Good morning, and welcome to Webster Financial Corporation'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 remains strong at over 10%. Record net interest income was driven by 11% loan growth and a one basis point improvement in the net interest margin and record non-interest income benefited from HSA Banks 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 Q4s record level, remained solid at just under a $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 pre-tax 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 initiatives near-term negative financial impact should diminish ratably over the next several quarters turning PPNR positive mid-year 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…

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 a 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 Q4s 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. Pre-tax 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 three 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 the yield of 325 basis points and…

Thanks, Glenn. I think you can see that we are making progress toward our goal to be among the highest performing midsize 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, 15 June and to tour some of our new banking centers on Thursday 16. We will also spend some time that day with members of our Boston commercial banking team that seen us loan book grow by over $1 billion since the end of 2009. Let Terry Mangan know and he’ll provide more details about the event if you haven't already heard from him. Let's now open it up for comments and questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Hey, good morning everybody.

Good morning, Steve.

Good morning, Steve.

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’m 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 channels, 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?

Well, first of all just to answer the last question we haven’t adjusted pricing following the rate hike that was pretty small change, so I don't anticipate that happening. And then the - in terms of growth I even 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 and 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’re driving through our health plan partners and employers. So really making sure that we’re getting back to pull 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 hike in September 25 basis points, we also assume Steve that the 10-year swap gradually increases from today being say 162 up to like a 185.

Okay. But you need that to get to the efficiency ratio target.

Yes, we do.

Okay. I appreciate all the color guys.

Thank you. Steve.

Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.

Hi, good morning.

Good morning Jared.

Good morning Jared.

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’ll 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 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 there 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’d say absolutely. I think you are 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 to become a primary partner for them. So we’re going to continue down that path and I'm optimistic about continuing to have success there.

Great, thank you.

Thank you Jared.

Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your questions.

Thanks. Good morning gentlemen.

Good morning Collyn.

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’ll let John take that one.

Yes, Collyn good morning.

Hey John.

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, the highest has been in five years, so I do think we’ll 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 kind of 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.

Yes, it’s 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 in the pipeline is built there, so we believe that's just a seasonal blip in an otherwise relatively positive trajectory.

Okay, 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.

Collyn, I’ll take that one as well.

Okay.

And I think you're right, 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's 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 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.

Yes, Collyn 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 and the allowance is FAS 5. So the provision increase 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 kind of 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 sort of any additional color around that?

I’ll 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 Collyn 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's 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.

Thank you.

Our next question comes from the line of Casey Haire with Jefferies. Please proceed with your question.

Thanks, good morning, guys.

Good morning, Casey.

Good morning.

Hey, 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?

Yes, so we’ll continue to benefit from a lot of the activity on deposit service fees and HSA's. 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’re hopeful that we get a rebound in the wealth management business that's been challenged because of the market volatility. So, those are the basic offsets quarter-over-quarter.

Okay.

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 sort of surprising you on the PPNR front to fall so short?

I’m going to make a broad comment and ask Glenn to comment further, and say on the PPR back in June of 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’ll ask Glenn if he wants to comment.

Yes. I think we’ve given some visibility to PPNR in the back of our earnings deck. Casey, I don’t know if you have seen that as well. I mean, but we are showing stated 42% growth quarter-over-quarter, and obviously, that’s impacted by the $2.3 million if you take that out. I think we’re closer to somewhere.

Yes, I think it is 25, so, yes, I mean you are within spitting distance of that 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’s a small adjustment, but if you look at it not only what we consider to be the duration of the deposits in the average life, but would we borrow at that rate and would we seek to borrow at that rate, do we have assets that the same or matched sort of duration. So we’re always looking at that and it was a slight tweak in the quarter. But back to your point I mean 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 this yield curve versus that 283 in the first quarter here.

So we are reinvesting about 275 on the investment portfolio.

Great. Thank you.

Sure.

Thank you.

Our next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed with your question.

Hey, good morning guys. 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 its worth about two 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 sort of fair to think about it as being flat absent that accrual this quarter, in line with the cap guide?

Yes. I think that’s fair, flat to up one if you factor in that. What’s going on is the loan book is good; it looks like things are coming on as they’re rolling off, but we’re 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’s worth a bip alone, a little over a bip. So, good on the loan side, but 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 kind of mine that customer base, to some extent?

Yes, Bob. We don't have that data right now. And we – and from a broad-based perspective it’s 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.

Our next question comes from the line of Mark Fitzgibbon with Sandler O'Neill. Please proceed with your question.

Hey, guys. Good morning.

Good morning, Mark.

Hey, Mark.

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?

Mark, it’s Glenn. This is the interim true-up and we have until mid-year to – the contract says we have until mid-year 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’s 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’re still operating well below 100 basis points above so we’ve plenty of room to add risk-weighted assets over the past…

Okay. I mean optically the TCE ratio looks little low that’s not something you are concerned about?

No, I mean within our range Mark, so it’s 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 CET1 ratio I think would be the focal point.

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

And we like our TCU 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 could 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 are trying to improve ourselves and we think we’ve 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 return. So that's what we are focused on. It’s possible and we will be looking as some banks that don't have skill 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 wait everything based on the return we get for the capital that we deploy. It was possible that there are portfolios of loans that might have an interest to us that we are not actively looking, that would 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 are in a good position now, no need to acquire, yet we’ll be open-minded about the possibility.

Thank you.

Our next question comes from the line of Matthew Kelley with Piper Jaffray. Please proceed with your questions.

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

So I think we are on track, we crossed $100 million as you know we think will be just below $300 million by year-end and well likely breakeven by mid-2017. And that's a balance that's closer to $450 million, $500 million on deposits. And we always look at that Matt, we are looking at say one-third business, two-thirds consumer and then you assume that you're getting about half of those balances to say by that point $150 million in loans as well and that 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's – we are just starting to get the buzz up there and we’ll see more as we formally launch this, but John you have some color on some of the activity.

Yes, I mean 90 days in we are seeing a lot of activity across all of our business lines and just some of the anecdotal prove points obviously a growing business, banking pipeline, we’ve 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’ve 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 now we are excited about it.

Okay, got it. And then in the HSA business, can you remind us kind of 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 that as you look at the quarter there are $3 million in core fees and about half of it was interchanged and half of it was monthly service fees. And so I’ll turn it over to Chad in a minute because 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.

Yes. 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 are some fluctuation throughout the year due to seasonality, but it stays relatively steady. So really a lift in the early part of 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 are adding – I guess the first point I would make is we’ve seen a significant increase in our production over the last two years just to stay at a 20% growth rate on our existing 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.

Hey 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 in the second quarter and it was down to 358, 334. And if I look at transactions per account, it sort of supports what I was saying 240, 243, 202, and this per account, 214 in the fourth quarter. And as I look back and I have trends in front of me over five years, it does sort of 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 kind of 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?

Yes, Matt I mean and 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 apartments, multifamily deals there still is some significant competition from the regional banks and big banks, so we didn't see sort of price stabilization in CRE in the quarter, but we still find it very, very competitive and in fact the market until we give you right now from Bill Wrang who runs the group is that he found first quarter to be very competitive. We actually, probably lost more term sheets issue then we had in the prior couple of quarters because of aggressive pricing and aggressive structure and proceeds. So that’s the story inquiry.

And I think quarter-over-quarter just to add more color this spread is probably done about 20 basis points or up to 20 basis points. That’s quarter-over-quarter.

What about just ex-multifamily, 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’s tough because from our origination perspective we didn't have a lot of close businesses in those asset classes.

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

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

Okay. Thank you.

Thank you. End of Q&A

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.