end due to the consumer lending pipeline being $95 million higher at $355 million, while the commercial pipeline is $94 million lower at $278 million coming off this exceptionally long strong level at year-end.

Core non-interest income was $2.6 million lower than a year ago, due to a $6.3 million decline in mortgage banking revenue from the very strong refi environment a year ago.

This reduction was partially offset by increases in client hedging revenue, wealth and investment services, and deposit service fees.

Nonetheless, despite the hit to mortgage banking revenue, total core revenue exceeded $200 million for the second straight quarter and grew to 3.6% from a year ago.

With expenses up only 0.2% from a year ago, the efficiency ratio improved 182 basis points to 60.3% and we achieved positive operating leverage of 3.4%, exceeding the four-year average of 2.7%.

Continuing improvement in asset quality was marked by meaningful declines in non-performing loans and assets.

The ratio of NPAs to loans plus other real estate owned is now at its lowest level since the end of 2007.

Given improving asset quality and the lowest quarterly level of net charge-offs since the third quarter of 2007, the loan loss provision was flat to Q4 despite the loan growth in Q1.

For the first time in four years, there was no net reserve release, as the provision exceeded net charge-offs in the quarter for the first time since the second quarter of 2010.

Our strong capital position, which strengthened further in the quarter, supports asset growth, provides for the return of capital to shareholders through dividends and selective buybacks, and enables us to confidently pass the annual regulatory severely adverse stress scenario.

A target of 10% for the Tier 1 common to risk-weighted assets ratio allows us to meet those objectives and at 11.5%, we well exceed that target.

All of our capital ratios are well above internal targets, as well as estimated fully phased-in Basel III well-capitalized targets.

Accordingly, the Board will consider an increase in the quarterly cash common stock dividend when it meets later this month.

Glenn will provide more detail on capital.

The Federal Reserve Board's April Beige Book for the Boston District, which includes the bulk of our four state footprint, reports that the district's economy continues to expand moderately.

One notable, but not surprising, observation is that several retailers and manufacturers continue to cite the adverse effects of recent winter weather.

Meanwhile, the Connecticut Department of Labor made the upbeat statement that the continued decline in Connecticut's unemployment rate, driven by growing household employment, signals that we continue on the path of job recovery.

Turning now to line of business performance, slide 3 shows continued strong growth in commercial and commercial real estate loans, which combined grew 5% from year-end and 17% from a year ago.

Funded loan originations remained strong at $415 million, representing our best first quarter ever.

Consistent with our strategic goals, commercial and business loans now represent 55% of total loans compared to 51% a year ago and 46% three years ago.

Portfolio yield declined a bit from the fourth quarter, reflecting competitive pricing pressure, which was more than offset by volume.

The yield on the new fundings improved 35 basis points over Q4, reflecting more favorable asset mix.

Swap fees grew nicely year-over-year to over $2 million in the quarter.

We subject the commercial portfolio to external review to validate our pricing relative to peers.

Despite the competitive environment, the review shows that we have maintained above average spreads and fee discipline, reflecting our success in building strong relationships with our clients over time.

Deposits increased 5% from a year ago and declined 6% linked quarter, reflective of seasonality in commercial and government deposits.

Slide 4 reviews our business banking unit, which recorded loan growth of over 2% linked quarter and 7.5% year-over-year.

The loan originations declined slightly from both Q4 and a year ago.

The portfolio yield increased 4 basis points linked quarter, largely driven by improved customer retention.

Deposits grew linked quarter and year-over-year, while the cost of funds is less than 10 basis points.

Transaction account balances comprise about three-quarters of total deposits and have grown 6% from a year ago.

Slide 5 presents personal banking results.

Overall consumer loan balances are about flat over the past year, driven by the slowdown in mortgage originations.

Total consumer lending originations were down 30% from Q4 and 51% from a year ago, primarily due to the refi bust and a low purchase demand, accentuated by this winter's New England weather.

Still, our results actually compare well with results to date from the big lenders.

Jumbo mortgages, as a percent of the total mortgage portfolio, grew to 47% from 43% a year ago.

Commensurate with our drop in Q1 consumer lending originations, total compensation and benefits cost in this unit declined 23% from Q4 and are down 40% from the peak in Q2 a year ago.

Personal bankings deposits increased about 1% from year-end, largely due to higher transaction account balances.

Deposits declined about 2% from a year ago, driven by CD maturities in Q3 that contributed to the 11 basis point reduction in the cost of deposits over the last year.

Investment assets under administration and Webster Investment Services continued their strong growth at over 7% year-over-year to $2.6 billion, driven by a 12% increase in increase in sales production and increased market valuations.

Regarding distribution, we continued to optimize our physical network during the quarter, consolidating two banking centers into one new center.

Migration to self-service channels continues, as deposits at all self-service channels represented about one-third of total deposits compared to about a quarter a year ago.

Also, banking center transactions were 9% lower in Q1 than a year ago.

Slide 6 presents the results of the private banking unit where we've nearly completed the transformation to a new model under a strategic plan we announced at the end of 2012.

The unit's leadership team is now fully in place and we're beginning to see the benefits of last year's strategic upgrade of the investment management platform and offerings.

The positive momentum, attributable to evolving private bank strategy, can be seen in the 12% year-over-year increase in assets under management adjusted to reflect the sale of a non-strategic AUM portfolio during the third quarter of last year and new inflows over the past year exceeded $200 million.

Loans grew modestly in the quarter and smartly year-over-year, even as originations were lower in the first quarter and the portfolio yield improved 1 basis point linked quarter, which is pretty much the same story for deposits.

Slide 7 presents the results of HSA Bank, which now has over $2.3 billion in footings, including over $1.7 billion in deposits.

Deposits grew 12% in the seasonally robust first quarter and 20% from a year ago.

HSA Bank opened 118,000 new accounts in the quarter; up 50% year-over-year.

The cost of deposits declined 4 basis points linked quarter and 14 basis point year-over-year to 33 basis points.

These low-cost, long duration, low volatility, and nationally diverse health savings account deposits will become an even more valuable funding source when interest rates eventually rise.

HSA Bank's growth outlook remains strong as we expand the product suite and move deeper into the large employer and insurance carrier markets.

Before I turn the call over to Glenn, I'm excited to share recently launched new brand elements that will enhance the way we communicate Webster's unique benefits and our vales to our customers.

You can see a visual representation of this on the cover of today's slide deck, with our new brand promise, Living Up to You.

Today's banking environment provides an opportunity for Webster to differentiate our brand by creating a unique visual identity and singular brand voice that is built on us.

A community-focused, values-guided organization, whose 3,000 bankers make a difference in the lives of our customers and communities everyday.

Living Up to You brings to life what Webster is best known for: local, personalized service and humanization of relationships across all channels and geographies and positions Webster as an organization that knows and cares about what matters most to our customers.

It's our true competitive advantage.

With that, I'll turn it over to Glenn.

Thank you, Jim.

I'll begin on slide 8, which summarizes our core earnings drivers.

Over the next few pages, I'll discuss the key drivers of our core earnings, but would note our average interest earning assets grew $386 million compared to Q4 and our net interest margin of 326 basis points decreased slightly from 327 basis points in prior quarter.

Combined, this resulted in a new quarterly record for net interest income of $155.3 million.

Core non-interest income, excluding $4.2 million of net securities gains and a small recognition of OTTI on CLOs, decreased $5.9 million on a linked quarter basis.

Mortgage banking was a key driver of this, given a 42% decline in settlement volume versus Q4.

This is in line with the industry decline and is a result of continued softness in refinance volume, as well as the impact of challenging weather conditions.

Our core expenses are slightly below Q4, while absorbing approximately $3 million in seasonal compensation tax-related expense and over $800,000 in snow and ice removal.

Taken together, our core pretax pre-provision earnings of $76.7 million were up about 10% from prior year and our pretax GAAP reported income of $71.5 million is at its highest level since the third quarter of 2004.

Our reported net income of $47.8 million benefited from a lower than anticipated effective tax rate of 29.5% in the quarter.

This was due to a $2 million tax benefit in Q1.

Slide 9 highlights the components of our net interest income in Q1 and Q4; all of which is presented on a fully tax-equivalent basis.

We posted quarterly growth in average interest earning assets of $387 million, 79% of which was in our loan portfolio.

A 6 basis point increase in the yield on securities was partially offset by a 4 basis point decline in the yield on loans.

Therefore, our yield on average interest earning assets remained flat to fourth quarter.

As you see, loan growth was offset by spread compression and the increase of about $2 million in interest income was a result of a higher yield on a securities portfolio.

Average deposits increased $287 million, reflecting seasonal strength in HSA Bank, while the rate paid on deposits declined 1 basis point to 28 basis points.

Our CD portfolio costs increased slightly to 110 basis points.

We have a little over $1 billion maturing over the remainder of 2014 at a rate of 52 basis points.

Our current average cost of new retail CDs is around 43 basis points and we are also adding five-year brokerage CDs at around 200 basis points, which will cause the portfolio yield to increase 2 to 3 basis points a quarter.

In doing so, we're positioning our balance sheet for an eventual rise in short-term rates, which I will discuss on a subsequent slide.

$98 million of the earning asset growth was funded with borrowings.

The average cost of borrowings increased by 8 basis points, due to the issuance of $150 million of 10-year senior notes on February 11 at an effective rate of 475 basis points.

This funding was timely, given a senior note maturity of $150 million occurred just two days ago.

The issuance allowed us to continue to maintain a strong holding company liquidity position at a very attractive cost.

Note that the overlap of the senior note issuance reduced NIM in Q1 by 2 basis points.

Incremental short-term secured borrowings currently cost about 23 basis points.

The net result is the $1.2 million or almost 1% increase in net interest income versus prior quarter and the 1 basis point decline in net interest margin to 326 basis points.

Slide 10 provides detail on core non-interest income.

While our GAAP reported non-interest income reflects an increase of $5.6 million over fourth quarter, both quarters include one-time items specific to the securities portfolio; specifically, a $7.3 million OTTI charge in Q4 and a gain of $4.3 million in Q1 from the sale of collateralized debt obligations.

Excluding these items and the OTTI charge, core non-interest income was down $6 million versus prior quarter.

$2 million of the decline was the result of a lower level of mortgage banking revenue.

Settlement volumes were down 42% on a linked quarter basis, while the settlement rate also declined by 17%.

Commercial loan fees were down $1.4 million on a linked quarter basis as a result of a lower level of loan prepayments versus prior quarter.

Wealth and investment revenue decreased by $1.2 million from a fourth quarter record level of just under $10 million.

While Q1 is typically slower than Q4, it was made more challenging by the first quarter's weather.

That being said, we expect to be back at near record levels in Q2.

The $0.5 million seasonal decline in deposit service fees was less than the $0.8 million Q4 to Q1 decline a year ago and includes growth in our credit card program and other fee categories.

However, NSF fees continue -- to continue their secular decline.

Lastly, the $0.9 million decline in BOLI and other category versus prior quarter reflects a $0.6 million decrease in fees in commercial banking.

Side 11 highlights our core non-interest expense, which declined modestly from Q4 and is essentially flat to a year ago.

We saw a linked quarter reduction of $1.8 million or 2.6% in compensation and benefits.

This is the net result of a seasonal reduction in medical costs, partially offset by higher seasonal employment expense in Q1.

As highlighted, snow removal expense was over $800,000 higher than the fourth quarter.

We continue to be disciplined in the pace in which we invest in our businesses and that discipline is reflected on slide 12, which highlights our efficiency ratio.

As you see on slide 12, our efficiency ratio was at the 60% level, despite a $5.9 million linked quarter reduction in non-interest income and the absorption of over $800,000 in non-recurring weather-related expense.

Despite these challenges, we achieved positive year-over-year operating leverage at 3.4%, which drove our efficiency ratio down 182 basis points year-over-year to 60.3%.

Slide 13 provides detail on our interest-rate risk profile.

We continue to expect no change in short-term interest rates until mid- to late 2014.

We also expect the curve to steepen further before short-term interest rates start to rise and have positioned our balance sheet to benefit from such an environment, as evidenced again by the improvement in our investment portfolio yields and the stability of our NIM this quarter.

Our interest-rate risk modeling suggests further improvement in PPNR with additional increases in long-term rates, which we call a long end up scenario.

This slide reflects data as of March 31.

The pattern of growing benefit to PPNR is consistent with prior quarters.

Note our PPNR analysis reflects scenarios with an immediate increase in long end rates compared to a scenario with no change in rates.

The benefit from higher rates is primarily related to slowdowns and prepayments of higher-yielding assets, the reduction of investment premium amortization, along with higher new asset yields.

We'll continue to take gradual steps to prepare for the eventuality of higher short-term rates.

In addition to limiting duration risk in the investment portfolio through asset selection, we've been opportunistically buying LIBOR caps, entering into forward-starting slots, and issuing five-year retail and brokerage CDs to lengthen our liability duration without adding significant cost.

The asset sensitivity our core bank is growing, as over three-quarters of our loan bookings in the last two quarters are floating or periodic, rather than fixed rate.

Now, turning to slide 14, which highlights our asset quality metrics, non-performing loans declined by $17.8 million in the quarter, this was led by reductions of $15 million in residential mortgages and $6.9 million in consumer loans.

As a result of updated regulatory guidance in Q1, $17.6 million of the decline is the result of moving Chapter 7 loans to accrual status.

The Chapter 7 loans were previously classified as nonaccrual since the fourth quarter of 2012.

Past due loans decreased $4.9 million in the quarter, primarily reflecting a reduction of $3.7 million in loans past due, 90 days or more, in accrual.

Commercial classified loans now total $239 million, or 3.35% of commercial loans, in line with 3.34% at year-end.

Assuming recent trends remain intact, continued improvement in key asset quality metrics can be expected in Q2 and beyond.

Slide 15 highlights our capital position.

Key capital levels remain similar to Q4 while supporting $323 million balance sheet growth, once again highlighting the strength of our core earnings.

In addition, in Q1, we settled on the repurchase of 328,000 common shares in order to neutralize the issuance of shares.

This reduced our capital by $10 million, but leaves us $40 million of approved bond years to buyback capacity.

Before turning it back over to Jim, I'll provide a few comments on our expectations for the second quarter.

Overall, average earning assets will grow in the range of 1% to 2%.

We expect average total loan growth to be in the 2% range.

While not at the rate of Q1, our growth will be led by C&I and commercial real estate.

Net interest margin is expected to be down 2 to 3 basis points, driven by lower securities and commercial loan yields.

Of course, NIM will vary with loan prepayment activity and loans returning to performance status.

That being said, we expect net interest income to increase about $1.5 million over Q1 driven by loan volume from some offset in NIM compression.

Our leading indicators of credit continue to be encouraging and signal further improvement in asset quality.

Given the outlook for loan growth in Q2, we see a modest increase in the 2Q provision.

Regarding non-interest income, while we do not expect mortgage banking revenue to improve until the second half of the year, we anticipate seeing a stronger Q2 growth in wealth management, loan fees, and client swap activity.

As a result, we anticipate core non-interest income to increase up to 10% linked quarter.

We continue to demonstrate a disciplined approach to investing in the business and as a result, we expect our core operating expenses to be at or below our targeted level to achieve a 60% efficiency ratio.

We expect our effective tax rate, on a non-FTE basis, to be around 32%.

Based on current market price and no additional buybacks in the quarter, we expect to see the average diluted share count to be in the range of 90.5 million shares.

With that, I'll turn things back over to Jim for our concluding remarks.

Thanks, Glenn.

Webster continues to progress along the path to high-performance as loan growth drove revenue growth.

We maintained expense discipline while continuing to invest in our future and once again, achieved positive operating leverage.

Our focus on core banking businesses allows us to continually improve our strategies and our financial performance, while our strong brand and good reputation provide us with opportunities to gain share.

We're happy to take your comments and questions.

(Operator Instructions) Bob Ramsey, FBR Capital Markets.

This is actually Travis Potts from Bob's team.

It looked like you had a very solid growth in the C&I portfolio.

I was wondering if you could give some more color on what you're seeing in the space and what your outlook is in that segment for the rest of the year, given this quarter's seasonally high growth?

Sure, I'll ask Joe Savage to comment.

A couple of things, Travis.

We guided the group the last time that we ended the year with an unusually high pipeline.

That was at about $367 million.

We ended December at $367 million.

And when you looked at it, in the prior year period, it was about $200 million.

So we came into the quarter with about $167 million to be funded.

I think you've got to look at that.

Secondarily, we had relatively minimal payoff activity.

We expect that to pick up in the second part of the year.

I think Glenn's guidance was pretty good.

We expect to move to more normalized commercial loan growth numbers, 2%-ish to 3%, just in the commercial book over the year.

We had a lot of things going in our favor through the period.

The next thing I would say, and I think it's an important comment to make, even at 2% and 3% per quarter, we know that number is going to look pretty good relative to our peer institutions.

That's attributable to a whole bunch of factors that we've cited in the past.

But it always starts with the engagement of our people, our ability to attract and retain people, success in expansion into new markets.

So we've got a lot of good things going.

The last comment I would make is it's probably been the most heartening quarter that I've witnessed.

This one was broad-based.

We saw a lot of good activity in our Connecticut franchise.

Normally, we've seen that occurring in our major markets; but good news, it was really broad-based.

Long answer, short question, but I think that gives you good flavor.

Yes.

That's very helpful.

Thanks a lot for the color.

David Darst, Guggenheim.

Jim, I appreciate your annual letter and how you've always set up the goalpost and focus on really driving the outcomes around the Company to what you lay out and earning your cost of capital.

What worries you the most?

And what do you think can change the direction or throw the Company off a little bit from kind of the steady progress and improvement that you're making?

There's always the issue of the pace of economic growth.

Will interest rates surprise?

But we take those challenges as a given and our objective is to continually improve ourselves, no matter the environment.

So that our absolute performance will improve, and we have always have an eye on our relative performance as well.

When we're talking about being a high-performing bank, we're talking about not only our absolute performance, but how we're doing relative to our peer group.

I really don't see a lot of impediments to our ability to continue to improve ourselves, particularly on a relative basis.

But there are some environmental factors out there that are going to determine how quickly we're going to be able to get to earning overall economic profits.

Okay.

You talked about the 60% efficiency ratio and operating leverage from here.

Should we assume that's going to be a pretty stable level and you're not really trying to accomplish a lower efficiency ratio, but you're really trying to reinvest in the Company to drive top line?

We're trying to balance that, David.

It is a very good question.

I'm really proud of the team for the effort that's been put forth to control our expenses.

That's what's really helped us to create that positive operating leverage.

As long as we continue to create positive operating leverage, we're going to drive that efficiency ratio lower, even as we invest in our future.

And that's the objective.

Okay.

I think, Glenn, you previously said you expect the margin to stabilize around the third quarter?

Is anything changing on that front?

No, I think we're still feeling that way.

Okay.

Great.

Thank you.

Casey Haire, Jefferies.

Digging a little bit on the NIM, can you give us a sense for what the new money yields are on the new loan production, as well as new money yields on securities investments versus the existing book?

I can start.

On the commercial, as an example, on the origination of $414 million, we had a coupon of $357 million.

On the investment portfolio -- that's the second part of your question -- the purchases were done at about $250 million.

Okay.

On the loan growth guide, Glenn, with $2.3 million this quarter, it sounds like the weather really slowed you guys down.

I'm just a little curious why we wouldn't see loan growth accelerate here in the second quarter?

It sounds like you guys are expecting it only 2%.

Yes, I think real strong commercial loan growth, if it impacted one of the portfolios, it was primarily the mortgage portfolio and the consumer portfolio.

We do that see that coming back, as I indicated, in the second half.

So it is starting to pick up.

I think our application volumes are up close to about 37% quarter over quarter.

We're starting to see the pipeline build, as Jim indicated, on the consumer side.

So that's coming back.

But all in all, I think that we're saying if we grew over 2% this quarter, the commercial's not going to grow at 6% and 2.8% quarter over quarter going down the next couple quarters.

It will come down a little bit, but that will be partly offset by the resi in the consumer portfolio.

This is Joe, again.

Again, a reminder that we did have a big pipeline going into the first quarter.

And we like to think normalized growth at around that 2% to 3% range.

We're comfortable with that.

We'll have prepay activity.

We were light on prepay activity.

So I think what we'll see, we'll see it on the consumer side; and that will help us.

17% year over year is not bad.

No, not at all.

And then just lastly, on credit, is it safe to say that we're building; the LOR is not going to go much lower than 118 levels being in line with 2006 levels?

No, I think it's all dependent on what we're looking in the portfolio going forward.

The encouraging thing, as you saw, was our charge-offs were down, which is sort of an offset to that.

But the build was all based on the robust growth in the commercial portfolio.

It could go lower.

We're comfortable where we are.

But it's possible it could go a little lower if asset quality continued to improve.

Okay.

I apologize if I missed this.

Did you guys get a big recovery in the quarter at all?

No.

No big recovery for the quarter.

Okay, great.

Thanks for taking the questions.

Mark Fitzgibbon, Sandler O'Neill.

First, your loan to deposit ratio is comparatively low at about 86%; and likewise, your securities portfolio is comparatively high.

I wondered if you had some targets in mind and timeframe for achieving those to bring them closer into sync with your peers?

I will take the loan to deposit ratio is at about 85%.

I would say our target's closer to 90%.

That sort of gives us some leeway.

We're growing deposits, as you see, that we're focused on the mix and the change in mix in deposits -- so a lot more transaction accounts.

We have that ability to do that.

In fact, it provides excess liquidity without forcing us to become aggressive on pricing.

That's worked in our yield as well.

That being said, we see us getting closer to the target over the next 90 days.

Over the next several quarters, moving up to around 90.

Mark, I want to add, if you look at the high-performing peers, we have about the same size securities portfolio as they do, maybe a skoosh smaller than that.

We're pretty comfortable where we are.

We also like having the loan to deposit ratio where it is, so moving up to 90 would be fine.

Of course, we have the benefit of HSA Bank.

And it's growing rapidly and providing low-cost long duration funding for us.

I'd say we're in the sweet spot on both of those metrics.

Okay.

Glenn, you had mentioned on the call that you'd been putting on some forward-starting swaps.

Could you just tell us how big a position you've done in that -- how much of that you have put out?

We've put on about $225 million.

That was all done in the first quarter?

No, the last couple of quarters.

Okay.

Lastly, I wonder if you could update us on how things are going in the Metro Boston and Providence regions.

Any update on sizes in the portfolio and such there would be helpful.

Mark, this is Joe.

Certainly speaking with respect to Boston, that's just been a home run for the institution.

And as you recall, we opened up that office in 2009 in the teeth of the Great Recession.

In fact, I was just up at an event last night.

We had a bunch of our clients and customers in.

And it's really becoming one of our top-performing units, some $250 million of C&I business.

Overall, the Boston market, when you add the ABL and the CREE in, that's become a $1 billion shop for us.

We're being extremely well-received.

One of the stats I shared last night is we've grown that office over the period of time from 11 to 26 individuals.

There's a good market demand for value proposition.

In fact, I asked the team yesterday, I said -- Do people know the Webster name in the market?

The answer is an obvious yes, which is just a great story having that one single unit branch in the market.

Providence is doing well for us.

We've got some very talented individuals -- or an individual -- that we're going to add to an already good team.

We continue to be optimistic about its prospects.

But really, of the two, you think about the real driver to our performance, you've got to go first to Boston.

Thank you.

Collyn Gilbert, Keefe, Bruyette & Woods.

Glenn, just a quick question first on how you're thinking of funding a little bit longer term.

Just wondering when, or if at all, do you start to extend a little bit more on the borrowing side?

Yes, we effectively did.

We saw our senior note that we issued February 11 that was at $150 million, so that's one component.

We also did the swaps, the forward swaps, as I just indicated.

We've done a lot or more on brokerage CDs.

We have about $225 million on brokerage CDs, and we continue to do that.

It's five-year brokerage CDs.

Five-year, okay, that's right, you did mentioned that.

Do you think we'll continue just to gradually do so more of that type of thing?

Maybe not the senior notes, but in terms of the --

No, I think particularly in the CD side, we're doing more.

We're targeting to do more.

Okay.

That's helpful.

On the wealth aside, can you just talk a little bit about what the dynamic was that occurred this quarter?

Why fees dropped off so much and what will cause it to recover the next quarter?

I'll start off, but you've got to keep in mind that fourth quarter was a record for us.

We were just below $10 million.

I think that part of that was weather-related driven.

We did see a reduction in consumer activity across the board, whether it was mortgage or whether it was in the banking center and looking at things like ATM transactions and credit card transactions.

So we saw a general reduction in volume, that was part of it.

But I think what you'll see, and our first quarter's typically slower than the fourth to begin with, so some of that is seasonal as well.

We expect, as I indicated in my remarks, that we'd come back up to the Q2 levels, or closer to our near record levels beginning in Q2 and going forward.

There's no one item that moved that number.

Okay.

Could you just talk a little bit about how New York City is doing and how that contributed to the overall loan growth this quarter and how you're seeing that segment of your business play out throughout the rest of the year?

Sure.

Collyn, Joe.

We've always had a presence in New York, the pretty robust commercial real estate book.

And of course you know we have our asset-based lending unit housed there and of course, that spills over into New Jersey.

But our John Ciulla has been quite successful in his recruitment.

We've talked about that in the past.

John and Abby Parsonnet have added three individuals, two of which are very, very high-quality relationship bankers.

We would be untruthful to say New York City isn't every commercial bank's answer to growing their commercial book.

So we're seeing a lot of competition in a market.

That said, we built a very nice pipeline.

A couple of transactions have come in.

But the kind of growth you're seeing -- you've seen in our book -- really isn't so much New York-based as it will be for the balance of the year.

I'm going to make a wild guess.

It's somewhere at around $40 million is on as a result of New York.

Okay.

That's great.

That's helpful.

That's all I had.

Thanks, guys.

Dave Rochester, Deutsche Bank.

I'm just looking at the expense commentary you guys gave.

If we back out that $3 million in seasonal expenses and the $800,000 of non-recurring snow removal, could we actually see flat expense trends in 2Q?

Just factoring in some continued investment in the platform that you talked about earlier?

Just trying to get a sense for where that goes.

I wouldn't back out the whole $3 million because we haven't maxed out everyone on the seasonal tax expense.

That's the first thing.

As far as flat expense, I think it's likely you'd see flattish type of expense quarter over quarter.

(Multiple speakers) happens, Dave, is that part of this, and I made the mention that we had a higher medical costs or employee medical costs.

And typically what happens is that starts low, and then it builds as employees hit their out-of-pocket maximum; and then we're self-insured, so we take that piece.

So you see a trend go up over a couple of quarters.

That was offset by the higher taxes in the first quarter, employee taxes.

But in general, I think you'd expect to see expenses relatively flat quarter over quarter.

Got you.

Perfect.

Your fee income guidance for 2Q doesn't include a rebound in mortgage banking; is that right?

You're expecting that to pick up in 3Q?

I would say that we are thinking mortgage is going to be flat quarter over quarter on mortgage gain on sale.

Right.

That would pick up, you were saying, I guess starting the third quarter?

The third quarter, yes.

Where should we ultimately expect that line to return to?

Should we be thinking something closer to the fourth-quarter level?

Something with a 2 handle?

How should we think about that from here?

I think 1.5 to a 2 handle is where you've got to expect it to be in third and fourth quarter.

We might be conservative there.

The market might pick up significantly more.

But as we look out, that's what we're thinking.

With the caveat, of course, there's an awful lot of moving parts there ensuring the level of gain on sale, too.

Yes.

Understood.

Great.

Glenn, would you happen to have the prepayment penalty income in the quarter and the securities premium am expense for the quarter?

Prepayments were around $700,000.

The amortization, that was of the second part of your question?

Yes, the expense.

$11 million.

Great.

Thanks, guys.

Matthew Clark, Credit Suisse.

On mortgage, can you give us a sense for whether or not you feel like you've right-sized that business?

Are there more variable or even fixed costs to take out there?

Or do you feel like you're at where you need to be at this stage?

I can tell you that we look at the second quarter of 2013 as peak from a funding standpoint.

And that since that period, we've taken out about 40% of the cost.

We've come down pretty significantly on our cost structure.

The other piece of that is that a lot of it has been repurposed to the consumer loans, unsecured.

We've not only reduced the cost, but we've repurchased it to volume in another portfolio.

So there could be modest additional cost reductions from here, but most of the meaningful cost has been taken out.

Got it.

And then in fees -- and I apologize if you mentioned this during your prepared remarks -- I know this is difficult to do; but do you have a sense for the magnitude that the impact of difficult weather conditions may have had on your fees?

If you listened to the commentary, we indicated that there was an effect.

It was hard to quantify exactly what the effect was, but that there was 29 snow events.

The traffic was measurably lower, of course, in the branches.

So there were transactions that weren't taking place.

There was sales productivity that was in decline.

There was less usage of cars in all.

But for us to actually put a hard number on that is pretty tough.

What we said was, given the overage on the snow removal cost of around $800,000, plus whatever the hard impact was on fees and the like, probably came into well over $1 million pretax.

I think we'll leave it at that.

Okay.

Thanks.

Probably bigger than that, but we don't want to put the hard point on it.

Understood.

On the commercial front, does your expectation for, say, 2% to 3% of normalized growth of a quarter to be going forward, does that consider any increase in line utilization?

Just trying to get a sense for where your line utilization is today and where you think that might normalize over time.

That's a great question and it's one we continue to ask ourself because it's maybe the harbinger of an improving economy.

But the honest answer to the question is we expect line utilization to remain about where it is today.

It sits at about, in our ABL unit, at about 53%.

We don't think it is going anywhere, truthfully.

I just want to add to that.

We do think that if the economy improves, there's going to be more transaction volume, And that's going to be a positive for us.

We also are gaining share in and peripheral in our markets.

So there are sources of additional volume there that we'll gain, even if we don't have a pick up in line usage.

That's a much finer point on it, Jim.

We're going to get our growth irrespective of what line usage is because we're going to grow share.

And we'll do that consistently with the expanded markets we're in.

So good point.

Okay.

And lastly, on just the overall size of the securities portfolio, started to see an increase here after remaining relatively stable for the last few quarters.

Just trying to get a sense for whether or not we might continue to see some incremental growth there going forward.

I think you would expect to see it relatively flat over the next couple of quarters.

Okay.

That's it for me.

Thank you.

Dan Werner, Morningstar.

I know you guys have been focused on the internal operations of the Company for quite a while now.

But there's been a little bit of M&A activity in your backyard.

And I just want to know your thoughts as far as dipping your toe back into that, or what your thoughts were on expansion via merger.

Yes, you said it well.

Our focus has been on internal operations, and I'll just say it continues to be.

We're very, very focused on organic growth and deployment of our resources in pursuit of that.

We think that we can win by continually improving ourselves and by taking share, as you've seen in our results.

We're really not spending a lot of time thinking about M&A opportunities, but rather constantly improving ourselves.

If something comes along and there's an opportunity -- not that we're looking for it, of course we'd be open-minded about it.

But our view is, and our business plan is, all about driving organic growth to improve our return on capital.

I only bring it up because it seems like there's been some more activity in your backyard.

That's the only reason why I'm bringing it up.

Matthew Kelley, Sterne Agee.

About a year into the Jones Lang LaSalle partnership to help reduce costs on your occupancy.

And I wonder if I can get a little progress report on that as you've been closing/ consolidating branches -- kind of the lessons learned and your ability to close branches more actively going forward.

I think that the JLL relationship has given us a lot more discipline around that in looking at rationalizing our branch network.

It's also given us a lot more intelligence on where we want to be in the markets.

We've done a lot of work.

And you've seen it even this quarter, where we did a two-for-one consolidation.

And we look at additional sites where we can either consolidate or put a new banking center in support of our mass affluence strategy.

They've been really helpful along those lines as far as giving us market intelligence.

As far as core, the core structure in the bank, they've helped as far as reduction in corporate-type facilities; and we continue to do that, Matt.

But we're at the early stages of that.

You'll see more on the expense reduction line as we go forward on those types of things.

And it's just reducing our footprint, both on the corporate side and on the banking center side.

At your Investor Day, you outlined a target for square footage.

Where are we on the progress towards that square footage reduction?

Maybe quantify that?

I think we are at 744,000 square feet, and we'd say we'd get it down 20%.

Over five years.

Yes, over five years, so I think we're at the beginning stages of it.

I don't have an exact number, Matt.

Since then, we've done things like we've moved the existing main office facility into a much smaller location.

There was 8,000 feet.

We consolidated a three-for-two.

We did another two-for-one.

We're easily into the 20,000 to 30,000 range.

So we've probably covered off on the first year's estimate.

Okay.

Switching topics to the HSA Bank, Jim, can you give us a sense of how the partners have changed and the distribution has changed -- interaction with private exchanges in that business?

It appears like the growth is accelerating.

Talk about that and how the HSA Bank operations changed over time.

The exchanges will represent an opportunity; there's no doubt about it.

But they're pretty much in formation at this point.

We haven't generated a lot of the new business from the exchanges.

It's come from traditional, where we're either direct to the individual or to the small businesses; and most of that is online business, while our sales force is deployed in the market, talking to medium-size to larger employers, to regional and national carriers.

And that's what we have been able to build the business.

The yield per employer has increased very significantly from where it was before, and we're starting to write more business directly with the carriers.

And that's where the market is going.

The other side of it is that you've got to have a complete set of consumer-directed healthcare financial services, not only including HSA accounts, but also health reimbursement arrangements and flexible spending accounts so that the employer will have the value of all of these and on a single card.

That's the big investment that we've been making over the last year or so, which will enable us to sell the full suite of CDH products.

And that is what will boost the growth in HSA accounts because those providers of HSAs that also have those other services are now growing their HSAs at twice the rate of those that don't.

That's a very important strategic shift that we have made.

The full suite of products and moving up market into a larger employers and carriers, those are primary focuses of the strategy.

Got it.

Just a clarification, what was the tax benefit this quarter?

What was that related to?

And then how should we think about the tax rate longer term?

Any other changes as we look further out in the model?

No, Matt, this was the benefit due to recording of a state deferred tax rate change.

It was somewhat one-time and non-recurring in nature.

I gave the guidance at 32%.

And I think if you look prior year, 31% goes to 32%.

The key driver of that was the reduction of some of our tax-exempt income, as well as earnings.

The reduction in tax-exempt income was driven by the reduction in our muni portfolio and holdings.

I would use, as I've have given out, the 32%.

The first quarter was just a nonrecurring one.

I assume that was related to the changes in the New York State Tax Code?

Yes it was.

Thank you.

Thank you.

It appears we have no other questions at this time.

I would like to turn the floor back over to management for any additional concluding comments.

Jesse, thank you very much.

Thanks, everyone, for joining us today.

We look for to speaking with you soon.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.