Webster Financial's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: Webster Financial (WBS)

Webster Financial Corporation (NYSE:WBS)

Q1 2014 Results Earnings Conference Call

April 17, 2014 09:00 AM ET

Executives

Jim Smith - Chairman and CEO

Glenn MacInnes - Chief Financial Officer

Joe Savage - President

Analysts

Travis Potts - FBR Capital Markets

David Darst - Guggenheim

Casey Haire - Jefferies

Mark Fitzgibbon - Sandler O'Neill

Collyn Gilbert - Keefe, Bruyette & Woods

Dave Rochester - Deutsche Bank

Matthew Clark - Crédit Suisse

Dan Werner - Morningstar

Matthew Kelley - Sterne Agee

Operator

Good morning, and welcome to Webster Financial Corporation’s First Quarter 2014 Results Conference Call. This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster’s financial condition, results of operations and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results may differ materially from those projected in forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in forward-looking statements is contained in Webster Financial’s public filings with the Securities and Exchange Commission, including our Form 8-K, containing our earnings release for the first quarter of 2014.

I’ll now introduce our host, Jim Smith, Chairman and CEO of Webster. Please go ahead, sir.

Jim Smith

Thank you, Jaycee. Good morning, everyone. Welcome to Webster’s first quarter earnings call and webcast. I’m joined by CFO, Glenn MacInnes, for about 20 minutes of prepared remarks focused on business and financial performance in the quarter, after which President, Joe Savage, Glenn and I will take questions.

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

Beginning on slide 2, quarterly net income exceeded $50 million for the first time ever, aided by net after tax securities gains of $2.9 million that Glenn will discuss later. After preferred dividends, net income available to common shareholders was $0.53 per share, adjusted for the securities gains and non-core expenses, earnings were $0.50 per share compared to $0.45 a year ago.

Core return on assets was 91 basis points and on common equity was 8.65%, both up a bit from a year ago. All my further comments will be based on core operating earnings. Overall performance was driven once again by exceptionally strong commercial loan growth which coupled with a relatively stable net interest margin produced record net interest income up about 1% from Q4 and 6.5% from a year ago. Other notable trends are further improvement in asset quality and disciplined expense management, leading to another quarter of year-over-year positive operating leverage.

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

There were 29 snow and ice events in the quarter where the volume of traffic in the banking centers and interchange in other revenue from debit card usage were meaningfully lower. While it’s hard to quantify exactly the weather’s effect on pre-tax income, we believe it’s well over $1 million.

Despite the challenges, we reported 10% year-over-year growth in core pre-tax, pre-provision earnings to about $77 million, the sixth straight quarter above $70 million and the 12th straight quarter with year-over-year positive operating leverage. Overall loan balances reached $13 billion, up over 2% from year-end and over 8% from a year ago. Balances in every key category are noticeably higher than a year ago except for a slight drop in consumer which reflects continued household deleveraging.

Total originations were about $940 million in the quarter or 2% higher than a year ago. Significantly lower residential mortgage originations from the changed refi environment were more than offset by increased originations in each of our key commercial categories. The overall pipeline of $720 million at March 31 is largely unchanged from year-end, due to the consumer lending pipeline being $95 million higher at $355 million, while the commercial pipeline is $94 million lower at $278 million coming off its exceptionally strong level at year-end. Core non-interest income was $2.6 million lower than a year ago due to a $6.3 million decline in mortgage banking revenue from the very strong refi environment a year ago. This reduction was partially offset by increases in client hedging revenue, wealth and investment services, and deposit service fees.

Nonetheless, despite the hit to mortgage banking revenue, total core revenue exceeded $200 million for the second straight quarter and grew 3.6% from a year ago. With expenses up only 0.2% from a year ago, the efficiency ratio improved a 182 basis points to 60.3% and we achieved positive operating leverage of 3.4%, exceeding the full year average of 2.7%.

Continuing improvement in asset quality was marked by meaningful declines in non-performing loans and assets. The ratio of NPAs to loans plus other real-estate owned is now at its lowest levels since the end of 2007. Given improving asset quality and the lowest quarterly level of net charge-offs since the third quarter of 2007, our loan loss provision was flat to Q4 despite the loan growth in Q1. And for the first time in four years, there was no net reserve release as the provision exceeded net charge-offs in the quarter for the first time since the second quarter of 2010.

Our strong capital position which strengthened further in the quarter, supports asset growth, provides for the return of capital to shareholders through dividends and selected buybacks, and enables us to confidently pass the annual regulatory severely adverse stress scenario. A target of 10% for the Tier 1 common to risk weighted assets ratio allows us to meet those objectives and that 11.5%, we well exceed that target.

All of our capital ratios are well above internal targets, as well as estimated fully phased in Basel III well capitalized targets. Accordingly, the Board will consider an increase in the quarterly cash common stock dividend when it meets later this month. Glenn will provide more detail on capitals.

The Federal Reserve Board’s April Beige Book for the Boston district, which includes the bulk of our four-state footprint, reports that the district’s economy continues to expand moderately. One notable, but not surprising observation is that several retailers and manufacturers continue to sight the adverse effects of recent winter weather.

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

Turning now to line of business performance, slide 3 shows continued strong growth in commercial and commercial real estate loans, which combined grew 5% from year-end and 17% from a year ago. Funded loan originations remained strong at $415 million, representing our best first quarter ever.

Consistent with our strategic goals, commercial and business loans now represent 55% of total loans compared to 51% a year ago and 46% three years ago. Portfolio yield declined a bit from the fourth quarter, reflecting competitive pricing pressure, which was more than offset by volume. The yield on the new fundings improved 35 basis points over Q4, reflecting more favorable asset mix. Swap fees grew nicely year-over-year to over $2 million in the quarter.

We subject the commercial portfolio to external review to validate our pricing relative to peers. Despite the competitive environment, the review shows that we have maintained above average spreads and fee discipline, reflecting our success in building strong relationships with our clients over time. Deposits increased 5% from the year ago and declined 6% linked-quarter, reflective of seasonality in commercial and government deposits.

Slide 4 reviews our business bank unit, which recorded loan growth of over 2% linked-quarter and 7.5% year-over-year, though loan originations declined slightly from both Q4 and a year ago. The portfolio yield increased 4 basis points linked-quarter, largely driven by improved customer retention. Deposits grew linked-quarter and year-over-year, while the cost of funds is less than 10 basis points. Transaction account balances comprised about three quarters of total deposits and have grown 6% from a year ago.

Slide 5 presents personal banking results. Overall consumer loan balances are about flat over the past year, driven by the slowdown in mortgage originations. Total consumer lending originations were down 30% from Q4 and 51% from a year ago, primarily due to the refi bust and the low purchase demand accentuated by this winter’s New England weather. Still our results actually compare well with results to-date from the big lenders.

Jumbo mortgages as a percent of the total mortgage portfolio grew to 47% from 43% a year ago. Commensurate with our drop in Q1 consumer lending originations, total compensation and benefits costs in this unit declined 23% from Q4 and are down 40% from the peak in Q2 a year ago.

Personal banking’s deposits increased about 1% from year-end, largely due to higher transaction account balances. Deposits declined about 2% from a year ago driven by CD maturities in Q3 that contributed to the 11 basis point reduction in the cost of deposits over the last year.

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

Regarding distribution, we continue to optimize our physical network during the quarter, consolidating two banking centers into one new center. Migration to self-service channels continues as deposits at all self-service channels represented about a third of total deposits compared to about a quarter a year ago. Also, banking center transactions were 9% lower in Q1 than a year ago.

Slide 6 presents the results of the private banking unit where we have nearly completed the transformation to a new model under a strategic plan we announced at the end of 2012. The unit’s leadership team is now fully in place and we are beginning to see the benefits of last year’s strategic upgrade of the investment management platform and offerings.

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

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

Slide 7 presents the results of HSA Bank, which now has over $2.3 billion in footings including over $1.7 billion in deposits. Deposits grew 12% in the seasonally robust first quarter and 20% from a year ago. HSA Bank opened 118,000 new accounts in the quarter, up 50% year-over-year and the cost of deposits declined 4 basis points linked-quarter and 14 basis points year-over-year to 33 basis points.

These low cost, long duration, low volatility, and nationally diverse held savings account deposits will become an even more valuable funding source when interest rates eventually rise. And HSA Bank’s growth outlook remains strong as we expand the product suite and move deeper into the large employer and insurance carrier markets.

Before I turn the call over to Glen I am excited to share recently launched new brand elements that will enhance the way we communicate Webster’s unique benefits and our values to our customers. You can see a digital representation of this on the cover of today’s slide deck with their new brand promise Living Up To You. Today’s banking environment provides an opportunity for Webster to differentiate our brand by creating a unique visual identity and singular brand voice that is built on us. Our community focus values guided organization whose 3,000 bankers make a difference in the lives of our customers and communities every day.

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

With that I’ll turn it over to Glenn.

Glenn MacInnes

Thank you, Jim. I'll begin on slide 8 which summarizes our core earnings drivers, over the next few pages I’ll discuss the key drivers of our core earnings but would note our average interest earning assets grew $386 million compared to Q4 and our net interest margin of 326 basis points decreased slightly from 327 basis points in prior quarter. Combined this resulted in a new quarterly record for net interest income of $155.3 million. Core non-interest income excluding $4.2 million of net securities gains and a small recognition of OTTI on CLOs decreased $5.9 million on a linked quarter basis.

Mortgage banking was a key driver of this given a 42% decline in settlement volume versus Q4. This is in line with the industry decline and as a result of continued softness in refinance volume as well as the impact of challenging weather conditions.

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

Taking together our core pre-tax, pre-provision earnings of $76.7 million were up about 10% from prior year and our pre-tax GAAP reported income of $71.5 million is at its highest level since the third quarter of 2004. Our reported net income of $47.8 million benefited from a lower than anticipated effective tax rate of 29.5% in the quarter, this was due to a $2 million tax benefit in Q1.

Slide nine, highlights the components of our net interest income in Q1 and Q4 all of which is presented on a fully tax equivalent basis. We posted quarterly growth in average interest earnings assets of $387 million, 79% of which was in our loan portfolio. A six basis point increase in the yield on securities was partially offset by a four basis point decline in the yield on loans. Therefore our yield on average interest earnings assets remained flat to fourth quarter. As you see loan growth was offset by spread compression and the increase of about $2 million in interest income was a result of a higher yield on the securities portfolio.

Average deposits increase $287 million reflecting seasonal strength in HSA Bank while the rate paid on deposits declined one basis point to 28 basis points. Our CD portfolio cost increased slightly to 110 basis points. We have a little over $1 billion maturing over the remainder of 2014 at a rate of 52 basis points.

Our current average cost of new retail CDs is around 43 basis points, but we are also adding five year brokerage CDs at around 200 basis points which records the portfolio yield to increase two to three basis points a quarter. In doing so, we’re positioning our balance sheet for an eventual rise in short term rates, which I will discuss in this subsequent slide.

$98 million of the earning asset growth was funded with borrowings. The average cost of borrowings increased by 8 basis points, due to the issuance of a $150 million of 10 year senior notes on February 11th at an effective rate of 475 basis points. This funding was timely given a senior note maturity of a $150 billion occurred just two days ago. The issuance allowed us to continue to maintain a strong holding company liquidity position at a very attractive cost.

Note that the overlap of the senior note issuance reduced NIM in Q1 by 2 basis points. Incremental short-term secured borrowings currently cost about 23 basis points. The net result is the $1.2 million or almost 1% in net interest income versus prior quarter and the 1 basis point decline in net interest margin to 326 basis points.

Slide 10 provides detail on core non-interest income. While our GAAP reported non-interest income reflects an increase of $5.6 million over fourth quarter, both quarters include onetime item specific to the securities portfolio specifically a $7.3 million OTTI charge in Q4 and a gain of $4.3 million in Q1 from the sale of collateralized debt obligations. Excluding these items and the OTTI charge core non-interest income was down $6 million versus prior quarter. $2 million of the decline was the result of a lower level of mortgage banking revenue, settlement volumes were down 42% on a linked-quarter basis, while the settlement rate also declined by 17%.

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

Wealth and investment revenue decreased by $1.2 million from a fourth quarter record level of just under $10 million, while Q1 is typically slower than Q4, it was made more challenging by the first quarter’s weather. That being said we expect to be back at near record levels in Q2.

The $0.5 million seasonal decline in deposit service fees was less than the $0.8 million Q4 to Q1 decline a year ago, and includes growth in our credit card program and other fee categories. However NSF fees to continue their secular decline. Lastly the $0.9 million decline in BOLI and other category versus prior quarter reflects the $0.6 million decrease in fees in commercial banking.

Slide 11 highlights our core non-interest expense which declined modestly from Q4 is essentially flat to a year ago. We saw a linked quarter reduction of $1.8 million or 2.6% in compensation and benefits. This is the net result of a seasonal reduction medical cost partially offset by higher seasonal employment expense in Q1. As highlighted, snow removal expense was over $800,000 higher than the fourth quarter. We continue to be disciplined in the pace in which we best in our businesses and that discipline is reflected on slide 12, which highlights our efficiency ratio.

As you see on slide 12 our efficiency ratio was at the 60% level despite a $5.9 million linked quarter reduction in non-interest income and the absorption of over $800,000 in non-recurring weather related expense. Despite these challenges we achieved positive year-over-year operating leverage at 3.4% which drove our efficiency ratio down 182 basis points year-over-year to 60.3%.

Slide 13 provides detail on our interest rate risk profile. We continue to expect no change in short-term interest rates until mid to late 2015. We also expect the curve to steepen further before short-term interest rates start to rise and that positions our balance sheet to benefit from such an environment as evidenced again by the improvement in our investment portfolio yields and the stability of our NIM this quarter.

Our interest rate risk modeling suggests further improvement in PPNR with additional increases in long-term rates, which we call a long end up scenario. This slide reflects data as of March 31. The pattern of growing benefit to PPNR is consistent with prior quarters.

Note our PPNR analysis reflects scenarios with an immediate increase in long-end rates compared to a scenario with no change in rates. The benefit from higher rates is primarily related to slowdowns in prepayments of higher-yielding assets, the reduction of investment premium amortization, along with higher new asset yields. We’ll continue to take gradual steps to prepare for the eventuality of higher short-term rates.

In addition to eliminating duration risk in the investment portfolio through asset selection, we’ve been opportunistically buying LIBOR caps, entering into forward starting swaps and issuing five year retail and brokerage CDs to lengthen our liability duration without adding significant cost. The asset sensitivity of our core bank is growing; there is over three quarters of our loan bookings in the last two quarters are floating or periodic rather than fixed rate.

Now turning to slide 14 which highlights our asset quality metrics. Non-performing loans declined by $17.8 million in the quarter. This was led by reductions of $15 million in residential mortgages and $6.9 million in consumer loans. As a result, of updated regulatory guidance in Q1, $17.6 million of the decline is the result of moving Chapter 7 loans to accrual status. The Chapter 7 loans were previously classified as non-accrual since the fourth quarter of 2012.

Past due loans decreased $4.9 million in the quarter, primarily reflecting a reduction of $3.7 million in loans past due 90 days or more in accrual. Commercial classified loans now totaled $239 million or 3.35% of commercial loans inline with 3.34% at year-end. Assuming recent trends remain intact; continued improvement in key asset quality metrics can be expected in Q2 and beyond.

Slide 15 highlights our capital position; key capital levels remain similar to Q4, while supporting $323 million balance sheet growth, once again highlighting the strength of our core earnings. In addition, in Q1, we settled on the purchase, the repurchase of 328,000 common shares in order to neutralize the issuance of shares. This reduced our capital by 10 million, but leaves us 40 million of approved [unused] buyback capacity.

So before turning it back over to Jim, I will provide a few comments on our expectations for the second quarter. Overall, average earning assets will grow in the range of 1% to 2%. We expect average total loan growth to be in the 2% range, while not at the rate of Q1, our growth will be led by C&I and commercial real estate.

Net interest margin is expected to be down 2 to 3 basis points driven by lower securities and commercial loan yields. Of course NIM will vary with loan prepayment activity and loans returning to performance status. That being said, we expect net interest income to increase about $1.5 million over Q1 driven by loan volume with some offset in NIM compression.

Our leading indicators of credit continue to be encouraging and signal further improvement in asset quality. Given the outlook for loan growth in Q2, we’ll see a modest increase in the 2Q provision. Regarding non-interest income, while we do not expect mortgage banking revenue to improve until the second half of the year, we anticipate seeing stronger Q2 growth in wealth management, loan fees and client swap activity. As a result, we anticipate core non-interest income to increase up to 10% linked-quarter.

We continue to demonstrate a disciplined approach to investing in the business. And as a result, we expect our core operating expenses to be at or below our targeted level to achieve a 60% efficiency ratio. And we expect our effective tax rate on a non-FTE basis to be around 32%. Based on our current market price and no additional buybacks in the quarter, we expect to see the average diluted share count to be in the range of 90.5 million shares.

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

Jim Smith

Thanks Glenn. Webster continues to progress along the path of high performance as loan growth drove revenue growth. We maintained expense discipline, while continued to invest in our future and once again achieved positive operating leverage. Our focus on core banking businesses allows us to continually improve our strategies and our financial performance, while our strong brand and good reputation provide us with opportunities to gain share.

We're happy to take your comments and questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from the line of Bob Ramsey with FBR Capital Markets. Please proceed with your question.

Travis Potts - FBR Capital Markets

Hey guys, this is actually Travis Potts from Bob's team.

Jim Smith

Hey Travis.

Travis Potts - FBR Capital Markets

Hey, how is it going? Looks like you had a very solid growth in the C&I portfolio. I was wondering if you could give some more color on what you're sort of seeing in the space and what your outlook is in that segment for the rest of the year given this quarter sort of seasonally high growth?

Jim Smith

Sure. I'll ask Joe Savage to comment.

Joe Savage

Hey Travis, it's Joe Savage. How are you?

Travis Potts - FBR Capital Markets

Good. How are you?

Joe Savage

Good. Well, a couple of things Travis, we guided the group last time that we ended the year with an unusually high pipeline that was at about $367 million and that was -- so we ended December at $367 million and when you looked at it in the prior year period it was about $200 million. So, we came into the quarter with about $167 million to be funded. So I think you got to look at that.

Secondarily, we had relatively minimal pay-off activity. We expect that to pick-up in the second part of the year. So I think Glenn’s guidance I think was pretty good. We expect to move to more normalized commercial loan growth numbers, 2ish to 3% just in the commercial book over the year.

So, we had a lot of things [going] in our favor through the period. I guess the next thing I would say and I think it’s an important comment to make. Even at 2% and 3% per quarter we know that number is going to look pretty darn good relative to our peer institutions and that’s attributable to a whole bunch of factors that we’ve sighted in the past, but it always starts with the engagement of our people, our ability to track and retain people, our success and expansion into new market. So we’ve got a lot of good things going.

And the last comment I would make is it’s probably been the most heartening quarter than I have witnessed and this one was broad-based. We saw a lot of good activity in our Connecticut franchise; normally we’ve seen that occurring rather in our major markets, but good news it was really broad-based. So, long answer short question, but I think that gives you good flavor.

Travis Potts - FBR Capital Markets

Yes, it’s very helpful. Thanks a lot for the color.

Operator

David Darst with Guggenheim. Please proceed with your question.

David Darst - Guggenheim

Good morning.

Jim Smith

Good morning.

Glenn MacInnes

Good morning David.

David Darst - Guggenheim

So Jim, I appreciate your annual letter and how you guys set up the goal post and focus on really driving the outcomes around the company that what you lay out and earning your cost of capital, what worries you the most? And then what do you think that change the direction for the company off a little bit from the steady progress improvement that you’re making?

Jim Smith

Well, there is always issue of the patient economic growth, will interest rate surprise, but we take those challenges as a given and our objective is to continually improve ourselves no matter the environment so that our absolute performance will improve and we always have an eye on our relative performance as well. When we’re talking about being a high performing bank, we’re talking about not only our absolute performance but how we’re doing relative to our peer group. So, I really don’t see a lot of impediments to our ability to continue to improve ourselves particularly on a relative basis. But there are some environmental factors out there that are going to determine how quickly we’re going to be able to get to overall -- earning overall economic profits.

David Darst - Guggenheim

Okay. And then you talked about the 60% efficiency ratio and operating leverage from here, so should we assume that’s going to be a pretty stable level and you’re not trying to accomplish a lower efficiency ratio but you’re really trying to reinvest in the company to drive top-line?

Jim Smith

We’re trying to balance that David. It’s a very good question. I am really proud of the team for the effort that’s been put forward to control our expenses. And that’s what’s really helped us to create that positive operating leverage. And as long as we continue to create positive operating leverage, we’re going to drive that efficiency ratio lower even as we invest in our future and that’s the objective.

David Darst - Guggenheim

Okay. And then one more for Glenn. I think Glenn, you previously said, you expect the margin stabilize around the third quarter. Is anything changing on that side?

Glenn MacInnes

No I think we’re still feeling that way.

David Darst - Guggenheim

Okay, great. Thank you.

Jim Smith

Thank you.

Operator

Thank you. The next question is coming from the line of Casey Haire with Jefferies. Please proceed with your question.

Casey Haire - Jefferies

Hey, good morning guys.

Jim Smith

Hi Casey.

Casey Haire - Jefferies

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

Glenn MacInnes

So, I can start, on the commercial as an example on the origination of 414 million, where 357, we had a coupon of 357. On the investment portfolio that’s the second part of your question, the purchases were done at about 250.

Casey Haire - Jefferies

Okay. And then on the loan growth guide, Glenn, with 2.3 this quarter, it sounds like the weather really kind of slowed you guys down. I’m just little curious why wouldn’t we see loan growth accelerate here in the second quarter? It sounds like you guys are expecting it only 2%.

Glenn MacInnes

Yes. So I think real strong commercial loan growth if it impacted one of the portfolios that was primarily the mortgage portfolio and the consumer portfolio, we do see that coming back as I indicated in second half. So it is starting to pick up, I think our application volumes are up quarter-over-quarter close to about 37% quarter over quarter. So, we’re starting to see the pipeline build as Jim indicated on the consumer side. So that’s coming back, but I mean all in all, I think that we’re saying we grew over 2% this quarter. The commercials are not going to grow at 6% and 2.8% quarter over quarter, going down next couple of quarters. They will come down a little bit, but that will be partly offset by the resi and the consumer portfolio.

Joe Savage

Yes, Casey, this is Joe again. Just again a reminder that we did have a big pipeline going into the first quarter and we like to think normalized growth at around that 2% to 3% range. And we’re comfortable with that, we’ll have prepay activity, we’re light on prepay activity. So, I think what we’ll see, we’ll sit on the consumer side that will help us.

Casey Haire - Jefferies

Got you.

Jim Smith

And your 17% year-over-year is not bad.

Casey Haire - Jefferies

No. And then just lastly on credit, is it safe to say that we’re building, the LLR is not going to go much lower than 118 levels being in line with 2006 levels?

Glenn MacInnes

I think it’s all dependent on what we’re booking in the portfolio going forward. I mean the encouraging thing as you saw was our charge-offs were down, which is sort of an offset to that. But the build was all based on the robust growth in the commercial portfolio.

Casey Haire - Jefferies

Yes, so it could go lower.

Jim Smith

We’re comfortable where we are but it’s possible, it could go a little lower, if asset quality continue to improve.

Casey Haire - Jefferies

Okay. Did you guys -- apologies if I missed this. Did you guys get a big recovery in the quarter at all?

Glenn MacInnes

No.

Casey Haire - Jefferies

Okay.

Glenn MacInnes

Not one big recovery for the quarter.

Casey Haire - Jefferies

Okay, great. Thanks for taking the questions.

Jim Smith

Sure. Thank you.

Operator

Thank you. Our next question is coming from the line of Mark Fitzgibbon with Sandler O'Neill. Please proceed with your question.

Mark Fitzgibbon - Sandler O'Neill

Hey guys, good morning.

Jim Smith

Good morning.

Mark Fitzgibbon - Sandler O'Neill

First, your loan-to-deposit ratio is comparatively low at about 86% and likewise your securities portfolio is comparatively high. I wondered if you had some targets in mind and timeframe for achieving those to sort of bring them closer into sync with your peers.

Glenn MacInnes

So I think the loan-to-deposit ratio is at about 85%. And I would say our target is closer to 90. But, I mean it sort of gives us some [lean] way. We are growing deposits as you see that we’re focused on the mix and the change in mix and deposits. So, a lot more transaction accounts. So we have that ability to do that.

We have in fact -- it provides excess liquidity without forcing us to become aggressive on pricing. And so that’s worked in our yield as well. But we see it -- that being said, we see us getting closer to the target over the next 90 days.

Jim Smith

Over the next several quarters probably.

Glenn MacInnes

Next several quarters.

Jim Smith

Moving up to around 90. So, Mark I want to add, if you look at the high performing peers, we have about the same sized securities portfolio as they do, maybe a scooch smaller than that. So we are pretty comfortable where we are. We also like having the loan-to-deposit ratio where it is. So, moving up to 90 would be fine. And of course we have the benefit of HSA Bank and it’s growing rapidly and providing low cost loan duration funding for us. So, I would say we are in a sweet spot on both of those metrics.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then Glenn you had mentioned on the call that you have been putting on some forward starting swaps, could you just tell us how bigger position you have done on that, how much of that you put out?

Glenn MacInnes

So, we’ve put on about $225 million.

Mark Fitzgibbon - Sandler O'Neill

And that was all done in the first quarter?

Glenn MacInnes

No, in last couple of quarters.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then lastly, I wonder if you could sort of update us on how things are going in the Metro Boston and providence regions. Any updates on size of the portfolios and such that would be helpful?

Joe Savage

Sure. Hi Mark, this is Joe. Certainly speaking with respect to Boston I mean that’s just been a homerun for the institution. And as you recall we opened up that office in 2009 and achieved in the great recession. In fact I was just up in an event last night; we had a bunch our clients and customers in. And it’s really becoming one of our top performing units, some $250 million of C&I business overall the Boston market when you add the ABL and (inaudible) that’s become a $1 billion shop for us and we’re being extremely well received. One of the stats I shared last night as we’ve grown that office over the period of time from 11 to 26 individual. So there is a good market demand for our value proposition.

In fact I asked the team yesterday, I said do people know the Webster name in the market? And the answer is an obvious yes, which is just a great story for having that one single unit branch in the market.

Our providence is doing well for us. We’ve got some very talented individuals that or an individual that we’re going to add to an already good team. So we continue to be optimistic about its prospects. But really of the two, you think about the real driver to our performance you’ve got to go first to Boston.

Mark Fitzgibbon - Sandler O'Neill

Thank you.

Operator

Thank you. Our next question is coming from the line of Collyn Gilbert with Keefe, Bruyette & Woods. Please proceed with your question.

Collyn Gilbert - Keefe, Bruyette & Woods

Thanks. Good morning gentlemen.

Jim Smith

Hi, Collyn.

Collyn Gilbert - Keefe, Bruyette & Woods

Glenn, just a quick question first on how you are sort of thinking about funding a little bit longer term, just wondering when or if at all do you start to extend a little bit more on the borrowing side?

Glenn MacInnes

Yes, we effectively did. I mean, we saw our senior note that we issued in early February, February 11 that was at 150. So that’s one component. We also do swaps, the forward swaps as I just indicated. And then we’ve done a lot on or more on brokerage CDs. And we have about $225 million on brokerage CDs and we continue to do that, it’s five year brokerage CDs.

Collyn Gilbert - Keefe, Bruyette & Woods

Five year, okay that’s really good [sense] on that. Okay. So do you think it will continue just to gradually do some more of that type of thing, I mean maybe not the senior notes, but in terms of the swaps?

Glenn MacInnes

Yes. No, I think particularly on the CDs side, we’re doing more or we’re targeting to do more.

Collyn Gilbert - Keefe, Bruyette & Woods

Okay. That’s helpful. And then just on the wealth side, can you just talk a little bit about what the dynamic was that occurred this quarter, why fees dropped off so much and what will cause it to recover in the next quarter?

Glenn MacInnes

I think I will start off, but you got to keep in mind that fourth quarter was a record for us, so we’re just about $10 million. So, I think that part of that was weather-related driven. We did see a reduction in consumer activity across the board whether it was mortgage or whether it was in the banking center and looking at things like ATM transactions and credit card transactions. So we saw a general reduction in volume that was part of it.

But I think what you will see -- and our first quarter is typically slower than the fourth quarter to begin with. So, some of that is seasonal as well. And we expect as I indicated in my remarks that we would come back up to the Q2 levels or closer to our near record levels beginning in Q2 and going forward.

Collyn Gilbert - Keefe, Bruyette & Woods

Okay.

Glenn MacInnes

So this is the one item that moved that number.

Collyn Gilbert - Keefe, Bruyette & Woods

Okay. And then just finally, could you just talk a little bit about how New York City is doing and how that contributed just to the overall loan growth this quarter and just sort of how you are seeing that segment of your business play out throughout the year?

Joe Savage

Sure. Collyn, Joe. Well, we've always had a presence in New York, the pretty robust commercial real estate book and of course we have our asset-based lending unit house there and of course that spills over into New Jersey. But our John Ciulla has been quite successful. In his recruitment, we talked about that in the past. John and [Avi Parsnet] we added three individuals, two of which are very, very high quality relationship bankers. We would be untruthful to say that, New York City is an every commercial bank's answer to growing their commercial book. So we're seeing a lot of competition in the market.

That said, we’ve built a very nice pipeline, a couple of transactions had come in, but the kind of growth you are seeing, you’ve seen in our book really isn’t so much New York based as it will be for the balance of the year. So, I'm going to make a wild guess, it's somewhere at around $40 million as a result of New York.

Collyn Gilbert - Keefe, Bruyette & Woods

Okay, that's great. That's helpful. Okay. That's all I had. Thanks guys.

Jim Smith

Thank you.

Operator

Thank you. Our next question is coming from the line of Dave Rochester with Deutsche Bank. Please proceed with your question.

Dave Rochester - Deutsche Bank

Hey, good morning guys.

Glenn MacInnes

Good morning Dave.

Jim Smith

Good morning.

Dave Rochester - Deutsche Bank

I'm just, looking at the expense commentary you guys gave, if we back out that $3 million in seasonal expenses and the $800,000 of non-recurring snow removal. Could we actually see flat expense trends in 2Q? Just factoring in some continued investment in the platform you talked about earlier, just trying to get a sense for where that goes?

Jim Smith

Yes. I just wouldn’t, I wouldn’t back out the whole $3 million, because we haven’t maxed out everyone on the seasonal tax expense. So that’s the first thing. As far as flat expense, I think it’s likely you see flattish type of expense quarter-over-quarter.

When it happens Dave is that part of this I mentioned that we had higher medical cost, our employee medical cost and typically what happens is that starts out alone and it builds its employees hit their out of pocket maximum and then we are self insured so we take that piece in it. So you see a trend go up over the couple of quarters. So that was offset by the higher taxes in the first quarter, employee taxes. But in general I think you expect to see expenses relatively flat quarter-over-quarter.

Dave Rochester - Deutsche Bank

Got you. Perfect. And your fee income guidance for 2Q doesn’t include a rebound in mortgage banking, is that right? You are expecting that to pick in 3Q?

Jim Smith

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

Dave Rochester - Deutsche Bank

Right. And that would pick-up you were saying I guess starting in the third quarter?

Jim Smith

The third quarter, yes.

Dave Rochester - Deutsche Bank

Where should we ultimately expect that line to return to, I mean should we be thinking something closer to the fourth quarter level, something with a two handle or how should we think about that from here?

Jim Smith

I think 1.5 to a 2 handle is where you got to expect it to be, in third and fourth quarter. And we might be conservative there and the market might pick up significantly more, but as we look out that’s what we are thinking.

Glenn MacInnes

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

Dave Rochester - Deutsche Bank

Yes understood, great. And just one last one, Glenn you haven’t had the prepayment penalty income of the quarter in the securities [premium] and expense for the quarter?

Glenn MacInnes

So, prepayments were around $700,000. The amortization, is that the second part of your question?

Dave Rochester - Deutsche Bank

Yes. Please fees expense, yes.

Glenn MacInnes

$11 million.

Dave Rochester - Deutsche Bank

Great. All right, thanks guys.

Jim Smith

Sure. Thank you.

Operator

Thank you. The next question is coming from the line of Matthew Clark with Crédit Suisse. Please proceed with your question.

Matthew Clark - Crédit Suisse

Hey, good morning guys.

Jim Smith

Good morning.

Glenn MacInnes

Good morning.

Matthew Clark - Crédit Suisse

On mortgage, I mean can you give us a sense for whether or not you guys, you feel like you’ve right sized that business are there more variable or even fixed costs to take out there or do you feel like you’re at where you need to be at this stage?

Jim Smith

I can tell you that we look at the second quarter 2013 as peak from a funding standpoint and that since that period we’ve taken out about 40% of the cost. So we’ve come down pretty significantly on our cost structure. And then the other piece of that is that a lot of it has been repurposed to the consumer loans, unsecured. So we’ve not only reduced the costs, but we’ve repurchased it to volume and in other portfolio.

Glenn MacInnes

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

Matthew Clark - Crédit Suisse

Got it. And then in fees and I apologize if you mentioned this during your prepared remarks, but and I know it’s difficult to do. But do you have a sense for the magnitude that the weather, the impact of difficult weather conditions may have had on your fees?

Glenn MacInnes

Well, I think if you listen to the commentary we indicated that there was an effect, it’s hard to quantify exactly what the effect was, but that there were 29 snow events. The traffic was measurably lower of course in the branches, so there were transactions that were taking place; there was sales productivity that was in decline, there were less usage of cars and all. But for us to actually put a hard number on that is pretty tough. So what we said was given the overage on the snow removal cost of around $800,000 plus whatever the hard impact was on fees and alike probably came into well over $1 million pre-tax and I think we’ll leave it at that.

Matthew Clark - Crédit Suisse

Okay. Thanks.

Glenn MacInnes

So are we dealing in that, but we don’t want to put the hard point on it.

Matthew Clark - Crédit Suisse

Understood. And then I guess with the, on the commercial front, does your expectation per se 2% to 3% of normalized growth a quarter maybe going forward, does that consider any draw or increase in line utilization. Just trying to get a sense for where your line utilization is today and where you think that might normalize overtime?

Jim Smith

Yes. I mean I think that’s a great question and it’s a one we continually ask ourselves because it’s maybe the harbinger of an improving economy, but the honest answer to the question is we expect line utilization to remain about where it is today, sits at about in our [ABL] unit at about 53%. We don’t think it’s going anywhere, truthfully.

Matthew Clark - Crédit Suisse

Okay. And then just…

Jim Smith

Let me -- I just want to add to that that we do think that as the economy approaches there is going to be more transaction volume and that’s going to be a positive for us. We also are gaining shares and in peripheral in our markets. So there are sources of additional volume there that we’ll gain even if we don’t have a pick-up in line usage.

Glenn MacInnes

Yes. That’s a good, that’s a much finer point on it, Jim. We’re going to get our growth in respect of what line you suggest because we’re going to grow share and we’ll do that consistently with the expanded markets we’re in, so good point.

Matthew Clark - Crédit Suisse

Okay. And just lastly on just the overall size of the securities portfolio, starting to see an increase here after remaining relatively stable for the last few quarters. Just trying to get a sense for whether or not we might continue to see some incremental growth there going forward?

Jim Smith

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

Matthew Clark - Crédit Suisse

Okay. That's it from me. Thank you.

Jim Smith

Sure.

Operator

Thank you. Our next question is coming from the line of Dan Werner with Morningstar. Please proceed with your question.

Dan Werner - Morningstar

A little bit different topic, I know you guys have been focused on the internal operations of the company for quite a while now, but there has been a little bit M&A activity in your backyard. And just want to know your thoughts as far as dipping your toe back into that or what your thoughts were on expansion via merger?

Jim Smith

Yes. So, you said it well, our focus has been on internal operations and I'll just say it continues to be. We're very, very focused on organic growth and deployment of our resources in pursuit of that. And we think that we can win by continually improving ourselves and by taking share as you have seen in our results.

So, we're really not spending a lot of time thinking about M&A opportunities, but rather constantly improving ourselves. If something comes along and there is an opportunity not that we're looking for it, of course we'd be open minded about it. But our view is and our business plan is all about driving organic growth to improve our return on capital.

Dan Werner - Morningstar

And I only bring it up because it seems like there has been some more activity in your backyard, that’s the only reason why I'm bringing it up. Thank you.

Operator

Thank you. The next question is coming from the line of Matthew Kelley with Sterne Agee. Please proceed with your question.

Matthew Kelley - Sterne Agee

Yes, hi guys.

Jim Smith

Good morning Matt.

Matthew Kelley - Sterne Agee

You got a year into the Jones Lang without partnership to help reduce costs on your occupancy. And wonder if I can get a little progress report on that and as you have been closing, consulting branches, kind of the lessons learned and your ability to close branches more actively going forward?

Glenn MacInnes

So I will start off but I think that JLL relationship has given us a lot more discipline around that and looking at rationalizing our branch network and it’s also given us a lot more intelligence on where we want to be in the markets. And so we have done a lot of work and you have seen it even this quarter where we did a two from one consolidation and we look at additional sites where we can consolidate or put a new banking center in support of our mass affluent strategy. And they have been really helpful along those lines as far as given this market intelligence. As far as core, the core structure in the bank may help as far as reduction in corporate type facilities and we continue to do that Matt, but we are at the early stages of that. So you will see more in the expense reduction line as we go forward on those types of things and it’s just reducing our footprint, both on the corporate side and on the banking center side.

Matthew Kelley - Sterne Agee

At your Investor Day you outlined a target for square footage; where are we on the progress towards that square footage reduction, maybe quantify that?

Glenn MacInnes

So I think we are at 744,000 square feet and we would say we did again 20%...

Matthew Kelley - Sterne Agee

Over five years?

Glenn MacInnes

Yes, over five years. So I think we are at the beginning stages of it. I don’t have the exact number, Matt.

Jim Smith

But I would say that since then we have done things like we moved the existing main office facility into a much smaller location that was 8,000 feet; we consolidated a three for two, we did another two for one. I mean we are easily into the 20,000 to 30,000 range, so we probably covered off on the first year’s estimate.

Matthew Kelley - Sterne Agee

Okay. And switching topics to the HSA Bank, Jim can you give us a sense of how the partners have changed and the distributions changed interaction with private exchanges in that business? And it appears like the growth is accelerating, talk about that and how the HSA Bank operations changed over time?

Jim Smith

Well, the exchanges will represent an opportunity, there is no doubt about it but they are pretty much in formation at this point. We haven’t generated a lot of the new business from the exchanges, it’s come from traditional where either direct to the individual or to the small businesses as well and most of that is online business while our sales forces deployed in the market talking to medium size to larger employers to regional and national carriers. And that’s where we’ve been able to build the business.

So the yield per employer has increased very significantly from where it was before and we’re starting to write more business directly with the carriers. And that’s where the market is going. And the other side of it is that you’ve got to have a complete set of consumer direct healthcare financial services, not only including HSA accounts but also health reimbursement arrangements and flexible spending account so that the employer will have the value of all of these and on a single card. And that’s the big investment that we’ve been making over the last year or so, which will enable us to sell the full suite of CDH products. And that is what will boost the growth in HSA accounts because those providers of HSAs that also have those other services are now growing their HSAs at twice the rate of those that don’t. So that’s a very important strategic shift that we’ve made. So the full suite of products and moving up market into a larger employers and carriers is -- those are primary focuses of the strategy.

Matthew Kelley - Sterne Agee

Got it. And then just a clarification, what was the tax benefit this quarter, what was that related to, and then how should we think about the tax rates longer term, any other changes as we look further up in the model?

Jim Smith

No, I think Matt this was the benefit due to recording of a state deferred tax rate change. And so it was somewhat one-time and non-reoccurring in nature. I gave the guidance of 32%. And I think if you look prior year, 31% goes to 32% where the key driver of that was the reduction some of our tax exempt income as well as earnings but that’s -- the reduction tax exempt income was driven by the reduction in our [muni] portfolio focus. So I would use as I’ve given out that 32% but first quarter was just a non-recurring I think.

Matthew Kelley - Sterne Agee

I assume that was related to the changes in New York state tax laws.

Jim Smith

Yes, it was.

Matthew Kelley - Sterne Agee

Thank you.

Operator

Thank you. It appears we have no other questions at this time. I would like to turn the floor back over to management for any additional concluding comments.

Jim Smith

Jaycee, thank you very much. And thanks everyone for joining us today. We look forward to speaking with you soon.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation and you may disconnect your lines at this time.

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