Jim Smith - Chairman and Chief Executive Officer Joe Savage - President Glenn MacInnes – EVP and Chief Financial Officer.

Jared Shaw - Wells Fargo Casey Haire - Jefferies Mark Fitzgibbon - Sandler O'Neill Dave Rochester - Deutsche Bank David Darst - Guggenheim Matthew Kelley - Piper Jaffray.

Good morning and welcome to Webster Financial Corporation’s Second 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 Webster Financial's public filings within the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the second quarter of 2015.

I’ll 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 us for Webster's second quarter earnings call. CFO, Glenn MacInnes and I will review business and financial results and then take questions along with President, Joe Savage.

Beginning on Slide 2, second quarter results were solid producing record net income and a 9% return on common shareholders' equity. That's 12.5% on tangible common.

Our results showcase our progress in executing our strategic plan for growth, including achieving sustained momentum around the commercial banking expansion, rapid growth in HSA bank footings, progress along the community bank transformational roadmap and growing traction in the private bank.

I am bullish on our prospects because I am confident that we have made good strategic choices that will create meaningful value for our customers and shareholders over the long-term and right now we are firing on all cylinders.

And we may get some help from a regional economy whose prospects seem to be improving according to the latest Fed Beige Book which cites stable or improving business conditions in the first district, stronger retail and an improving housing and commercial real estate market.

A common denominator in the quarter across all of our businesses was strong loan growth with total loan originations of $1.5 billion setting a quarterly record, including a big uptick in first mortgage lending.

This robust loan volume drove higher net interest income that overcame net interest margin compression and helped produce 10% year-over-year core revenue growth, the 23rd consecutive quarter of year-over-year core revenue growth. That's momentum. There were two items of special note in the quarter.

First, we experienced a lower than expected tax rate from a net tax benefit of $3.7 million that Glenn will discuss. And second, we increased the quarterly loan loss provision by $3 million in response to loan growth in excess of $500 million.

Given net charge-offs once again in the $7 million range, the result was a quarterly reserve build of about $6 million and the allowance for loan losses which keeps our reserve to loans flat at 1.14% and comfortably within our current desired range of 1.10% to 1.15%.

Glenn will discuss increases in commercial classified and nonperforming loans in his review of asset quality but I want to highlight a leading indicator of credit quality. Loans more than 30 days past due which declined to a remarkably low 22 basis points, down over 30% year-over-year. All my further comments will be based on core operating earnings.

Turning to Slide 3, you can see the recent quarterly trends for loans and deposits. While loans have been growing briskly, core deposits have grown even faster reducing reliance on borrowings and underscoring our balance sheet strength and strong liquidity position.

The loan to deposit ratio was 85% compared to 87% a year ago largely because growth in HSA deposits is fully funding loan growth. And the borrowing to asset ratio is down to 16% compared to 18% a year ago. Our balance sheet is well positioned for increases in interest rates.

On the loan side more than 80% of C&I and commercial real estate loans are floating-rate or repriced periodically. And virtually all of our $1.9 billion in home equity lines are floating-rate. On the deposit side, combined transactional and HSA deposits now represent 55% of total deposits compared to 47% a year ago.

I will provide more comments on loan growth when we get to the LOB slides. On Slide 4, strong loan growth approached 4% linked quarter and exceeded [indiscernible] year which contributed to another quarterly record for net interest income with all loan segments posting year over year growth in all but consumer in double digits.

Note the rebound in residential mortgage activity as our jumbo mortgage strategy positions mortgages as the lead product for building relationships. Turning to Slide 5.

In addition to the quarterly record for net interest income, noninterest income grew 25% year-over-year to another record aided by a 17% gain in loan fee revenue and reflecting in particular the recent HSA acquisition.

Noninterest expense growth also shows the effects of the HSA platform acquisition which accounted for almost $10 million of the $15 million year-over-year increase.

Our ability to invest in strategies that create economic profit while diligently controlling expenses enabled us to achieve an efficiency ratio of 60% or better for the ninth straight quarter which in turn produced a 6% increase in pre-provision net revenue or PPNR.

Slide 6 shows the sustained revenue growth and expense discipline that have resulted in consistent growth in PPNR and here you can see that year to date PPNR growth exceeded 8%. Slide 7 breaks down the PPNR performance in the first half of 2015 compared to a year ago in our four lines of business.

As you see, commercial banking continues with double-digit PPNR growth while the HSA bank benefits mightily from its strong organic growth and its recent acquisition.

Community banking is lower than prior year due to the effects of the persistent low interest rate environment, 8% linked quarter, driven by progress against our strategic roadmap initiatives that we covered in detail at our June investor day.

Private banking is poised to achieve breakout performance as the model shift is complete and the foundation for success is firmly in place. Line of business performance begins with Slide 8. The slides speak for themselves especially with regard to balance sheet and production metrics so I'll be brief.

Commercial banking continues to perform extremely well, growing loans, revenue and economic profit while executing on the strategic initiatives of geographic expansion, leveraging industry expertise through specialization, relationship focus and local model feel.

Loan growth and originations were spread across the business units in all geographies as our bankers continued to attract new well-known customers and excel in service to all customers. The portfolio yield decline was attributable to continued pricing pressure on new originations and payoffs of mature higher-yielding loans in the quarter.

Over half the fundings in Q2 were in middle market versus a third in Q1, resulting in higher yields on new fundings which at 3.46% were 33 basis points higher than in Q1.

Transaction deposits were up 8% year-over-year on a comparison that eliminates the strong Q2 seasonal impact of government deposits and demonstrates positive momentum in core deposit growth and relationship acquisition.

Moving to community banking, Slide 9 shows that business banking is hitting its stride, generating continuing growth in the loan portfolio as originations picked up linked quarter while the pipeline grew over 100% both linked quarter and year-over-year. Our recent initiative to cut loan approval time by over half is generating higher volumes.

Total deposits, DDAs and fee income grew year-over-year and linked quarter. Our focus on high-value relationships has been driving growth in average loan amounts, deposit balances and fee-based services. Looking at the personal banking unit on Slide 10 and referring also to the mortgage origination trends on slide 11.

Stronger consumer lending including home equity product and much higher first mortgage loan originations boosted overall consumer loan balances driving portfolio growth by 4.5% linked quarter and 9% year-over-year. Our lending sales force have 70 plus market facing mortgage bankers.

A 16 banker dedicated sales force in our call center and 700 national mortgage license system bankers in our banking centers, and our correspondent partner channel capitalized on the spring purchase mortgage market and improving consumer loan demand.

Residential mortgage originations exceeded $500 million with 29% originated for sale and the balance for portfolio of which 91% was jumbo relationship product related to our mass affluent segment focus.

The higher yield on these loans contributed to the three basis point linked quarter increase in the overall yield on the $6 billion personal banking loan portfolio. Overall personal banking deposits remained flat as growth in transaction balances offset a decline in CDs.

Transaction balances benefited from the strongest growth in net new checking accounts in five years and average balances per account eclipsed their highest ever levels. Investment assets under administration in our Webster Investment Services brokerage unit grew 3% year-over-year to $2.8 billion. Sales production grew 8% linked quarter.

Slide 12 presents the results of HSA Bank where the full quarter effect of the mid-January acquisition of J.P. Morgan Chase's health savings account business is visible in Q2 results. In HSA Bank's best second quarter ever, we opened 151,000 new accounts, more than fourfold the number opened last year.

This more than offset the expected roll off in the quarter of acquired out of scope accounts, leading to a net gain of over 67,000 accounts. Total footings now stand at $4.7 billion including deposits of $3.7 billion which represents about 21% of Webster's total deposits.

Excluding the acquisition, deposits grew 26% year-over-year and accounts were up 36%, reflecting the importance of our multiproduct strategy now also including flexible spending accounts, health reimbursement accounts and community benefits accounts, our extensive integrations with major health plans and our success competing in the large employer channel.

In June, for example, we on boarded our largest employer to date representing approximately 60,000 accounts and $70 million in deposits.

Large employer wins like this and a 40,000 account relationship we landed in July will cause spikes in our quarterly growth rates but overall we are still in line with our 2015 account growth projection of about 25%.

As we noted during investor day, the market for consumer directed healthcare was projected to grow at a 20% compounded annual growth rate for several years which presents significant upside for this business. We completed the transition to the industry-leading Evolution One platform for the legacy HSA bank business last quarter.

The conversion of the J.P. Morgan Chase portfolio and health plan integrations are progressing well and on schedule. When completed, the resulting scale and future growth will help lower unit cost and increase net revenue per account.

To give you a feel for HSA Bank's financial impact including the acquisition, overall accounts increased 160% year-over-year to 1.7 million. Referring back to Slide 7 for a moment, we can deduce that revenue in the quarter doubled to about $34 million, split 52% as net interest income and 48% as fee revenue from card fees and account fees.

Expenses, including some conversion related costs, increased about $10 million as I noted and segment PPNR grew around 75% to about $14 million. Slide 13 summarizes results for Webster Private Bank.

The fully integrated offering we described at investor day continues to take hold as can be seen by strong loan growth aided by a newly streamlined, dedicated credit process and the increasing AUM pipeline. We expect that growth at the private bank will accelerate from here as the new model and our capable bankers achieve their vast potential.

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

Thanks, Jim. I will begin on Slide 14 which summarizes our core earnings drivers. Our average interest-earning assets grew $707 million compared to the first quarter.

About three-quarters of the growth was attributable to our loan portfolio with the remaining growth result of incremental security purchases made during Q1 in connection with the HSA acquisition. Net interest margin at 305 basis points was down 5 basis points from Q1. The decline was within the anticipated range.

It was primarily driven by lower securities and commercial loan yields. Our 3.4% linked quarter growth in earning assets, partially offset by NIM compression in the quarter, resulted in record net interest income of $163.5 million.

Core noninterest income increased by $1.6 million or 3% on a linked quarter basis to establish a new high of $59.4 million. Core expenses were up $4.1 million over Q1 primarily driven by increases in HSA Bank, annual merit increases and stock-based compensation expense.

Taken together, our core pre-provision net revenue totaled $85.9 million, up 1% linked quarter and 7% from prior year. And as you see, we had a $3 million increase in our provision to $12.8 million this quarter. Pretax GAAP reported income totaled $73.2 million for the quarter, up 3% over the prior year.

Reported net income of $52.5 million includes an effective tax rate of 28.2% relative to our original expectations of 33%. The lower tax rate in the quarter reflects the $3.7 million net tax benefit. Slide 15 highlights the drivers of net interest margin versus prior quarter.

We achieved quarterly growth in average interest-earning assets of $707 million or 3%. The securities portfolio had average linked quarterly growth of $158 million from the completion of planned security purchases during Q1 associated with the HSA acquisition.

Cash flows totaled $430 million in the quarter with the yield of 304 basis points which included $39 million of municipal bonds at 664 basis points. Purchases totaled $512 million in the quarter at a yield of 250 basis points.

Portfolio interest income decreased by $900,000 versus prior quarter due to a 13 basis point reduction in yield which more than offset the increase in average balance. We saw rates rise late in the quarter but TDRs typically lag rate changes and therefore increased from 13.9% to 15.8%.

This drove an increase in premium amortization expense by $1.9 million to $14.1 million. Average loan balances grew $515 million and the portfolio yield declined 2 basis points. As a result, interest on our portfolio increased $4.9 million.

Average deposits increased $144 million largely from growth in HSA deposits with some offset from a seasonal decline in government deposits. The rate on deposits was unchanged at 27 basis points. Average borrowings increased $573 million in support of strong loan growth and to supplement the seasonal decline in government deposits.

The average cost decreased 24 basis points to 138 basis points as the increase was in short-term FHLB borrowings at 24 basis points. In summary, continued strong balance sheet growth partially offset by NIM compression resulted in a $3.7 million increase in net interest income to a $163.5 million and a net interest margin of 305 basis points.

On Slide 16 we provide additional detail on core noninterest income which increased $1.6 million or 3% versus prior quarter. Mortgage banking revenue, the top box, increased $956,000 on settlement volume $128 million and a spread of 196 basis points.

Wealth and investment services, highlighted in gray, increased by $895,000 due to increased sales production during the quarter. HSA Bank saw a fee income growth of $1.1 million both from new accounts and the full quarter effect of the acquisition.

And other deposit service fees saw an increase of $660,000 from higher consumer activity during the quarter. And other income decreased $1.7 million primarily driven by lower volume of client swap activity. Slide 17 highlights our core noninterest expense which was up $4.1 million from Q1.

HSA Bank represented $1.2 million or almost 30% of the increase. Of this two-thirds was driven by higher volumes and one-third as a result of the full quarter impact of the acquisition.

Excluding HSA Bank, the remaining $2.9 million increase is a result of growth of compensation and benefits of $3.3 million from incentive related and stock-based compensation expense and 14 additions in customer-facing positions and higher quarter-over-quarter medical expense.

Other expense increased $2.6 million reflecting Q1 adjustment to our reserve for unfunded liabilities. We also saw an offset from a reduction in occupancy expense as Q1 included $1.8 million in snow removal expense. Slide 18 highlights our ongoing expense discipline while continuing to invest in the business.

As you see, despite seasonal expenses we continue to operate with an efficiency ratio at or below 60% which we have now achieved for nine consecutive quarters. Turning to Slide 19.

Consistent with comments that we made at our investor day in June, Q2 saw a modest decrease in our asset sensitivity mainly due to an increase in market rates during the quarter. Ten-year swap rose growth 41 basis points which increased our base case earnings projections and reduced our sensitivity through asset extension.

We continue to closely manage our asset sensitivity and are well positioned for the anticipated rise in interest rates. We have pushed back our assumption of a fed rate increase to January 2016 and like the market believe that rate increases will be modest by historic standards.

Consequently, we booked more fixed rate residential mortgage loans during the quarter which increased interest income but also contributed to the reduction in our asset sensitivity. We used our historical pricing betas in modeling deposited rate changes which coincided with the timing of fed rate increases.

Upside potential exists for an additional 9.7% PPNR growth over the next 12 months if our managed deposit rates don't move for the first 50 basis points of fed tightening. This is also known as the [bull twister] [ph] scenario. Turning now to Slide 20 which highlights our asset quality metrics.

Nonperforming loans, in the upper left, increased to $168 million and were 1.14% of total loans. The $16 million increase was mostly in middle market where we had been operating at historically low levels. We had very few outflows and a handful of inflows during the quarter.

The $16 million increase primarily reflects three credits, the largest of which is a $7 million credit that has already been restructured. Appropriate charges have been taken and we expect it to return to accrual before year-end. The two other credits are in various stages of resolution and have very limited amount of potential loss.

Past due loans in the upper right saw a decrease of $12.7 million with declines across each key category and now represent 22 basis points of total loans. Past due loans have declined 32% from a year ago when they represented 36 basis points of total loans. Commercial classified loans in the bottom left increased by $39 million.

One credit for $20 million cured in July to refinance. Another credit for $13 million is in asset based lending and we are fully secured. We monitor the other credits closely and see these as discrete downgrades with no particular trend or industry issue.

Our annualized net charge-off rate was 19 basis points on $6.9 million of net charge-offs in the quarter. This represents the sixth consecutive quarter at or below 25 basis points. Also worth noting, as seen on slide 47 in the supplemental section, is a 5% linked quarter decline in TDR's.

The decline was led by commerce real estate where TDR's now total $52 million compared to $66 million on March 31. We continue to expect further improvement in consumer asset quality metrics where there can be customarily quarterly variations in commercial metrics given the nature of the business. Slide 21 highlights our capital position.

Capital ratios remain well in excess of fully phased in Basel III well-capitalized levels as well as our internal targets. The tangible common equity ratio increased 7 basis points from March 31 and is around our internal target of 7.25% for this ratio.

The ratio had 13 basis points of benefit from the conversion to common of the remaining $28.9 million of our 8.5% convertible preferred issue. A little over 1 million shares of common were issued under the conversion. Since the conversion occurred on June 1, about 355,000 shares were included in the diluted share count in Q2.

Therefore the average diluted share count will be about 700,000 shares higher in Q3. The increase in diluted share count is offset by a $615,000 reduction in preferred dividend expense per quarter, resulting in no impact to EPS going forward.

The common equity tier one ratio increased by 11 basis points to 11.04% and we continue with the longer-term target of 10% for this ratio. Both capital ratios are down from last year due to the combination of strong asset growth and the HSA acquisition and for TCE a reduction in AOCI due to an increased pension liability at year end.

Our strong capital position and solid earnings continues to support asset growth, provide for future increases in the dividend and selective buybacks and enabled us to confidently meet the requirements of the 2015 Dodd-Frank stress test. Also of note, we announced in April a 15% increase in our quarterly common dividend.

Before turning it back over to Jim, I will provide a few comments on our expectations for the third quarter. Overall, average interest earning assets will grow approximately 2% and we expect average loan growth to be up approximately 2% to 3% growth in all portfolios. We now see less pressure on net interest margin.

Assuming the level of the 10-year swap and its spread to mortgage rates remains in today's range, we expect zero to 2 basis points compression in Q3. That being said, we expect an increase of $3 million to $4 million in net interest income. Our credit indicators remain strong.

As such, we expect Q3 provision to be in the range of the second quarter's level. Regarding noninterest income, we expect an increase of $3 million to $4 million over Q2's core noninterest income of $59.4 million. This will be driven by deposit service fees and wealth.

We anticipate our expense base will increase as a result of continued bank wide investments in people and technology. That being said, we will continue to demonstrate a disciplined approach to investing and expect to operate within core expenses at a targeted efficiency level of 60% or lower.

Our expected effective tax rate on a non-FTE basis should be between 33% and 34% going forward. And we expect our average diluted share count to be in the range of 92 million shares which incorporates the additional 700,000 shares from the convertible preferred conversion on June 1. So with that I will turn things back over to Jim..

Glenn, thank you. And I want to thank so many of you on the phone today for attending our investor day back in June where you heard about the success we have been having in investing capital and resources to support strategies that create value for customers and maximize economic profit over time.

We think we are making meaningful progress in our pursuit of high-performing status and our momentum is strong. Let's now open it up for comments and questions..

[Operator Instructions] Our first question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question..

Just a few questions for you.

The first, I guess if we look at the deposits and the decline in the money market in time and then the offset growth in FHLB advances, does that shift to try to extend the duration of liabilities or is that more reaction to deposit rates being flexible?.

Yes. Jared, it's Glenn. That was more of the seasonality in government banking where we saw that $0.5 billion reduction quarter over quarter typical of Q2. So the FHLB borrowings short-term were provided for the loan growth..

Okay. Okay.

So we should expect then to see as government banking grows back, to see that shift back towards more of a deposit focus?.

That's correct..

Okay.

And then when you talk about the mortgage banking or the originations increasing, is that more due to the strength of the market and keeping your market share there or is that more of a push to take more market share and become more active in the area?.

It's actually both. As you know the jumbo product can be a lead product in relationship development, consistent with our mass affluent strategy. And so we have had a lot of success directly through our mortgage bankers and through our correspondent channels focusing on jumbo originations.

So we are seeing some share pickup as part of the program, most of it’s purchase mortgages. And we think we are on target for success with the jumbo program..

Okay. Great, thanks. And then finally on the HSA side you mentioned that in June you on boarded an employer with 60,000 accounts.

When you're seeing these large employers come over, are these typically employers that are already offering an HSA or a high deductible health care plan to their employees and you are taking that business away from someone else? Or is this more the large employer will now begin to offer a high deductible plan and you are stepping in as the first HSA provider..

It's actually both of those. It may be an employer that had multiple solutions that wants to have an exclusive relationship with us. It may be employers, and there were many of them, that are just starting to offer the program, or maybe an employer that is dissatisfied with their current arrangements.

But a lot of the volume is coming as a result of employers that are emphasizing this business more than they did before..

And so as we look going out in the next few years, do you think that this will be really the new trend where you start seeing more and more of the large employers coming on board with tens of thousands of accounts..

We do think that will be a strong trend..

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

Glenn, just wanted to follow up on the fee guide. If I heard you correctly it was up $3 million to $4 million led by wealth management and deposit charges. It just feels a little bit aggressive.

Could you just maybe provide a little bit more color particularly on the deposit side given the secular pressures we're seeing elsewhere?.

Yes, I think what we are seeing Casey is we saw some strong consumer volume in the second quarter and so things like interchange and ATM certainly picked up, and so we expect to see that continue into the third quarter.

And then with that in addition with the HSA and the additional volume that's been booked quarter to date or year-to-date, is generating volume as well. So that's really what's driving the deposit service charge numbers. On the wealth side, you saw we made progress Q1 over Q2.

And, quite frankly, given the pipeline we have on the private bank and all the work that's being done on Webster Investment Services, we feel really confident about where we are going..

Okay..

If you were to look at -- if you look at the total increase, I would say it's split between both of those..

Got you..

On the services and wealth..

And the other income, I notice you didn't call that out after a reset down from some nice swap income last quarter.

Is that a reasonable run rate going forward?.

Yes..

Yes. Casey, it's Joe. The swap income numbers that can be lumpy relative to the investment commercial real estate business that we originate. Second quarter was a little bit soft for us. We are not sure with respect to third quarter at this juncture. But certainly it's in area that we really focus on and it's part of keeping our balance sheet floating..

Let me add one comment to what Glenn was saying too. When you look at, just take debit card transactions for example, up by 16% year-over-year. So that's part of where that income is coming from..

We have seen increases in consumer activity on both the debit card and the ATM. Just transaction volumes were up generally in the second quarter..

Got you..

And Casey, it's Joe again. If I go back to the ICRE side, it's really a function of whether or not we book the large transactions in a particular quarter that will drive the swaps. So that can get lumpy in a quarter for us..

Okay. And just a question on overall efficiency. Obviously you guys got a nice little run going here with, you know keeping under 60. It is up year-over-year. Obviously there's been, investments being made on HSA.

Are you guys pulling forward a lot of those investments with some strong revenue numbers and we may expect to see some of these investments ease in the back half of the year. Just trying to get a sense of where the HSA sort of build out expense is..

Yes. So with regard to HSA, I mean there is a few dynamics in there and the acquisition is one of them where we have a service agreement with J.P. Morgan and as we convert that onto our platform that will begin to taper off.

And that process will begin in the third quarter so you will start to see some fixed costs go away or costs associated with the TSA. Partly offsetting that is the conversion that we have done on to the EV One platform. But generally I think the fixed costs will go down over the next couple of quarters in HSA..

Okay, great. Thank you..

I want to add to that. However, overall investments in the businesses will continue. And the art of what we have been trying to achieve is to make those investments in support of our bankers and our businesses and improving our technology at the same time as managing expenses in the disciplined way that we have to keep the ratio at 60 or better..

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

First question I have for you was that are we likely to see any additional charges in coming quarters for branches and facilities optimization or is that largely behind us at this point?.

I think it's not behind us. We continue to rationalize the branch network and in the third quarter I think you will see another consolidation. It's like a three to one type of deal, Mark. But the team there continues to rationalize the branch network and reduce the footprint size..

Okay. And then secondly, the non-performers in the commercial nonmortgage portfolio jumped up again this quarter.

Could you tell us what's sort of going on there?.

Sure. Mark, it's Joe. I guess what I would say is more a return to a normalcy. I think it would be where inside the bank we see this as really a step coming perhaps closer to a normalized state when you think about where our positions are. So there isn't a concern that we have with respect to the portfolio. We talk to the people about the flows.

There is really nothing there that would suggest that this is anything other than coming to a normal state for our organization..

Joe, no particular industries?.

No. No, I mean if implicit in that question is oil and gas or if implicit in that is shared national credit, everything is running within normal bands for our particular business. So, yes, it is within the middle market bank but again we really like where the classified and NPL levels are in the book.

Could they go down and get better from here? Absolutely. Could they go up a tad from here? Absolutely. So just -- go ahead, Glenn..

I think you covered it. I just, as I did in my comments, I think we are at historically low levels or have been there and so it will bounce around as things and you see the trend, the flow of things coming in being cured and things coming in back-and-forth. So I think you will see some lumpiness in there..

Yes. So Mark I don't know whether you heard Glenn's comments on that specifically earlier but what he was saying was that you got a handful in and that you get some out. We didn't get many coming out this time. There were three loans accounting for $16 million of which one or half of it already has been resolved..

That's right, Jim. We have got couple of classifieds, one's just paid off in full. One significant one was, got additional capitalization, already been upgraded and approved. So again, just, we would love you to think about our portfolio as having $10 million-$20 million to $30 million exposures that move around.

And we are in such a low state right now that anyone of those makes a basis point move for us that might appear on its face material, but again just working with it, with the guys just the other day and working with [Dan Bley] [ph]. We just don't see, we don’t see anything here that would suggest that there is anything other than a bump along..

Right. Overall loan quality is very good. And one other point I think we noted was the TDRs declined in the quarter also. And then you look at the days past due in the commercial or the consumer book and those levels are still declining..

Our next question comes from the line of Dave Rochester with Deutsche Bank. Please proceed with your question..

Nice loan growth this quarter. So given that strong growth on the loan side, the average pace you are guiding to seems to imply a little bit slower growth pace in 3Q.

Maybe if you could just comment on that and also on why the provisions should remain in this 2Q range if loan growth might slow?.

Yes, so I think, let me start now and I will hundred over to Joe. But with regard to the loan growth, the consumer side, you saw a significant growth quarter over quarter. And that was, some of that was a reflection of the market rates. We have seen [assets] [ph] slow down a little since the first quarter.

So that's factored into our thinking here on the residential side. And then on the commercial side I will let Joe touch..

Yes. Hey, Dave. I mean certainly the good news is that Webster has been investing in our people and our markets for some period for time. So we like to think that we have got more good athletes in various markets helping us do well.

But in fact, what happened in this particular quarter that we think will happen in next quarter is in some growth which we had expected to see in Q2, quite frankly, on the prepay side, and it's up even more specific with respect to our ICRE book. So that should have happened in Q2.

It probably will happen in Q3 and so how Glenn guided you is probably appropriate. Now we would love the surprise [indiscernible] on the upside to that but our guess is we think that should be our guidance for you..

Perfect. Thanks.

And as that relates to the provision, if loans are going to grow slower, why not a lower provision?.

Well, you know we have run it through our model so it's not -- it depends on each portfolio and that’s where we are right now. Once we get the loan growth, we look at our existing portfolio and that’s how we ended up being in the range of where we are today. As we indicated in the past, we like to be anywhere from 1.10% coverage to 1.15%.

And the model informs us about where we are. So it's going to depend on where the growth comes during the quarter as well as the existing portfolio..

But it's right. We are guiding to the same but it could be lower. Higher too, right. It could be higher, it could be lower..

Got you. And then just a bigger picture question on the efficiency ratio. It seems like you are talking about a lot of revenue growth in 3Q and I know you are reiterating that 60% or lower on the efficiency ratio. Shouldn’t we expect to see that ratio decline over time as the J.P.

Morgan expenses come out and then you have got the other fee income growth and the balance sheet growth continuing..

Well, sure. That would be -- the plan would be that over time, and we have talked about this, we ought to be able to get it down. What we are trying to be careful about is to continue to invest in our businesses, so it's not all a save. It creates opportunity that revenue growth to not only manage efficiently but to invest in the businesses.

So we are just trying to achieve that balance. And that’s why we are saying at this point on just a single forward quarter basis that we think we can keep it under 60%. Over time we think we can drive it down and invest in our businesses..

Great.

And can you guys just remind us how much in the way of net savings you expect to get as TSA rolls off through the first quarter next year?.

It's about $2 million a quarter. Somewhere around that..

$2 million on a quarterly run rate basis?.

Yes..

Great.

And then just one last one on your margin guidance? What are you assuming for securities premium and expense? Are you assuming that that increase we saw this quarter unwinds over the next couple of quarters?.

From a premium standpoint we think it will be about flat quarter-over-quarter..

So flat is baked into the zero to 2 down?.

Yes..

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

Hi, this is [Martin Kirsten] [ph] for Bob Ramsey.

Could you provide some color around compensation and expense increase? Was it full HSA related or is there something else?.

No. HSA is part of it but we did add staff, customer facing staff. And more significantly as we go through our annual incentive comp cycle at the beginning of the second quarter, so you get a full quarter of that. So if you look at base comp, all things being equal, you would expect that to go up about 2% on an annual basis. That’s driving it.

And then the last piece which is worth a couple of $100,000 as well to that number, as you saw our stock price went up about $2.50 quarter-over-quarter and the accounting for that probably is worth about $600,000 to $700,000 for the quarter..

Okay. Thank you.

Next question that I have is, what was the reason for the other income dropping by roughly $2 million?.

The other income included, I think as we highlighted in the first quarter call, the first quarter over second quarter swap volume was about half of where it was in the second quarter. I think Joe just said that..

It's correct..

Got it. And I guess lastly, I saw the [indiscernible] expense decrease quite dramatically.

Was that due to your facility optimization effort and do you think this is kind of a good run rate or is it more of a onetime thing?.

We had less now in the second quarter. And, no, seriously, we had about $1.8 million in snow removal expense in the first quarter. So you can call that seasonal, I guess, right. That’s the whole driver..

Our next question comes from the line of David Darst with Guggenheim. Please proceed with your question..

Maybe you could talk about competition in the HSA business and in a rising rate environment or in any other scenario why would other providers not raise deposit price increase or maintain or grow their portfolios at a faster rate?.

Well, they could. I think that again it's the balance there. I would say that most providers of HSA accounts or less concerned with the deposit rate than they are with the quality of the service they are getting from their partner. And the technology, the platform, the experience that their employees are having.

So we will just have to see what happens in a rising rate environment but we believe that these purpose driven long-duration, low-cost deposits are not going to have a high elasticity going forward. We will just have to see.

But that’s our view and to the extent that that does become a competitive factor in terms of what the rates are that are paid, we will be sensitive to that. But at this moment that hasn’t been the driver..

Okay.

And then in kind of same line, in the brokerage space or in the money market alternatives, could you also see that influencing your beta and it would be higher than you expect?.

We could but we have tried to plan for that in our projections..

If you were to grow that broker business, would it change your economic?.

Are you saying where we are sweeping to the investment accounts?.

That’s right, off balance sheet..

No. Actually we have planned for that activity. I think you probably know we have $1 billion right now that is managed in that fashion. So those tradeoffs there is obviously less expense that’s involved. It could be nominally lower revenue as well. But we look at it as part of the overall program..

Yes. And David they typically have higher balances, deposit balances as well. Those that sweep into investments..

So we don’t think it will have a meaningful impact..

Okay. And then, you have outlined what you are going to be spending on risk management this year and then also in the digital space, in infrastructure.

Is that already in the run rate in the second quarter or is that going to be building up and then offsetting some of the gains you have got going forward?.

Yes. David, that’s in the run rate for the quarter. There will always be additional capital spends particularly with respect to mobile banking and online expenditures like that. But the risk piece is all in our memory..

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

Just the first question on the jumbo mortgage business that you have been building out. Just remind us on kind of rate and term and that’s about 25%-26% of loans.

Where that could go over the next couple of years here?.

So it's primarily 30 year jumbos at about 4%. And as far as projections, I think that’s going to be subject to where the rate environment is..

Yes. It's the rate environment, it's how we want to manage the balance sheet, interest rate sensitivity, all those factors come together. But it's a great, it really is a great relationship development tool and very very high quality with a decent return. And our mortgage customers have six products with us.

It's not just about the mortgage loan, it's about relationship development. It's consistent with the mass affluent strategy. This is all positive..

Got it.

Similar type of growth for third quarter back half of the year?.

Not off the second quarter. I think you will see it taper down a little bit..

Then on the securities book, $7.1 billion in total balance.

Where do you see that just in terms of size over the next year?.

We see it staying relatively flat..

Okay. And then you are in a good position obviously with the HSA deposit business driving nice balance growth there at pretty low rates.

But what are you seeing across your markets for deposit cost trends, you know some of your competitors have much higher loan to deposit ratios and have to be a little bit more competitive on money market high yield savings.

What have you seen across each of your markets on deposit pricing during the quarter and more recently?.

We have noticed a little bit of percolation. Some of the community banks have been pushing rate a little bit, some of the larger banks have been having specials that they have provided. So we are tuned into it. We have our own set of specials we could offer. We haven't felt too much pressure at this point.

We haven't seen much uptick in overall cost to deposits. In fact in some cases we have been able to continue to drive it down. So we are alert to it. But as yet, it has not created a major event..

Okay. And one question on expenses? Your FDIC insurance ticked down a little bit, assessment rate is 10 basis points.

Is that where it stays for the next year or two?.

Yes. It will stay around that level..

And then you mentioned capital, I think it was 7.25 TCE ratio target.

Do you see any need for capital raising to support growth over the next 12 to 18 months or internal capital generation should be sufficient?.

Yes. I think we are good with that as we look out over 12 months..

Mr. Smith, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments..

Thanks, Christine and thank you all for being with us today. 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..