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 from those in the forward-looking statements is contained in the Webster Financials public filings within the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the first quarter of 2015. I’ll 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 two, 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’ 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 the earnings asset growth didn’t fully offset lower spreads. This result is similar to our experience in Q2 last year. Glenn will describe it 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 towards lower yielding floating rate CRE loans pressured the NIM…

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 HAS acquisition. Net interest margin at 310 basis points was down seven basis points from Q4. We anticipated a four basis point NIM compression from our loan and investment portfolios as noted on our last earnings call. The unexpected compression was the result of a decline of two basis points associated with lower than anticipated pre-payment activity at quarter end, and a deferral of a planned commercial loan transaction and a one basis points decline associated with holding reserves at the federal reserve as a result of our HSA acquisition. Our 3% linked quarter growth in earnings assets coupled with NIM compression and too 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 the 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, pre tax 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…

Thanks Glenn. I think it’s clear we’re making meaningful strides along the pathway to high performance as we’re investing our capital resources and energy and growth strategies that are designed to create value for our customers and shareholders alike. Now let’s open it up for comments and questions.

Thank you. [Operator Instructions] Our first question comes from the line of Dave Rochester from Deutsche Bank. Please go ahead with your question.

Hey, good morning guys.

Good morning Dave.

Good morning Dave.

Hey, 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.

Hey Dave, this is Joe. 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 we were quite pleased with it. We do think we’ll see some prepay activity in the second quarter, but I always go back to the markets, the broad markets we’re doing business in, all of the arrows effectively we have in our quiver. Our guys continue to surprise even us to the upside. So it was a good quarter for us, but we’ll be muted in our expectations with respect to second quarter given the prepay activity that we’re expecting. So I hope that helps.

Great, yes. No, that does. Glenn on the margin, the three to five basis points of pressure you’re talking about, that’s just a little bit lower than what you had been talking about last quarter, assuming that the curve remains relatively stable. We’re just wondering if this three to five 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’d highlight is there’s one basis point in there that is a result of us keeping funds at the fed too, which really doesn’t play off on earnings. It is about one basis point.

Got you. And I guess 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’re 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 and we buy it back. So we’ve actually whittled down our authority towards probably around $35 million right now and I think we’ve said before that we look at stock buybacks more opportunistically and 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 that 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 opportunistically.

Great. And Jim just on the wealth and investment fees, you had talked about some of the stuffs that you 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’re very excited about our Private Bank and we made a lot of changes there over the last couple of years and we’re pretty well through what we call the model shift. We have highly qualified investment advisors; Yves Cochez who is our Chief Investment Strategist. He 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 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, state planning, financial planning to all of the potential customers in the Webster Bank base today as well as in the market. It 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.

Hey Dave, this is Joe. Let me just say that 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 add 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 are 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 a 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, where 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 and overall revenue growth, but is very positive for a stable revenue growth over the longer term.

All right, great. Thanks guys.

Thank you.

Thank you. Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Please go ahead with your question.

Hi, good morning.

Good morning Jared.

Can we just spend a couple of minutes just talking about the – on the expense side. You had mentioned that there was the increased cost for store removal and then you also talked about transitional HSA expenses. Should we be excluding those from the growth rate guidance that you’re giving going forward?

Jared, it’s Glenn, good morning. 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, so I’m not sure if that gives you enough. But 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% distributable to sort of transitional services that will eventually wind down. We’re basically running two platforms and so we have the HSA, the JPM HSA on their platform and we have our AV1 [ph] platform, so there’s sort of a bubble in the cost on that.

Okay, and that’s going to be with us sort of 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 end of first quarter ’16.

Okay, and then as we – 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 of the transition we’re going to be looking at overall elevated expenses?

It will be slightly below that and then it will follow and in the fourth quarter or first quarter it will return to more normal levels.

Okay. Then when we look at the shifting to the commercial loan yields…

Hey Jared, I’m sorry to interrupt and the other thing you know, keep in mind that we don’t have a full quarter of HSA revenue or expense – JPM HSA revenue or expense as we close mid month 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. I just want to make sure you get that, because it wasn’t a normal quarter, the first quarter.

Right, okay. That’s helpful, thanks. Looking at the yield on commercial lending, you had mentioned that pricing was getting tighter and that there’s more of a focus on fixed versus floating. Are you swapping out fixed or floating or is that a more customer preference at this point?

Jared, this is Joe. We’re doing virtually no fixed other than in our equipment finance books. Now again, I’m referring to the commercial book, I’m not talking about the business bank as part of our community banking role, but we are doing full swaps, so our book is as Jim said right in his opening comments, you blended 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 year we’ve done in the last six months. I’m sure there are some, but I can’t, so that’s the world we’re in right now and we like that.

Okay, great. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Casey Haire with Jefferies. Please go ahead with your question.

Hey, good morning guys.

Hi Casey.

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.

Good morning. As we went through and looked at our reserve models, we came to the conclusion that we probably had more access there and that some of it was probably captured in our ALLL calculation as well. So this is unfunded reserve. So this is meant to cover the 90 day period when a loan is booked until such time it moves that they draw down and then it moves to the regular loan book and as a reserve establish more. 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 point, I mean it sounds like you guys are pretty good or feeling good about the asset quality, but you guys the new non-accruals was an outsized number for you guys. Just curious what was driving that?

Sure. Hey Casey, this is Joe and yes, 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 comment. And you know 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’ve been running at about 20 basis points. So when you think of our business with loans that range 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 CNI book. I think the great news is our credit life partners. We had these things in gun sites since all the way back at 2010 and as Glenn said, we’re going to expect to see these things move through their paces. Certainly possibly over the next quarter or two, but certainly within the year and that’s not all of them, but a few of them. So I guess what I would say is from our vantage point we see this as a part of doing our business. We had them under radar and we think you’ll see lumpy things occur over a period of time and maybe we’ll get back to 20 basis points, but quite frankly, obviously those are levels that we have never been at. So it’s something that we see as part of our process of being – approaching a $7 billion commercial book. I don’t know if that help.

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 and 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?

Yes, it’s a great question and we talk about it 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’re able to fund all of this organically, which is why you can see our borrowings going down and that’s part of the strength that the HSA bank brings to the overall balance sheet. So no, we’re not thinking about getting international lending businesses. We’ve got regional lending businesses as it is, our commercial real estate, asset based lending, equipment finance, we’re moving out the middle market as well into the regional space. So I think we’re in a really good place for HSA to support what we plan as organic growth in the Webster book.

And the other thing is that if you have this, 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’re in a wonderful position as a bank to have the funding source, but also to have the capability to off load some of those deposits if we chose. Not the plan, but it could be…

Okay. So broker deposits I guess would be – as of now the broker deposits would bet the preferred method rather than pursuing national business lines.

I wouldn’t necessarily call them broker deposits, but they maybe deposits we wouldn’t hold on our balance sheet, that’s true and right now we’re not choosing one over the other. We’re just saying that we’re focused on organic growth in the regional businesses that we’re in today. We don’t have plans right now to open up the national platform. We may expand the region that we serve through ABL and through equipment finance and CRE gradually. As you know we’re down to Philadelphia where we’ve been for several years on a CRE side moving middle market down there. CRE is now in Washington DC. So there is a lot 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 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 baking in?

So if I look at the forward curve, today and we say 221 in the 10 years by the end of the year. 241 by say the end of 2016, and 253 by the end of end of 2017, we would bottom out late 2015. And actually we’d begin according to our model – based on our model we begin to approach 350 NIM by the end of ‘19.

Got you.

How is that for…

That’s great color, thank you. I guess 2025.

Can we talk about ’18.

Thanks guys.

Okay, thank you.

Thank you. Our next question comes from the line of Collyn Gilbert with KBW. Please go ahead with your question.

Thanks. Good morning guys.

Good morning Collyn.

Good morning Collyn.

Just on the HSA side Glenn, and you know obviously in your slides I think 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 could pretty much evenly split it between fees and interchange. It’s all rolled up in deposit services, but the interchange revenue which is about half of that, and that’s just on the JPM business. It’s pretty, it’s pretty consistent across the whole business as well.

Okay, so that $6.5 million is applicable to the HSA business for both.

Applicable to the acquisition. I thought that...

To JP Morgan?

Yes.

No, I just meant all in, right, because the numbers you’ve given 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, it’s a total of $15 million fees, fees and net. So revenue is split as well between net interest income and fees.

Got it, okay, okay, that’s helpful, thank you. And then just one other question on HSA, you guys have mentioned the account openings that you saw this quarter and you know obviously an amazing ramp up from last year, do you have thoughts on where you think kind of some of the 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 over the next couple of years anyway, 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.

Collyn, let me just add to that. What we typically see is the number of accounts we opened in the first quarter on a full year basis is double. So meaning, if we open up a 125,000 accounts in the first quarter, by the end of the year we typically have 250,000. 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 the 600,000 accounts.

Okay, that would be my next question, how much of the account growth in the year comes actually in the first quarter. Okay, that’s super helpful. Okay and then just circling back, and I know obviously asset qualities have been really strong, but just the three credits that popped up this quarter, were any of those tied to energy?

Collyn, this is Joe. No, they were not tied to energy. The classic CNI in our footprint, classic CRE, ICRE in our footprint and the CRE side just lost a tenant, a couple of tenants in a nice property and 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 off.

Okay, okay, all right that’s helpful. And then just one final question, Glenn so the 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 of those is longer. What is the average duration on those that are left?

It’s about 1.7 years.

Okay. Okay, that’s all I had thanks.

Okay, thank you.

Thank you Collyn.

Thank you. Our next question comes from the line of Bob Ramsey with FBR Capital Market. Please go ahead with your question.

Hey Bob, we can’t hear you very well.

Hi, this is Martinus Burke in for Bob Ramsey.

Yes, how are you doing?

Good, how are you?

Good.

You mentioned a few headwinds regarding..

You need to speak up a little bit.

Sorry about that. You mentioned a few headwinds regarding the NIM [inaudible] pricing and also for competitive pricing markets. Can you give some color about the [inaudible] pricing markets?

I’m sorry, would you mind repeating the question. We had a hard time hearing that. 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 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.