Webster Financial Corp (WBS) 2015 Q1 法說會逐字稿

Good morning and welcome to Webster Financial Corporation's first-quarter 2015 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 on those in the forward-looking statements is contained in the Webster Financial's public filings with the securities and exchange commission, including our Form 8-K containing our earning release for the first quarter of 2015.

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

Please go ahead, sir.

Thank you, Adam, and good morning, everyone.

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

CFO Glenn MacInnes and I will review business and financial results, after which President Joe Savage, Glenn, and I will take questions.

Results for the first quarter reflect continuing solid performance and further progress in expanding our commercial banking business, transforming our community banking and private banking models and growing HSA Bank, including through the January acquisition of JPMorgan Chase's health savings account business.

Beginning on slide 2, quarterly net income of $49.7 million increased 5% year-over-year excluding Volcker rule-related securities gains a year ago, while earnings per share increased 4% on that basis.

Return on average common equity was 8.6% and return on average tangible common equity was 11.8%.

Given Webster's strong capital position and solid earnings, the Board plans to consider an increase in the regular quarterly cash dividend when it meets next week.

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

First, I want to acknowledge the greater than anticipated margin pressure in the quarter, which drove the net interest margin down a more than anticipated seven basis points linked quarter, after three consecutive quarters of relative margin stability.

As a result, net interest income, while 3% higher than a year ago, was slightly below the Q4 level as earning assets both didn't fully offset lower spreads.

This result is similar to our experience in Q2 last year.

As Glenn will describe in more detail, the NIM was affected by multiple factors, notably lower rates, as evidenced by the 30 basis point linked quarter decline in the average 10-year swap rate and the effect on reinvestment yields.

Additionally, continuing mix shift in commercial banking originations toward lower yielding, floating-rate CRE loans pressured the NIM, as has competitive pricing across all asset classes.

That said, our modestly asset-sensitive balance sheet will boost yields once short-term rates begin to rise.

On slide 3, year-over-year results were aided by solid Q1 loan growth.

Overall loan balances grew 10% year-over-year with originations across the Bank again at near-record levels.

Each key loan segment posted linked quarter and year-over-year growth.

Originations showed impressive resilience given the softer pipelines at the end of Q4.

Once again, strength in commercial and commercial real estate loans accounted for most of the growth, growing on a combined basis 3% linked quarter and 14% year over year.

Non-interest income grew 27% year over year to a record, aided by a 20% gain in commercial banking fee revenue and reflecting in particular the HSA acquisition, without which non-interest income would have grown 12%.

Core revenue grew year-over-year for the 27th consecutive quarter.

Expenses grew at a lower rate than revenues year over year for the 16th straight quarter, as we reported an efficiency ratio of 60% or better for the eighth straight quarter.

This, in turn, produced a 10% increase in pre-provision net revenue or PPNR.

The quarterly loan loss provision increased slightly linked quarter to $9.75 million, marking the fifth straight quarter in which we added net reserves after net charge-offs.

Ongoing loan growth was accompanied by little change in most asset quality measures, apart from an increased level of nonperforming loans in commercial banking where three seasoned loans in various stages of resolution were moved to nonperforming.

Turning to slide 4, you can see the recent quarterly transfer loans and deposits.

In addition to the increase in commercial loans to 57% of total loans over the past year, you can also see floating and periodic rate loans as a percent of total loans continued to increase, now at 68%.

Combined transactional and HSA deposits now represent 53% of total deposits compared to 45% a year ago.

The loan-to-deposit ratio is now 81% compared to 86% a year ago.

And the borrowing-to-asset ratio is 13% compared to 18% year ago.

These are powerful ratios that underscore Webster's balance sheet strength, strong liquidity position, and, most especially, the overall value of the HSA business to Webster.

Slide 5 shows progress from a year ago in our key loan portfolios with growth in each segment and particular strength in the commercial categories.

Slide 6 shows the sustained revenue growth and expense discipline that have resulted in consistent growth in PPNR.

Line of business performance begins with slide 7. Commercial banking continues to perform at a high level, growing loans, revenue, and economic profit while earning regional and national recognition from its middle-market customers for excellence in client service.

Loans grew about 4% linked quarter and 15% year over year, a result of quarterly originations of $640 million in funding so $483 million, both representing record Q1 loan activity but at traditionally slower first quarter.

Our bankers have excelled in attracting new customers across all business units in all geographies with particularly strong results in commercial real estate.

The portfolio yield decline was partly attributable to the delayed effect of record originations and payoffs in Q4 as well as loan mix in Q1 originations.

Q1, similar to Q4, saw a greater proportion of high-quality, lower yielding investor CRE fundings, representing 44% of Q1 originations.

It's noteworthy that our commercial loans will be sensitive to eventual increases in short rates, since 82% of CRE loans and 85% of C&I loans are floating rate or reprice periodically.

Deposits in transaction accounts were up strongly year over year, a comparison that eliminates the seasonality impact of government deposits and demonstrates positive momentum in core deposit growth.

Commercial banking posted PPNR growth of 17% compared to Q1 of 2014 and positive operating leverage of 9%.

Moving now to community banking, slide 9 shows the business banking unit continuing its loan growth trajectory.

While loan demand and pipeline remain relatively soft, a higher focus on continues to improve balances.

The loan portfolio yield decreased as we move up market and due to competitive pricing pressure.

Our focus on high-value businesses resulted in net interest income growth, increased market share and deposit growth of over 8% year over year.

Looking at the personal banking unit on slide 10, overall consumer loan balances grew year over year and linked quarter, and the end of the period loan pipeline is up sharply.

Overall resi mortgage production rose 20% linked quarter and over 130% year over year, continuing our rapid growth in jumbo originations through retail and corresponding channels.

Consistent with our mass affluent focus, 90% of mortgages originated for portfolio were jumbos.

The linked quarter increase in personal banking deposits reflects the strongest growth in years in net new checking accounts.

Investment assets under administration grew 7.5% year over year to $2.8 billion, driven by a combination of new asset inflows and market gains.

While new production for investments was soft in the quarter, the pipeline for advice appointments increased by over 65%, which should positively affect production and revenues.

Community banking continues to make progress along its transformational strategic roadmap.

Customer satisfaction is high and notably so in the key mass affluent segment.

Our new banking center incentive program delivered over 20% year-over-year improvement in productivity as our customers increasingly shift to electronic and mobile transaction channels and our bankers continually transition their roles to providing customer advice.

Slide 11 shows that, despite these many positive achievements in community banking's transformation, PPNR declined 7% year over year, due primarily to the effects of the persistent low interest-rate environment on the value of deposits.

Slide 12 presents the results of Webster Private Bank.

Strong loan growth continues with significant year-over-year increases in balances, originations, and pipeline.

With the separate path private banking model now established, assets under management production turned net positive in Q1 with net inflows growing markedly as the quarter progressed.

The AUM pipeline is strong and growing, propelled by more sophisticated investment strategies, a broad asset allocation program, and a new sales incentive plan aligned more closely with the Private Bank's strategic priority of growing AUM.

Slide 13 presents the results of HSA Bank, where the effects of its mid-January acquisition of JPMorgan Chase's health savings account business are readily visible.

This can easily be described as HSA Bank's best quarter ever in that we opened 315,000 new accounts between legacy HSA Bank and the acquired HSA platform, compared to 118,000 new accounts opened last year.

Total footings now stand at $4.6 billion, of which deposits total about $3.5 billion and represent 20% of Webster's $17.5 billion in total deposits.

Slide 14 shows our diverse distribution channels and the rapid growth we are making in moving deeper into the employer and health plan space.

HSA Bank got its start working with insurance agents.

When we went into business we obtained a list of 10,000 insurance agents and began calling them up one at a time saying we wanted to provide the HSA if one of their clients bought a high-deductible health plan.

That's how we built that network.

It's difficult to replicate and is very sticky, and we built it out by signing up one agent at a time over 20 years.

We probably do better in that space than anyone.

In recent years we have significantly increased our focus on health plan partnerships and large employer groups, to the extent that they now account for most of our new account production.

Adding new product capabilities last year such as flexible spending accounts, health reimbursement accounts, and commuter benefit accounts was integral to our ability to pursue that strategy.

You can see from the slide that the JPM portfolio acquisition accelerated that strategic transition, given the plethora of large employers in their base as well as the contractual relationships we've developed with two of the five largest healthcare insurers.

Another distinguishing feature of HSA Bank is our average deposit balance.

According to Devenir's 2014 year-end survey, HSA Bank's average account balance of over $2,400 is the highest among the top 10 in the industry, which represents 65% of industry assets, and 37% higher than the median for the top 10.

We believe this is a reflection of our balanced approach to the market, as our insurance broker channel tends to yield higher deposit balances on a per-account basis while our partner channel drives faster account growth.

Slide 15 shows the continued progression of HSA Bank's growth in PPNR.

Growth in Q1 compared to a year ago reflects the recent acquisition and ongoing growth in the legacy business.

Here's the beauty of HSA Bank to Webster.

Most importantly, it provides a rapidly growing source of stable, long-duration, low-cost core funding.

It generates a substantial non-interest income, requires little capital to support and is significantly EP positive.

Given that HSA's are a scale business, our position as a market leader provides competitive advantage in pursuit of growth and our position as a bank enables us to deliver a single end-to-end solution to health plans, employers, and consumers.

Finally, we scheduled an Investor Day for June 17 in Westport, Connecticut, where our executives will discuss their strategies and progress toward their financial goals.

We helped many of you will be able to join us.

Terry will provide detail shortly.

And for those of you who want to do a deep dive into the world of HSAs, we are planning and HSA Investor Day in our Milwaukee HSA Bank offices later in the summer.

Now, I will turn it over to Glenn for financial comments.

Thank you, Jim.

I'm going to begin on slide 16, which summarizes our core earnings drivers.

Our average interest earning assets grew $539 million compared to the fourth quarter.

Half the growth was attributable to our loan portfolio with the remaining growth the result of incremental securities purchase made in connection with the HSA acquisition.

Net interest margin at 310 basis points was down seven basis points from Q4.

We anticipated a 4 basis point NIM compression from our loan and investment portfolios, as noted on our last earnings call.

The unexpected compression was a result of a decline of 2 basis points associated with lower than anticipated prepayment activity at quarter and a deferral of a planned commercial loan transaction and a one basis point decline associated with holding reserves at the Federal Reserve as a result of our HSA acquisition.

Our 3% linked quarter growth in earning assets coupled with NIM compression and two fewer days resulted in net interest income of $159.8 million.

While down less than 1% from prior quarter, net interest income is up 3% over prior year.

Core non-interest income increased by $4.2 million or 8% on a linked quarter basis to a new quarterly record.

The primary driver was the addition of new and acquired HSA accounts.

Core expenses were up $5.5 million over Q4 with the majority of the increase associated with HSA acquisition.

Taken together, our core pre-provision net revenue totaled $84.7 million, down 2% linked quarter but up over 10% from prior year.

And as you see, pretax GAAP reported income totaled $73.8 million for the quarter, up 3% over prior year.

Reported net income of $49.7 million includes an effective tax rate of 32.6%.

Slide 17 highlights the drivers of net interest margin versus prior quarter.

As highlighted, we achieved quarterly growth in average of interest earning assets of $539 million or 3%.

The securities portfolio had average linked quarter growth of $173 million as we completed the planned purchase of $500 million in securities associated with HSA acquisition.

Recall that we purchased about half the HSA-related securities in Q4.

During the quarter we purchased a total of $570 million in securities with a yield of 272 basis points and a duration of 5.2 years.

The longer average duration was due to the combination of our typical portfolio purchases, which had a roughly four-year duration, and the incremental HSA-related purchases with six-year duration.

Securities portfolio cash flow totaled $282 million in the quarter with a yield of 294 basis points.

As a result, despite a 4 basis point reduction in yield, portfolio interest income increased by $600,000 versus prior quarter.

Average loan balances grew $278 million and the portfolio yield declined 7 basis points linked quarter.

The decline in interest on our loan portfolio of $1.8 million was primarily driven by two fewer days in the quarter.

And interest on total interest-earning assets declined by $800,000 or seven basis points.

Average deposits increased $1.7 billion in the quarter, largely in connection with the HSA acquisition and core seasonal deposit growth.

The rate on deposits declined 2 basis points to 27 basis points, driven by a 3 basis point reduction in HSA Bank's cost.

Average borrowings decreased $1.1 billion as a result of a reduction in short-term FHLB borrowings which was planned as part of the HSA acquisition to reduce interest rate risks.

As you see, the average cost increased 45 basis points to 162 basis points while borrowing expense declined $174,000 for the quarter.

In summary, continued strong balance sheet growth was offset by NIM compression and two fewer days in the quarter, resulting in an $884,000 decline in the net interest income.

On slide 18, we provide additional detail on core non-interest income, which increased $4.3 million or 8% versus prior quarter.

Mortgage banking revenue, the top box, increased $584,000 on settlement volume of $75 million.

The spread for the quarter was 208 basis points, which was up 37 basis points over prior quarter.

Wealth and investment services, highlighted in brown, declined by $628,000 due to lower than anticipated volume in Webster Investment Services in the latter part of the quarter.

Loan-related fees, in green, dropped $2.7 million as we had highlighted significant prepayment activity in Q4.

And deposit service fees increased $6.7 million, primarily reflective of incremental monthly service charges and interchange fees associated with the HSA Bank acquisition.

Slide 19 highlights our core non-interest expense, which was up $5.5 million from Q4 and $8.9 million from prior year.

Occupancy expense, highlighted in light green, increased $2.1 million versus prior quarter with approximately $1.8 million attributable to snow removal.

Technology expense, highlighted in dark green, increased by $3.4 million as result of $3.6 million in transitional service cost associated with HSA acquisition and $600,000 in expense associated with the new HSA technology platform.

Other expense benefitted by a favorable adjustment in the quarter to our unfunded reserve which was somewhat offset by higher loan-related expenses.

Slide 20 highlights results of ongoing expense discipline while continuing to invest in the business.

As you see, despite seasonal expenses we continue to operate with an efficiency ratio at or below 60%, which we have now achieved for eight consecutive quarters.

Turning to slide 21, as we have discussed on past calls, we have been making a conscious shift to become more asset sensitive.

And this slide shows the progress we have made over the last two years.

Here you see our interest sensitivity profile as we get closer to a tightening in monetary policy, which we expect to occur later in the year.

The HSA acquisition is included in the 2015 numbers and has added about 200 basis points to our asset sensitivity.

Our sensitivity on this chart assumes deposit rates react immediately to changes in market rates.

Any lag in timing of deposit rate increases for a bull twister scenario would improve the results significantly.

I would encourage you to review pages 26 and 27 of our appendix, which highlight the significant structural changes we have made in our balance sheet since 2004, the last time the Federal Reserve raised rates.

Turning now to slide 22, which highlights our asset quality measures, nonperforming loans, in the upper left, increased to $152 million and were 1.07% of total loans.

The $22 million increase was driven by three loans in the commercial banking segment.

One of the loans is in advanced stages of resolution, and we expect to cure over the next two quarters.

Past-due loans, in the upper right, saw an increase of $2.8 million due to one commercial account that has since been brought current and the reclassification of $2.1 million of residential mortgage loans from nonaccrual to accrual status based on full government guarantee.

Past-due loans now represent 32 basis points of total loans.

Commercial classified loans, in the bottom left, decreased $2 million and remain at pre-recession levels of about 3% of commercial loans.

Our annualized net charge-off rate remained at 20 basis points on $7 million of net charge-offs in the quarter.

This represents the fifth consecutive quarter at or below 25 basis points.

Assuming recent economic trends remain intact, key asset quality metrics are expected to remain relatively strong.

Slide 23 highlights our capital position.

As expected, our ratios decline from December levels as a result of strong asset growth and the HSA acquisition.

Nonetheless, the ratios remain well in excess of the fully phased-in Basel well-capitalized levels as well as our internal targets.

Tangible common equity declined 25 basis points from December 31, largely as a result of an increase of $50.2 million in goodwill and other intangible assets, reflective of the HSA acquisition, plus overall asset growth of around 2.5% in the quarter.

Note that this quarter we are reporting our capital ratios under Basel III rules for the first time.

In the appendix you will see that the leverage and Tier 1 capital ratios declined due to reclassification of 75% of our $75 million of Trust-preferred securities from Tier 1 to Tier 2 capital.

The remaining TruPS will be reclassified next year.

TCE, Tier 1 common, and total risk-based capital ratios, were not affected by the change in capital treatment of TruPS.

Risk rating changes in some categories also impacted some of the regulatory ratios such as Tier 1 common shown on this slide.

In the Tier 1 common ratio shown here, retained earnings growth offset the increase in intangibles during the quarter.

The entire decline in the ratio was due to an increase in risk-weighted assets.

About half of the risk-weighted assets increase was due to balance sheet growth, while the remainder was due to changes in Basel III.

The decline in Tier 1 common brings us closest to our longer-term target of about 10%.

Our strong capital position and solvent earnings continue to support asset growth, provide for future increases in the dividend and selective buybacks, and enable us to confidently pass the annual regulatory severely adverse stress scenario.

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

Overall, average interest earning assets will grow approximately 2% to 3%.

We expect average loan growth to be up approximately 2% to 3% with growth in all portfolios.

We expect to see continued pressure on net interest margin.

Assuming the level of the 10-year swap and its spread to mortgage rates remains in today's range, we expect a 3 to 5 basis point compression in Q2, driven by lower securities and commercial yields.

That being said, we expect an increase of up to $2 million to $3 million in net interest income over Q1, driven by loan and investment volume with some offset in NIM compression.

Leading indicators of credit continue to signal strong asset quality.

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

Regarding non-interest income, we expect an increase of up to $3 million over Q1 core non-interest income of $57.8 million.

This will be driven by a full quarter of fees associated with the HSA acquisition and our expected rebound in wealth management.

We anticipate our expense base will increase as the result of a full quarter of the HSA transition expense along with bank-wide investments in people and technology.

That being said, we will continue to demonstrate a disciplined approach to investing and expect to operate the core expenses at a target level and keep our efficiency at or below 60%.

Our expected effective tax rate on a non-FTE basis should be around 33% due to increased earnings and lower tax-exempt income, and we expect our average diluted share count to be in the range of 90.8 million shares.

So with that, I'll turn things back over to Jim.

Thanks, Glenn.

I think it's clear we're making meaningful strides along the pathway to high performance as we are investing our capital resources and energy in growth strategies that are designed to create value for customers and shareholders alike.

Let's open it up for comments and questions.

(Operator Instructions) Dave Rochester with Deutsche Bank.

I was really surprised that the stronger loan growth this quarter on an end-of-period basis.

I was just wondering if this actually surprised you guys as well.

And then if you could just comment on why maybe the average loan growth guidance seems to be a little conservative there.

Normally, you guys experience a little bit of a pickup in the second quarter.

You would think, with the strong end-of-period growth this quarter you might see maybe at the upper end of that range or higher.

We were positively surprised with respect to the loan growth.

And I think one of the things we guided you on last quarter was we were expecting greater prepay volumes in the commercial real estate book.

Not only did that not come to pass but in fact we grew that business better than we had originally projected.

So it was -- we were quite pleased with it.

We do think we will see some prepay activity in the second quarter, but I always go back to the markets, the broad markets we are doing business in, all of the arrows, effectively, which have in our quiver.

Our guys continue to surprise even us to the upside.

So it was a good quarter for us.

But we will be muted in our expectations with respect to second quarter, given the prepay activity that we are expecting.

So I hope that helps.

Great.

Yes, that does.

Glenn, on the margin, that 3 to 5 basis points of pressure you are talking about -- that's just a little bit lower than what you had been talking about last quarter, assuming that the curve remained relatively stable.

I was just wondering if this 3 to 5 is a good assumption for the next few quarters as well or if you see some relief in the back part of the year.

We see some relief in the back part of the year.

And Dave, the other thing I would highlight is you've got to -- there's 1 basis point in there that is a result of us keeping funds at the Fed, too, which really doesn't play off on earnings.

But it is worth 1 basis point.

Got you.

And on capital it seems like you guys have a decent amount of excess capital there.

I know you mentioned raising the dividend later this quarter.

Are you thinking at some point you might be comfortable with buying back stock?

Is there anything you are waiting on before you start buying back stock?

I'll respond to that.

We actually have made some acquisitions like if we issue shares in a management recognition program, we buy it back.

So we have gradually whittled down our authority to where it's probably around $35 million right now.

I think we've said before that we look at stock buybacks more opportunistically.

We are using our capital to capitalize our loan growth.

We like the idea of a more permanent return of capital through the dividend program.

So I think you should look more there than to ongoing share repurchase as a means of returning capital.

But it is in the quiver.

It's a possibility, maybe even expanding the buyback authority at some point down the line.

But for now we would look at it as opportunistic.

Great.

And Jim, just on the wealth and investment fees, you had talked about some of the steps that you had taken to grow that business and improve the level of fees there.

You changed the incentive plans.

What else can you do and what are you expecting for growth in that line this year?

Well, I want to say we are very excited about our Private Bank.

We've made a lot of changes their over the last couple years, and we are pretty through what we call the model shift.

We have highly qualified investment advisors.

Yves Cochez, who is our chief investment strategist, is extraordinary, resonates in the market.

He's got a lot to do with why that pipeline is bursting at this point.

So we're very pleased to see that the model shift is taking a so-called separate path to the Private Bank so they can provide a complete set of services, both lending and deposit, and investment advisory, estate planning, financial planning to all of the potential customers in the Webster Bank base today, as well as in the market, bodes well for revenue growth in the future.

And I think you see that in the pipeline numbers there at the end of the first quarter.

Let me just add one important point to everything Jim said.

Jim is spot on.

The chassis is good; we like it.

We think we've got the right levels of leadership in the group.

And the thing that's really going to get this thing going is continuing to add to our sales folk.

We had some irons in the fire there, and to the extent that we can realize that, that will accelerate the path.

But the chassis is in good shape.

So I just wanted to second Jim's comment on that.

But I will comment that we were a little perplexed at the fact we didn't have a higher growth rate in the brokerage side of the business, the Webster Investment Services, where we've got about $2.8 billion of assets under administration.

And we don't know whether people didn't want to keep their appointments in the first quarter or what it may have been.

And we do have a very strong backlog of appointments, which we expect will have a positive impact in Q2.

But we are looking for growth there as well.

And I want to point out that we've also been in the process of converting a lot of the revenue in the brokerage channel to recurring revenue.

We are now well over 30% of revenue is, in fact, recurring.

So that actually, in some ways, creates a bit of a drag over the near-term on overall revenue growth but is very positive for stable revenue growth over the longer-term.

All right, great.

Thanks, guys.

Jared Shaw with Wells Fargo Securities.

Could we just spend a couple minutes just talking about the -- on the expense side you had mentioned that there was the increased cost for snow removal.

And then you also talked about transitional HSA expenses.

Should we be excluding those from the growth rate guidance that you are giving for going forward?

They are in the guidance for the second quarter.

The thing with the transitional expenses is that they will eventually wind down as we get into the fourth quarter.

I'm not sure if that gives you enough, but it's -- we had indicated last time that we expected incremental costs associated with the HSA transaction of about $5 million in the quarter.

A big piece of that is attributable -- say 75% is attributable to transitional services that will eventually wind down.

We are basically running two platforms.

So we have the HSA on -- the JPM HSA on their platform, and we have our EV1 platform.

So there's sort of a bubble in the cost on that.

Okay.

And that's going to be with us throughout 2015?

No.

It tapers off.

It peaks in the second and third quarter and then it starts tapering down.

And it will be gone by the end of first quarter 2016.

Okay.

And in the past you've spoken about how the fee income generated from the HSA deposits covers about 90% of the expenses.

Will that still be the case this year?

Or is this more with the transition we're going to be looking at overall elevated expenses?

It will be slightly below that and then it will follow in the fourth quarter.

First quarter it will return to more normal levels.

Okay.

Then when we look at the -- shifting to the commercial loan yields --

Hey, Jared?

The other thing -- I'm sorry for interrupting, but the other thing -- keep in mind that we don't have a full quarter of HSA revenue or expense, JPM HSA revenue or expense, as we closed midmonth.

Right?

Right, right.

You can expect another, say, $1.2 million, $1.3 million in additional fee revenue coming in, in the second quarter.

Again, that's part of my guidance, but then a little less than $1 million in additional expense as well.

Okay.

I just wanted to make sure you get that because it wasn't a normal quarter in the first quarter.

Right, okay.

That's helpful, thanks.

Looking at the yield on commercial lending, you had mentioned that pricing is getting tighter and that there's more of a focus on fixed versus floating.

Are you swapping out fixed for floating?

Or is that more customer preference at this point?

We are doing virtually no fixed other than in our equipment finance book.

Now, again I'm referring to the commercial book; I'm not talking about the business bank as part of our community banking world.

But we are doing all swaps, so our book is -- Jim said right in his opening comments, you blend the two of those together and roughly 84% of the business that we have currently on our books is float.

And I can't think of a fixed deal we've done in the last six months.

I'm sure there are some, but I can't.

So that's the world we are in right now.

And we like that.

Okay, great.

Thank you very much.

Casey Haire with Jefferies.

So on the other expense line you mentioned there was a benefit from an unfunded reserve.

I was just wondering what that amount was and what kind of credit was it pertaining to.

So that was -- as we went through and looked at our reserve models, we came to the conclusion that we probably had more excess there and that some of it was probably captured in our ALLL calculation as well.

So this is unfunded reserves, so this is meant to cover the 90-day period when a loan is booked until such time it moves.

If they draw down, then it moves to the regular loan book and there's a reserve established for it.

The total amount was about $2.5 million and it was just about evenly offset with additional loan expense within that other category.

Got you, okay.

And then, just keeping on the credit front, it sounds like you guys are feeling good about the asset quality.

But the new non-accruals was an outsized number for you guys.

Just curious what was driving that.

We do feel good about our non-accruals.

And as you well know, the classified loans are the feedstock for, really, how we go.

And that's why Glenn brought that up in his particular comments.

And further -- and again I'm just going to limit my comments in answering your question to the almost $7 billion commercial book.

And heretofore we have been running at about 20 basis points.

So when you think of our business with loans that range from, my gosh, from $5 million to $25 million to $30 million, stuff moves.

And when it comes in, it can have a large effect on the book of business.

These particular assets that Glenn noted in his comments were about a third in the CRE book, two thirds in the C&I book.

I think the great news is our credit line partners.

We had these things in our gunfights since all the way back at 2010.

And as Glenn said, we are going to expect to see these things move through their paces certainly possibly over the next quarter or two, but certainly within the year.

That's not all of them, but a few of them.

And so, what I would say is from our vantage point we see this as a part of doing our business.

We had them on our radar.

And we think you will see lumpy things occur over a period of time, and maybe we will get back to 20 basis points.

But quite frankly, those are levels that we have never been at.

So it's something that we see as part of our process of being, approaching $7 billion commercial book.

I don't know if that helps.

Yes.

No, that's very helpful.

Thank you.

And then, Jim, just last one for you, big-picture question on HSA.

Just curious what the appetite is, if this is a funding source that is going to be a double-digit growth category for you.

What is the appetite -- presumably, your liquidity profile will improve, loans to deposits will dip even below that 81% now.

Just curious what your appetite is to pursue maybe national business opportunities or maybe run with a more robust treasury platform, just what's the appetite on the asset side if you do get explosive growth on the HSA side?

It's a great question and we talk about a lot.

What it really boils down to is that we've got pretty good loan growth.

And having HSA Bank in addition to regular deposit channels is very helpful to us.

In fact, if you were to look at the growth in HSA Bank over the last several years it matches up almost exactly with the growth in the commercial loan book.

So we are able to fund all of this organically, which is why you can see our borrowings going down as part of the strength that HSA Bank brings to the overall balance sheet.

So no, we are not thinking about getting into national lending businesses.

We've got regional lending businesses, as it is -- our commercial real estate, asset-based lending, equipment finance.

We are moving out to middle-market as well, into the regional space.

So I think we are in a really good place for HSA to support what we plan as organic growth in the Webster book.

Okay, thanks.

And the other thing is that if you have the explosive growth, and it's quite possible that the growth rate of 20-plus will continue for several years, our growth rate actually could ramp up once we have everything in place here, that we have a safety valve, that as much as we value the deposits as a funding source, if we wanted to, we could sell off the deposits, as other competitors do.

So we are in a wonderful position as a bank to have the funding source but also to have the capability to offload some of those deposits if we chose.

Not the plan, but it could be.

Okay.

So broker deposits, I guess, would be the -- as of now, the brokered deposits would be the preferred source, preferred method rather than pursuing national business lines?

I wouldn't necessarily call them broker deposits.

But they may be deposits we wouldn't hold on our balance sheet; that's true.

And right now we are not choosing one over the other.

We are just saying that we are focused on organic growth in the regional businesses that we are in today.

We don't have plans right now to open up a national platform.

We may expand the region that we serve through ABL and through equipment finance and CRE gradually.

As you know, we are down in Philadelphia, where we have been for several years, on the CRE side, moving middle-market down there.

CRE is now in Washington, D.C. So there's lots of things that are percolating that we think are going to absorb these excess deposits based on the plan that's in place today.

If we need to think more broadly than that, of course, we will.

But for now we don't think we have to.

Okay, great.

And then, Glenn, sorry, just one last one.

You mentioned you expect NIM relief in the back half of the year.

I'm just curious what kind of forward curve are you breaking in.

So if I look at the forward curve today and we say a 2.21% on the 10-year by the end of the year, a 2.41% by, say, the end of 2016 and a 2.53% by the end of 2017, we would bottom out late in 2015.

And actually, we'd begin -- according to our model, if I use our model we would begin to approach a 3.50% NIM by the end of 2019.

So --

Got you.

How's that for --?

That's great color, thank you.

2025?

Can we talk about 2018 now?

Thanks, guys.

Collyn Gilbert with KBW.

On the HSA side, Glenn, and obviously in your slide deck you guys break out the revenue.

But what was the fee component of that this quarter tied to HSA?

So if we -- in the first quarter, say we did $6.5 million in non-interest income, you can pretty much evenly split between fees and [interchange].

It's all rolled up into deposit services, but there's interest change revenue, which is about half of that.

And that's just on the JPM business.

It's pretty consistent across the whole business as well.

Okay, okay.

So that $6.5 million is applicable to the HSA business for both --

It's applicable to the acquisition.

I thought that --

To JPMorgan?

Yes.

No; I just meant all in.

Right?

Because the numbers you give in your slide deck is all in on the PPR.

And I just wondered, of that revenue number that's on the slide deck, how much is fees.

Okay, I'm sorry.

So the non-interest income piece that's on that slide deck for the first quarter for HSA Bank is a total of $15 million in fees.

Okay, perfect.

So it's fees and net -- so the revenue is split as well between net interest income and fees.

Got it.

Okay, okay, that's helpful.

And then just one other question on HSA -- you guys have mentioned the account openings that you saw this quarter, and obviously an amazing ramp up from last year.

Do you have thoughts on where you think some of those account openings can go next year?

Well, I think the guideline is to say that we think we can grow this business at 20% plus of the next couple of years.

That would be the best way to look at it.

I'd rather not just pick a number but to say that the growth rate should stay intact, and having implemented an industry-leading platform for technology as well as added the various accounts, and now we've got the national healthcare insurers as well and the large employers that, if anything, we could see the ramp-up increasing.

We don't want to predict it, but we are very bullish on this business.

Let me just add to that that what we typically see is the number of accounts we open in the first quarter on a full-year basis is double.

So meaning if we open up 125,000 accounts in the first quarter, by the end of the year we typically have 250,000.

Okay.

So you can look at the 315,000 that way and say that on a full-year basis, given the core business as well as the acquisition, we could be on target to open up 600,000 accounts.

Okay.

That was going to be my next question, how much of that account growth in a year comes actually in the first quarter.

Okay, that's super helpful.

Okay.

And then just circling back -- and I know, obviously, asset quality has been really strong.

But just the three credits that popped up this quarter -- were any of those tied to energy?

No, they were not tied to energy.

It's classic C&I in our footprint, classic CRE, ICRE in our footprint.

In the CRE side, just lost a tenant, a couple tenants in a nice property.

No, no energy.

Energy only helps us on the equipment finance side with respect to those parties operating that heavy machinery.

So we don't have any exposure on the energy side to speak of.

Okay, all right, that's helpful.

And then just one final question, Glenn -- so that FHLB advances you have left on the balance sheet now, I'm assuming that you obviously got rid of the overnight, so that the duration on those is longer.

What is the average duration on those that are left?

It's about 1.7 years.

Okay, that's all I had.

Thanks.

Bob Ramsey with FBR Capital Markets.

This is [Martinus Burke] for Bob Ramsey.

Bob, we can't hear you very well.

This is Martinus Burke in for Bob Ramsey.

You mentioned a few headwinds regarding your NIM [because of frequent] --

You need to speak up a little bit.

Sorry about that.

You mentioned a few headwinds regarding your NIM.

Specifically [to book] real estate pricing and also competitive pricing in the market.

Can you give me some color the competitive pricing in the markets?

I'm sorry.

Would you mind repeating the question?

We had a hard time hearing that.

Hello?

Hello?

Hello?

Gentlemen, that questioner has dropped their line.

Okay.

We have no further questions in our queue.

Yes, I think we may have dropped another one.

Okay, so if there's no additional questions --

Terry and I can follow up on any additional questions as well today.

Right.

So if anybody did not get to ask a question -- I think there may have been one more in the queue -- we'll make sure we follow up directly.

Okay?

Okay.

Adam, thank you very much.

Thank you all for being with us today.

Thank you, ladies and gentlemen.

This does conclude our teleconference for today.

You may now disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.