Webster Financial Corp (WBS) 2016 Q1 法說會逐字稿

Good morning and welcome to Webster Financial Corp.'s first-quarter 2016 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 the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from those in the 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 2016.

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

Please go ahead, sir.

Thank you, Christine, and good morning, everyone.

Thanks for joining Webster's first-quarter earnings call.

CFO Glenn MacInnes and I will review business and financial results and then take questions, along with President John Ciulla, Executive Vice Chairman Joe Savage, and HSA Bank head Chad Wilkins.

Beginning on slide 2, year-over-year revenue growth remained strong at over 10%.

Record net interest income was driven by 11% loan growth and a 1 basis-point improvement in the net interest margin, and record non-interest income benefited from HSA Bank's rapid growth.

The Fed rate hike in December and modest spread improvement led to higher origination yields and, in turn, stable to higher yields across all loan portfolios.

Loan originations, while down from Q4's record level, remained solid at just under $1 billion.

But for the strategically compelling Boston expansion, which as expected resulted in net expenses of nearly $6 million in the quarter, or nearly $0.04 a share, we would also have achieved record pre-provision net revenue, record pretax income, and a 59% efficiency ratio.

ROE would have improved to 8.71% and return on average tangible common equity would have exceeded 11.8%.

The Boston expansion is at or ahead of plan on every important metric, having recently crossed $100 million in new deposits.

The initiative's near-term negative financial impact should diminish ratably over the next several quarters, turning PPNR positive midyear 2017.

Results also reflect an increase in the loan-loss provision associated with the charge-down of a commercial classified credit that Glenn will discuss in more detail.

We continue to maintain a positive near-term forward view on credit performance.

That being said, credit metrics have been at historically strong levels for a significant period, so some normalization is to be expected.

Overall, we are making good progress in executing our growth strategies that are intended to add value for customers and maximize economic profit for shareholders.

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

On slide 3, you can see the quarterly trends for loans and deposits over the last year.

Double-digit loan growth was primarily funded by deposit growth from our multiple deposit-funding sources, including fast-growing HSA Bank.

The loan-to-deposit ratio was healthy at around 85%.

On slide 4, $1.6 billion of loan growth over the past year is spread across key loan segments, with each segment again posting solid year-over-year growth.

On slide 5, $1.2 billion of deposit growth over the last year has been led by the transactional categories of demand, health savings accounts, and interest checking.

Taken together, these categories grew 10% year over year and now represent 54% of total deposits.

Also note that higher-costing time deposits now represent only 11% of total deposits, thus providing a clear illustration of how Webster benefits from our multiple deposit-funding sources.

Slide 6 shows that net interest income and non-interest income both rose over 10% year over year, reflecting strength in commercial banking and also HSA Bank's dual contribution of low-cost long-duration deposits and its strong fee income stream.

Non-interest expense growth also reflects HSA Bank's growth over the past year, along with expenses related to the Boston expansion, plus investments in key growth strategies, risk infrastructure, and sales tools.

The net result is 6% growth in pre-provision net revenue compared to a year ago, which, ex the Boston initiative, would have been over 12%.

As part of our ongoing strategic investments to boost enterprise sales force productivity, in March we rolled out Salesforce.com across the entire network.

We expect this bankwide CRM platform to help us significantly improve the pace and efficiency of customer acquisition and development.

Line of business performance begins on slide 7. Commercial banking, a major contributor of economic profit, continued its strong performance, delivering nearly 12% loan growth, higher revenue, and improved PPNR in an intensely competitive environment.

Portfolio yield increased 5 basis points, primarily due to the December rate change by the Fed, showing the portfolio is positioned well in anticipation of rising rates.

The Group continues to leverage industry expertise in select verticals, to expand geographically, and deliver increasingly sophisticated treasury management products.

Linked-quarter loan growth recognizes seasonality, payoff activity, and the unusually high conversion of the pipeline in Q4 when originations exceeded $1 billion.

The pipeline has now been replenished to levels double year-end and significantly higher than a year ago, which augurs well for loan and revenue growth.

Asset quality in commercial banking is solid.

Despite the charge-down I noted and the increase in classified loans in the quarter, there are no underlying common trends or specific industry challenges and we remain encouraged by our portfolio quality.

Before reviewing the community banking unit's performance, I will share the progress on the Boston expansion strategy, which began in January.

This turnkey de novo addition of 17 banking centers to our Boston flagship presence has given us instant critical mass in the economic engine of New England and the marketing power that goes with size.

We have literally hit the ground running.

We are significantly ahead of our expectations for total deposits and loan accounts and balances and our business and consumer loan pipelines are filling nicely.

Feedback on our Surprisingly Good Service brand campaign has been quite positive.

We are confident that Boston will add $1 billion to our existing $500 million commercial deposit base in that market over five years or less.

All business units are benefiting from this remarkable opportunity.

Moving to community banking, slide 8 reflects another quarter of positive momentum in business banking, with loan and deposit balances up 7% and 11%, respectively, year over year, driven by increased loan originations in the New York and Boston regions and strong DDA account growth.

The yield on new originations jumped about 30 basis points in response to the Fed's December move.

Our new fast-track program that expeditiously processes loans up to $100,000 in half the time originated twice the volume this quarter, compared to a year ago.

Fee income grew 8%, driven by strong performance in swaps, credit card sales, and SBA loan sales.

Slide 9 highlights the steady growth in loan and deposit balances for personal banking.

Loan originations were down, due to mortgage market normalization to purchase mortgages versus refinancing, while origination yields rose due to a higher mix of unsecured loans.

Transaction deposit balances increased year over year as average DDA balance per account rose 5%, underscoring once again the success of our mass affluent strategy.

New investment production was down, driven by a combination of sales force reduction and market volatility.

We are in the process of reengineering the investment services business model in conjunction with the expected changes driven by the Department of Labor's recently announced final fiduciary rule.

Online and mobile banking penetration continued to improve significantly.

Nearly 70% of all transactions are now conducted online via mobile devices or through ATMs, and we expect the mobile trend to accelerate as smartphone becomes the banking channel of choice for most customers.

Slide 10 reflects trends in mortgage originations, with notably 90% of portfolio loans coming from high-value jumbo mortgage relationships that typically have higher-than-average products and services per household and support our mass affluent strategy.

Mortgage banking income improved with loan sales income of $2.6 million.

While overall community banking PPNR decreased year over year, primarily due to the Boston expansion program and the effect of persistent low interest rates on deposit values, our transformational strategic initiatives are taking hold, as reflected in improving quality and quantity of new accounts originated, best-in-class Net Promoter Scores from the mass affluent segment, a 21% improvement in per-capita sales productivity in the banking center network, and improving asset mix and yield, all of which improved core PPNR, net of Boston, by 11%.

Slide 11 presents the results of HSA Bank, including year-over-year growth in deposits of 16% and growth in accounts of 20% driving record revenue and PPNR.

Growth adjusted for anticipated attrition related to the JPM Chase HSA acquisition was actually much better than that, as I will explain in a minute.

I am pleased to report that the JPM Chase HSA accounts migration was completed in Q1, as planned.

Congratulations to Chad Wilkins and his team on completing the largest acquisition and migration in the history of the HSA industry.

As a result, HSA Bank now has integrations with three of the industry's largest health plans and we converted 4,800 employers and 850,000 accounts over the past 12 months.

Total footings now stand at $4.8 billion, including $4.1 billion in deposits, comprising 22% of Webster's total deposits.

According to Devenir's year-end survey, HSA Bank holds the number one position in total footings for the industry.

Further according to Devenir, HSA Bank's average balance per account of over $2,500, including investment balances, is 50% higher than the average for the other four members of the industry's top five.

HSA Bank's average balance growth of nearly 5% from a year ago is also about 50% higher than the combined performance for the other four.

Higher balances and long duration contribute to high value per customer.

HSA Bank experienced its best quarter ever in new business growth, opening 335,000 new accounts, up 25% year over year.

That strong growth was partially offset by the anticipated transfer out to other custodians of 66,000 accounts and $166 million in balances associated with the JPM transition.

You may recall that during due diligence we identified accounts that were terminating and at risk.

We made allowance for this likelihood in our purchase agreement and negotiated a clawback provision in the transition services agreement.

In other words, we were contractually protected from attrition of former JPM accounts that converted to other custodians during the transition services agreement, and net of the acquisition-related attrition, deposits grew $440 million in the quarter and 24% year over year and accounts grew 28% year over year.

HSA Bank's success in developing health plan partnerships and onboarding large employer groups is apparent through first-quarter account production results, with these segments generating 65% of portfolio production.

These results are important, as 63% of industry growth is coming from health plans and large employers, as reflected in that Devenir survey.

Significant recent partnerships include a referral agreement with BlueCross BlueShield of Tennessee and a new integration with health exchange platform provider Liaison.

With the addition of Liaison, we are now integrated with five industry exchange platform providers and we are well positioned in this important growth channel.

With the period of intense internal focus required for major conversion and integration activities now winding down, HSA Bank can focus intently on client acquisition, product development, operational excellence, and customer experience.

In particular, we are aggressively expanding our distribution capabilities.

By midyear, we will have increased our nationwide sales and distribution resources by 60% in support of our intense focus on adding new health plan partners, large employers, and selling our broader product suite to a larger base of partners and clients.

We expect to achieve forward asset and account growth at the market rate or better and to realize meaningful improvement in per-account PPNR.

Slide 12 summarizes results for Webster Private Bank, which generated growth in loans, deposits, total relationships, and revenue per new client.

Total fee-generating assets in AUM and AUA combined grew modestly.

Loans crossed the $0.5 billion mark in Q1, representing a five-year compound annual growth rate of over 20%, and deposits continue to grow rapidly.

Early success in the private bank's move upmarket can be seen in annualized revenue growth per new client of about 50% year over year.

Overall, revenue growth was about 10% and PPNR was flat.

I will now turn it over to Glenn for his financial comments.

Thanks, Jim, and good morning, everyone.

I will begin on slide 13, which summarizes our core earnings drivers.

Average interest earning assets grew $277 million or 1.2% compared to the fourth quarter, with an increase of $346 million or 2.2% in the loan portfolio.

Net interest margin increased to 311 basis points for the quarter, as the increase in short-term market rates had a favorable impact on loan and securities yields.

Earning assets growth, coupled with the NIM expansion, resulted in record net interest income of $176 million.

Core non-interest income increased by $3.6 million on a linked-quarter basis.

This was primarily as the result of higher-than-anticipated mortgage banking revenue, as well as an increase in other income.

Core expenses were up $7.4 million, primarily as a result of $5.7 million in expenses related to our Boston expansion.

Taken together, core pre-provision net revenue totaled $89.4 million, down slightly from Q4's record, but up 5.5% from prior year.

And although the provision increased to $15.6 million, as Jim indicated, we remain positive on asset quality, given the specific nature of the charge.

Pretax GAAP reported income totaled $72.8 million and included $1.2 million in restructuring expense, and reported net income of $48.6 million includes an effective tax rate of 33.2%.

Slide 14 highlights the drivers of net interest margin versus prior quarter.

Starting at the top, while the average balance in the securities portfolio declined slightly, we enjoyed a 3 basis-point increase in the yield, primarily due to a reduction of $800,000 in premium amortization.

This reduction was driven by prepayment speeds on the mortgage-backed securities slowing from 12.9% to 12.1%.

We also benefited from a higher yield on floating-rate securities.

Cash flows for the quarter totaled $253 million with a yield of 325 basis points and purchases totaled $481 million at a yield of 283 basis points.

We also sold $43 million in securities during the quarter.

Taken together, investment portfolio interest income increased by $400,000.

The $400,000 decrease in money market and other line reflects the reduction in the Federal Reserve stock dividend.

Further down, you see average loan balances grew 2.2% and the total portfolio yield increased 6 basis points.

The 25 basis-point increase in the Fed funds rate in mid-December was the primary driver of the increase.

Also during the quarter, commercial loan income was impacted by a one-time unfavorable adjustment of $1.2 million, which equated to 2 basis points of NIM.

Commercial loans grew 2.8%, while the yield improved by 5 basis points.

Consumer loans grew 1.5% and the yield improved 7 basis points, with the improvement driven by the prime-based home equity line of credit portfolio.

As we highlight, the combined interest income generated by our loan portfolio increased $4.5 million for the quarter.

Deposits increased $652 million as a result of HSA Bank enrollment and the seasonal strength in government deposits.

The overall deposit cost increased 1 basis point to 27 basis points as a result of a higher rate and balance in government money market deposits.

Average borrowings decreased $313 million as deposit growth exceeded loan growth.

The average cost of borrowings increased 18 basis points to 152 basis points, due to the combination of higher short-term funding costs and the change in borrowing mix.

In summary, continued strong loan growth, along with NIM expansion, resulted in a $2.8 million increase in non -- net interest income to $176 million.

Slide 15, we provide additional detail on our core interest income -- core non-interest income, which increased $3.6 million from the previous quarter.

Mortgage banking revenue, the top box, increased by $353,000.

Consistent with our guidance, settlements decreased from $98 million in Q4 to $83 million in Q1.

The premiums on Q1 settlements came in better than expected and only registered a slight 4 basis-point decline to 173 basis points.

In addition, our election of fair market value accounting at the beginning of the year had the effect of earlier recognition of gains.

Other income increased $2.3 million, due to a positive fair-value adjustment in the JPM HSA receivable.

This involved the purchase price true-up for account attrition, as Jim highlighted.

Wealth and investment services, highlighted in grey, decreased $857,000, almost entirely in our retail brokerage unit, where a decline in sales production was attributable in large part to a challenging market condition.

HSA Bank fee income increased $3 million or 19%, split between account maintenance fees and interchange revenue, reflecting seasonal growth in the business.

And deposit service fees in community banking declined by $1 million, due to a quarter-over-quarter reduction in transaction activity, as well as the partial effect of the check processing order change implemented in November of last year.

Putting the processing change into full-year context, we expect a revenue reduction of $2.1 million in 2016 compared to 2015.

Slide 16 highlights our core non-interest expense, which was up $7.4 million linked quarter.

Our Boston expansion represented $5.7 million of the increase and was in line with the expectations.

The $1.7 million increase apart from Boston expansion reflects higher compensation and volume-related expenses.

That being said, we continue to meet our efficiency ratio objective, as we highlight on the next slide.

Turning now to slide 17, as anticipated, the Boston expansion drove our efficiency ratio to 61.29%.

Excluding the Boston-related expenses, our efficiency ratio would have been just below 59%.

Turning now to slide 18, which highlights our asset quality metrics, nonperforming loans in the upper left were up slightly as an increase of $5.4 million in commercial nonmortgage was largely offset by a decrease of $4.8 million in commercial real estate.

NPLs were flat at 89 basis points of total loans and the allowance is 124% of NPLs.

Past-due loans in the upper right increased $17 million and represent 35 basis points of total loans.

The increase was primarily due to a commercial real estate loan that is fully secured by a high-performing property.

Commercial classifieds in the bottom left increased by $30 million, reflecting net increases in middle market and commercial real estate.

Commercial classifieds now represent 3.91% of total loans and remain well below our five-year average of 5.7%.

New non-accruals were $40.4 million, primarily reflecting an increase in commercial nonmortgage of $16.5 million and commercial real estate of $4.8 million.

Charge-offs totaled $16.6 million, included $8.7 million for a middle market credit where we have very limited remaining exposure.

The reduction in our loan-loss coverage to 110 basis points from 112 at December 31 incorporates a FAS 114 reserve utilization related to the charge-off.

As Jim indicated, credit metrics remain at historically strong levels and we maintain a positive forward view on performance.

Slide 19 highlights our capital position.

Ratios remain in excess of Basel III well-capitalized levels.

The tangible common equity ratio increased 1 basis point from December 31 and remains within our recently stated range of 6.75% to 7.25% for this ratio.

The common equity Tier 1 ratio was 10.63%, noticeably above its recently established range of 9.25% to 9.75%, so we continue with the ability to add relatively more 100% risk-weighted loans as a percent of our total assets growth going forward.

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

Before handing it back to Jim, I have a few comments on our outlook for Q2 as compared to Q1.

Overall, average interest-earning assets will grow approximately 1% to 2% and we expect average loan growth to be approximately 1.5% to 2.5% and we expect NIM to increase 1 to 3 basis points.

Reflecting the loan growth and the NIM expansion, we expect an increase of around $4 million in net interest income in Q2.

We expect the provision to be more in line with Q4's level, depending on loan growth.

We expect non-interest income to be relatively flat quarter over quarter.

We continue to manage our non-interest expense closely.

Given the Boston expansion, we expect the efficiency ratio to be between 61% and 62% in Q2.

Excluding Boston, our efficiency ratio would remain below 60%, and our expected effective tax rate on a non-FTE basis should be around the same as Q1.

And we expect average diluted share count to be about 92 million shares.

With that, I will turn things back over to Jim.

Thanks, Glenn.

I think you can see that we are making progress toward our goal to be among the highest-performing midsized banks, as measured by financial performance, growth in key segments, and customer satisfaction.

We hope that many of you can join us in Boston for dinner on Wednesday, June 15, and a tour of some of our new banking centers on Thursday, the 16th.

We will also spend some time that day with members of our Boston commercial banking team that has seen its loan book grow by over $1 billion since the end of 2009.

Let Terry Mangan know and he will provide more details about the event, if you haven't already heard from him.

Let's now open it up for comments and questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

I wanted to start, a few questions on HSA.

Looking at the 1.97 million accounts where you ended the quarter, can you talk about what gross new account openings were in the first quarter and maybe give some color around what channel the new account openings came through?

I am going to ask Chad Wilkins if he would respond.

Yes, good morning, Steve.

The primary channels that we saw the growth was through our health plan channel.

We had about 65% of our growth came through health plans, and total accounts in the first quarter were 335,000 new accounts.

Okay, that's helpful.

And Chad, while I have you, just to follow up on Jim's comments about the increased focus on customer acquisition, now that the integration is behind you guys, can you comment on the competitive environment for customer acquisition in the HSA business?

And I don't know if you guys adjusted pricing at all following the December rate hike.

Maybe you could talk about that.

First of all, just to answer the last question, we haven't adjusted pricing following the rate hike.

That was a pretty small change, so I don't anticipate that happening.

And then in terms of growth, I haven't seen a big change in the competitive environment, although you have seen some additional players opt to get out of the market, which -- and the larger players growing.

So, I think it's more intense with the top five competitors.

We also -- as I mentioned, we're adding sales resources in the employer channel and so we can focus on growing that channel.

We also are adding resources in our field sales to allow them -- mostly in strategic and saturated markets, where we can free them up, add junior sales reps underneath them to free them up so they can pursue larger relationships.

And then, we're also adding resources to our relationship management staff and account execs so that we can maximize the amount of growth we are driving through our health plan partners and employers, so really making sure that we are getting back to pulling all of the levers that we need to for growth.

Okay, thank you.

And maybe just one for Glenn, in terms of getting the efficiency ratio back to 60% by year-end, do you need higher rates, additional Fed hikes, to get there?

Can you get there without rates helping?

We are -- in our forecast, we assume a hike in September of 25 basis points.

We also assume, Steve, that the 10-year swap gradually increases from today being at, say, 1.62% up to a 1.85%.

Okay, but you need that to get to the efficiency ratio target?

I need it.

Yes, we need that.

We do.

Yes.

Okay.

Okay, appreciate all the color, guys.

Jared Shaw, Wells Fargo.

If you could spend just a few minutes on the Boston expansion and the $5.7 million of expenses there, could you break out what portion of that was actual compensation and occupancy versus marketing?

And as we go through the year, maybe if we look at, say, fourth quarter, what would be a good run rate for Boston expenses?

Sure.

So I think as -- I will take the last part first.

And we said that we would be $5 million to $6 million for the first two quarters and then it would come back down to a level closer to $5 million for the third and fourth quarter.

And as far as the breakout of expenses, I would break it out that about -- of the $5.7 million, you would probably say about $2.6 million is comp related, $1.3 million is marketing related, and then occupancy is the other piece, say $1.8 million.

So those are the broad categories where we are spending, and I would highlight the first two quarters, Jared, as we indicated, it will be a bigger marketing push, so quarter over quarter there will be more of a marketing spend as we do our official launch of the Boston initiative.

Okay, great.

And then just following up on the HSA side, you said that this quarter you were able to establish a new relationship with a Tennessee healthcare plan.

How many insurance plans or how many other relationships like that are there still available in the market?

It seems like at this point that most people or most of the counterparts would already have a relationship if they were looking for one.

Is that still an opportunity to continue to grow?

Yes, this is Chad, I would say absolutely.

I think the -- you're right that most of the larger regional health plans have established a HSA relationship of some sort, and they vary dramatically from a highly integrated to a referral type of relationship.

And, however, many of them are open to adding an additional provider.

That's how we got the growth that we have today.

The health plan partners that we are working with had prior relationships, and we were able to establish relationships with them and grow them and become a primary partner for them.

So, we're going to continue down that path and I am optimistic about continuing to have success there.

Great, thank you.

Collyn Gilbert, KBW.

Could you guys just talk a little bit about your outlook for loan growth?

Glenn, I think the guidance is a little bit lower than where you were guiding for in the fourth quarter.

And just talk about where you are seeing the best opportunities and maybe areas that you are pulling back.

Yes, Collyn, I will let John take that one.

I think you saw a little bit of a slowdown in the first quarter in commercial loan growth, and I think we stated our pipeline is at a record level right now.

It's the highest it has been in five years.

So I do think we will have robust loan growth as that pipeline gets converted over the second and third quarters.

So I think we feel pretty comfortable about the high end of Glenn's range, and we could outperform, but given market conditions, we think that 2.5% is the right bogey.

We see opportunities, I think, across all sectors, business banking, across geographies, and that pipeline growth is really across all of our commercial businesses and business banking.

It is actually across all our business units.

The pipeline has improved quarter over quarter, so, to John's point, we feel pretty good about it.

Okay, so the decline -- I think -- did I see that there was a decline in equipment finance this quarter?

Would that --

There was, and last year we were actually up in first quarter, which was unusual because historically in that business the first quarter has been a low quarter where we have seen either flat to down overall balances, and the pipeline is built there, so we believe that's just a seasonal blip in an otherwise relatively positive trajectory.

And very (multiple speakers) as it was.

Yes.

$4 million.

Okay, that's super helpful.

Thank you.

And then, Glenn, maybe you could just talk a little bit more about the C&I credit, the circumstances of that, and just it sounds like you are pretty comfortable with the outlook for credit, but just getting a little bit more color there.

I will take that one as well.

Okay.

I think you are right, and you heard both Jim and Glenn say we feel pretty good about where our asset quality statistics are right now in the cycle on an absolute basis and relative to even where we were before the Great Recession.

The one credit was an in-footprint services company.

We had over a five-year relationship with that company, and it has been challenged over the last several years and those challenges are unique to it and to its operations, not related to any industry, and we don't really see any other correlated risk evidence from that one credit.

So as Glenn and Jim both mentioned, again you know we evaluate our portfolio constantly and we don't see any underlying trends -- geographic, industry, product type, or otherwise -- that lead us to be concerned that there is more behind this one.

The only color I will add just from the financial performance standpoint is the provision increase, about $2.1 million of that was relative to this credit, and that has to do with the accounting between -- this was FAS 114, which is loan specific, and the other bucket in the allowance is FAS 5.

So, the provision increased and that's why our guidance is back to Q4 levels, and then, depending on loan growth, that would inform our provision going forward.

But that was the -- that accounted for the bulk of the increase in the provision quarter over quarter as well.

Okay, okay, that's great.

That's helpful.

And then just one last question, on the HSA, the JPMorgan deposits that didn't come over where you covered yourself with that $2.3 million gain, do you know what the circumstances were on why those deposits didn't come over or just any additional color around that?

I will just say briefly here that there was a long lag time between when JPM decided they were going to exit that business and when they actually did that, which left a lot of time for people to consider what their options were, and we knew and planned for not just the possibility, but the likelihood, that there would be those that would choose otherwise, away from JPM and us as a result.

And so this has just played out, and the protections that we had built in have easily covered that.

And you can reference that in both our Q and K where when we did the transaction, we had a fair value adjustment for just this, so that is the other side of this $2.3 million, that we did build in a protection for it.

Okay, okay, that's great.

I will leave it there.

Thanks, guys.

Casey Haire, Jefferies.

Glenn, I wanted to follow up on the fees.

The guide is coming in flat on the second quarter.

I'm assuming you lose the $2.3 million adjustment, so obviously a decent hole to fill.

What are the drivers to get you to flat fees in the quarter?

So, we will continue to benefit from a lot of the activity on deposit service fees and HSAs.

We get a full quarter of that.

That's one of the offsets.

We also anticipate higher loan fee income as well.

And then, depending on the market, we are hopeful that we get a rebound in the wealth management business.

That's been challenged because of market volatility.

So, those are the basic offsets quarter over quarter.

Okay, so (multiple speakers)

And you are right to take out the $2.3 million, so effectively -- you can't annualize that, so that was a one-time take it out.

We will overcome that and be relatively flat through those three items I mentioned.

Okay, got you.

And then, just another one on HSA, so if I look at some of the objectives you guys laid out at your investor day last year, you guys were right on the money with accounts and balance growth in the low 20s, but the PPNR, I think you guys said 50% plus.

You came in a little bit shy of that and well shy of it if I strip out the $2.3 million.

So I am just trying to -- what is surprising you on the PPNR front to fall so short?

I am going to make a broad comment, then ask Glenn to comment further, and say on the PPR back in June 2015 when we were talking about the 50%, that had the effect of the JPM transition, which made a big bump in that first year, which influenced the compounded annual growth rate over the three-year term.

We subsequently indicated that going forward in the 2016 to 2018 plan, with the transition completed, that the PPNR would drop down into the mid-30s or so, so I just want to level set on that, and we have adjusted that openly in the conversation.

And then, beyond that, I will ask Glenn if he wants to comment.

I think we have given some visibility to PPNR in the back of our earnings deck.

I don't know if you have seen that as well.

But we are showing stated 42% growth quarter over quarter, and obviously, that is impacted by the $2.3 million.

If you take that out, I think we're closer to somewhere (multiple speakers)

Yes, I think it is 25, so, yes, you are within spitting distance of that (multiple speakers) and it is a three-year time period as well.

Yes, we did make a small adjustment to FTP as we looked at the value of the deposits.

It is a small adjustment, but we look at it at the not only what we consider to be the duration of the deposits and the average life, but would we borrow at that rate and would we seek to borrow at that rate and do we have assets that have the same or matched duration?

So, we're always looking at that and there was a slight tweak in the quarter.

But back to your point, if you look at PPNR, we're pretty much right on top of where we thought we would be.

And we are looking as we go forward at an improvement in PPR per account as we realize some of the benefits of our scale and operational excellence going forward, improving by 15% or so over the next 12 to 18 months.

Okay, understood.

Just last one for me, on the NIM outlook, I am just wondering where reinvestment yields are today along with yield curve versus that 283 in the first quarter here.

So, we are reinvesting about 275 on the investment portfolio.

Great, thank you.

Bob Ramsey, FBR Capital Markets.

Glenn, I think I heard you just say that there was about two basis points of adverse NIM impact from one commercial credit loan adjustment or something like that.

Could you just give me the details there?

Sure, that was an adjustment for an accrual on a commercial credit.

That was reversed, and so that is a one-time item for the quarter.

I wouldn't normalize that, certainly, and I think it's worth about 2 basis points.

Okay, so then is that -- as we think about your guidance for NIM to expand 1 to 3 bps next quarter, is it fair to think about it as being flat absent that accrual this quarter, in line with the cap guide?

I think that's fair, flat to up 1, if you factor in that.

What's going on is the loan book is good.

It looks like things are coming on as they are rolling off.

But where we are still feeling the pressure is on the investment side.

We think amortization will increase.

The CPRs, we're thinking, will go from 12.1% on the investment book to 12.7%, so that will result in an increase in amortization of about $800,000.

That is worth 1 bip alone, a little over a bip.

So, good on the loan side, but both the reinvestment rate on the investment side, as well as the increase in amortization expense, will present headwinds going into Q2.

Got it, thank you.

And then, one other question I just wanted to ask is I know you all highlighted the $100 million of deposits in Boston with the new branches there.

Just curious how much of that is from former Citi customers, given your opportunity with their -- since you have hired their employees to mine that customer base, to some extent?

Yes, Bob, we don't have that data right now, and from a broad-based perspective, it is from multiple banks and we feel really good about conversion of ex-Citi customers, as well as drawing from the general market, but we don't have that data specifically.

All right, fair enough.

Thank you.

Mark Fitzgibbon, Sandler O'Neill.

I wondered just if I could follow up on a question Collyn asked earlier about the HSA business.

Was I correct in hearing there won't be any further attrition related to that JPMorgan business in future quarters?

No, this is a -- Mark, it is Glenn.

This is the interim true-up.

We have until midyear to -- the contract says we have until midyear to look at attrition, but I don't -- so it's hard to anticipate how much more we would have.

We actually have until July 2016 to true this up, so it is not final yet.

There will be a tail, but it's not going to be significant.

Yes.

Okay, and then I know your regulatory capital ratios are certainly solid, but given the aggressive growth you guys, the plans you have, do you see the need to potentially raise some additional capital over the next several quarters?

No, I think when we look at the outlook, as I indicated, our common equity Tier 1 ratio, we are still operating well below, 100 basis points above.

So we have plenty of room to add risk-weighted assets over the next (multiple speakers)

Okay.

Optically, the TCE ratio looks a little low.

That's not something you are concerned about?

No, it's within our range, Mark, so it is right there in the middle of the range.

And again, we would want to focus on the risk-weighted assets being relatively low, and look at the cDt-1 ratio, I think, would be the focal point.

Yes, and if you look at our risk-weighted assets, I think we're about 70 basis points -- 70% risk-weighted assets, and I look across and we look at our peers and they are at a much higher level, 73%, 74%, so we have plenty of room either way you look at it to grow additional 100% risk-weighted assets.

And we like our TCE ratio where it is.

Okay.

And then, I wondered if you could, Jim, just talk a little bit about your appetite for acquisitions, either HSA transactions or bank deals.

Sure, Mark.

Well, you can see we got a lot going on, very positive opportunities in terms of organic growth.

We are not spending a lot of time on bank M&A because we're trying to improve our sales and we think we have got a lot of running room here and very good strategies that will help us deploy our capital in a manner that gets us good returns.

So, that's what we are focused on.

It is possible, and we will be looking as some banks that don't have scale and others may decide to exit the HSA business, we will take a look at that, but we like the idea of being able to generate organic growth of more than 20% without having to worry about paying a premium for an acquisition.

So, we have to weigh everything based on the return we get for the capital that we deploy.

It is possible that there are portfolios of loans that might have an interest to us that we are not actively looking that will augment some of our existing portfolios, but we believe the organic growth opportunity we have on the commercial banking side is very, very attractive, and, again, no need to acquire.

So I think we're in a good position of no need to acquire, yet we would be open minded about the possibility.

Thank you.

Matthew Kelley, Piper Jaffray.

Just a question on the Boston expansion, maybe just a little bit of an update on your expectations for breakeven and the deposit totals that you have in mind to achieve breakeven in that new market and how that is tracking.

So I think we're -- we're on track.

We crossed $100 million, as you know.

We think we will be just below $300 million by year-end and will likely break even by mid-2017.

And that is a balance that's closer to $450 million, $500 million on deposits.

And we always look at that, Matt, when we are looking at, say, one-third business, two-thirds consumer, and then you assume that you're getting about half of those balances, let's say by that point $150 million in loans, as well, and we are tracking to that.

So, we feel really good about it.

There has been a lot of activity, and I can flip it over to John just to give you a sense of what's going on because I think it is -- we're just starting to get the buzz up there and we will see more as we formally launch this, but John, you have some color on some of the activity.

Yes, 90 days in, we're seeing a lot of activity across all of our business lines, and just some of the anecdotal proof points are we see a growing business banking pipeline.

We have closed mortgages and home equity and consumer loans.

We closed several new bank-at-work programs with commercial customers; now that we have the branch coverage there, we can cross-sell that product.

And we have had private banking and wealth opportunities close and a lot of referral activity, so it really is broad based, selling the totality of Webster in the new market, and we are excited about it.

Okay, got it.

And then in the [interstate] business, can you remind us the seasonality of fees throughout the course of the year?

I assume that the maintenance fees are spread out, but the swipe and interchange?

How does that play throughout the year?

I think as you look at the quarter, they were up $3 million in core fees, and about half of it was interchange and half it was monthly service fees.

And so, I will turn it over to Chad in a minute, but I think that you probably have higher interchange in the beginning part and then it tapers down.

But Chad, why don't you take that one?

Good morning, Matthew.

I would agree with Glenn.

We see an increase in January as we add new accounts.

Obviously, we get more fees associated with those, and then the interchange stays at a higher level.

There is some fluctuation throughout the year due to seasonality, but it stays relatively steady, so really a lift in the early part of the year and then staying at that state through most of the year.

Okay, got you.

And then, Chad, while I have got you, just maybe a little bit of an update on the current projections for deposit and account growth in the business and then how your operation stacks up to that.

Maybe just give us a sense of growth rates anticipated for industry and Webster in the year ahead.

Yes, the industry is still tracking at around a 20% growth rate, both in balances and accounts over the next several years.

Devenir just did a survey in January, and so we're still tracking at that, and we expect to see at least industry growth rates and, as I talked about earlier, we're adding -- I guess the first point I would make is we have seen a significant increase in our production over the last two years, just to state a 20% growth rate on our existing -- or our larger base.

So we are continuing to add additional resources on top of that in order to drive our growth rates hopefully up above the industry averages.

And that's our goal.

Okay.

Matt, let me add a little more color on transactions because I pulled some data.

But if I look at interchange per account, I am using [2015], it was about [395, 395] in the second quarter.

Then it goes down to [358, 334].

And if I look at transactions per account, it supports what I was saying, [240, 243, 202], and this is per account, [214] in the fourth quarter.

And if I look back, and I have trends in front of me over five years, it does start out for the first two quarters a little higher and then it tapers down, both from a number of swipes or transactions per account to interchange revenue per account.

Okay, got it.

And then, last question, on commercial real estate origination trends, obviously some dislocation in the market for larger loans in the CMBS world, with spreads on new deals widening.

How did that impact what you were seeing during the quarter in some of your larger commercial real estate type of transactions in terms of spreads this quarter versus what we were seeing in 2015, and is that sustainable, in your view?

For us, it was a reasonable origination quarter in CRE.

For us, the spreads rely largely on mix of business, and we find in our markets on the high-quality apartment, multi-family deals, there still is some significant competition from the regional banks and the big banks.

So we didn't see price stabilization in CRE in the quarter, but we still find it very, very competitive, and in fact, the market intel we would give you right now from Bill Wrang who runs that group is that he found first quarter to be very competitive.

We actually probably lost more term sheets issued than we had in the prior couple of quarters because of aggressive pricing and aggressive structure and proceeds.

So that's the story in CRE.

And I think quarter over quarter, just to add more color, the spread is probably down about 20 basis points -- or up 20 basis points.

That's quarter over quarter.

What about just ex-multi-family, just office, industrial, retail, properties that would typically go into securitizations in the past?

Any opportunity there, uptick there, or was it across the board lower spreads?

For us, it was across the board lower spreads, but we -- again, it is tough because from our origination perspective we didn't have a lot of closed businesses in those asset classes.

Okay, so yours is still concentrated in the multi-family and the apartment space?

I think about 55% of our originations were apartments and multi-family and the other were in some of those other categories, but in smaller transactions.

Okay, thank you.

Mr. Smith, we have no further questions at this time.

I would now like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you all for joining us this morning.

Have a good day.

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

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.