We're here, fireside chat with Webster Financial. John Ciulla here, Chairman and CEO. And thank you for being here, John.
Thanks, John, for having us.
Yeah, it's great. And this is the first fireside chat at this event that we've had, so I especially appreciate it. And, maybe you could just provide a quick overview of the company. What is Webster? We have a lot of people here that already know what your company's all about, but our investor attendance is up about 30%. A lot more generalists interested in the industry, and I think you have a good story to tell.
Great. Yeah, thank you. Webster is an $80 billion regional bank, founded 90 years ago, this October. So, a long and interesting history. We operate primarily from Philadelphia to Boston. Great demographic, maybe a little more slow growth, but obviously from a socioeconomic perspective, a very good and vibrant market. Our assets and our activities are generally about 75% in that Philadelphia to Boston market with respect to commercial activity and retail branch footprint. And then we have about 25% of our revenue generated on national businesses that we've been in for a long time, mostly commercial focused. And I think for us, the differentiator starts with being a really good deposit gathering company. And we've got we always put it, the second slide in our earnings deck every quarter is our deposit profile.
I think we have. We feel the most differentiated deposit profile of any of the banks in our peer group. It starts with kind of great traditional retail deposits, commercial deposits, small business deposits, government deposits. But we also have some unique deposit verticals, IntraFi, which we acquired a couple of years ago, timely, right before the March madness of two years ago, which gives us low cost of acquisition, not necessarily low cost deposits, but core deposits that help fund our growth and our balance sheet. We have HSA Bank, which most of the people that follow our bank are familiar with. We're the largest bank custodian of health savings accounts in the country. That's an industry that is largely consolidated, 70% among the top five players.
We sit squarely in the fourth position with a really good market share and almost $9 billion in low cost, long duration sticky deposits. Then most recently, we acquired a company called Ametros, which provides banking services to people in settlement or workers' compensation settlements. Again, the average cost of those deposits is about 7 bps . We crossed a billion dollars this year, and it's growing at a 25% CAGR. I think that serves us well. When you look at our positioning, we've got, you know, an 80% loan to deposit ratio, lots of liquidity. For us, it starts with having liquidity flexibility, good core deposits, low cost and long duration deposits. We have a commercial bank that has a bunch of levers we can pull, very diverse in terms of our origination capabilities, the traditional in-market, middle market, commercial real estate.
We have a more regional institutional commercial real estate practice. We've got asset-based lending, equipment finance, small business, and then what's been a differentiator for us in the past is this 20-year sponsor and specialty business where we've got some great industry verticals, and we think it's been a real differentiator for us, particularly when in certain sectors of commercial bank loan growth gets stuck, we've got a lot of levers to pull to continue to grow the balance sheet. So, really happy about where we are. We've got a lot of capital. We've got a lot of liquidity. We run a very efficient bank. Our efficiency ratio is in the 40s. It's really a function of the types of businesses we're in, and that's allowed us to sort of continue to consistently generate higher than peer returns over time.
Perfect. Also, I'll just note that we are open for questions. So if anyone has questions throughout the session, put up your hand and we'll get you a microphone for questions. So, John, topical maybe is just the economy. Maybe there's uncertainty, maybe there isn't, I'm not sure, but how do you feel about the economy in your region in general? What are your thoughts on maybe some of the tariffs and if there's any impact that you think about there?
Yeah, it's great. It's interesting. I mean, I think the general view is that there's a positive outlook on economic growth. I probably subscribe to the idea that the probability of recession is relatively low. In our market, when we talk to our commercial and consumer borrowers and clients, there is decidedly more optimism than there was pre-election. However, we haven't seen that translate into an acceleration in the investment cycle. And I think that goes to your exact point that we're seeing a bit of whiplash now with respect to some government policies and tariffs, and even geopolitical issues that I think have people feeling good about the fundamentals of their business or the fundamentals of their personal balance sheet, but also a little cautious and waiting for the dust to settle to see what happens.
I think, as we mentioned earlier, as managers and stewards of everyone's capital, we are similarly feeling good about the long-term future of the economy. We're feeling good about a more constructive regulatory environment, but we're not making any bold moves right now and counting on anything happening in the short term, so we're managing our bank and positioning ourselves for what should be a good environment for banks over the next couple of years.
Okay, good. It was interesting going through all your businesses and some of the businesses that you've added in the past, and I think they're great additions, but talk a little bit about your strategic priorities for 2025. What are the top few things that you're focused on?
Yeah, I'd say from a business perspective, it's continuing to invest in and maximize the potential of our interesting and diversified deposit verticals. You know, we've put HSA and Ametros in a single operating unit, run by our President and COO, Luis Massiani, that many of you may know, a very talented executive. And there's a lot of opportunity for us there, not only in those core businesses as we invest in sales capabilities and technology and user interface and customer experience, but also we are in the early stages of finding ways to sell additional banking products and services to those clients. We have 3.5 million HSA account holders and some 50,000 Ametros clients. And so we have opportunities there to sort of move horizontally and do more with them from a business perspective. So healthcare vertical is important to us.
We continue to invest in teams and expansion in our middle market and commercial business. So I think we can go on offense there and continue to take share from others by adding talented people. And then internally, as you know, we're in that fun position, I would say, of you know just getting towards category four. So you've heard us talk on our calls a lot about investing more in the infrastructure of the bank, the risk and compliance paradigm, and structure. And so, that's also a top priority of ours as we move forward to give us the most optionality we could possibly have as we move forward towards a hundred billion and we figure out what this regulatory landscape really looks like.
Let's talk about that a little bit more because it seems like the goalpost may be shifting. And so philosophically, I know that there are some expenses and debt that might come into play, but how do you think about that philosophically and how do you just manage through them?
Yeah, I think it's a great question and we get, we get that a lot. So I think we found a way to sort of have a deliberate build of expenses. And these are things like, you know, liquidity and capital management, regulatory reporting, first line risk infrastructure, all of the things that are kind of required from a governance perspective as you approach category four. And when we're asked, hey, that a $100 billion barrier might go away, that's not our base case. It might get less onerous. I think what we're trying to do is be thoughtful in how we build. I think I said on the last earnings call, probably 3/4 of those expenses that we've talked about as shareholders, you would want us to do anyway to build a more resilient and more industrialized bank, right?
That will allow us to do acquisitions, that will allow us to navigate whatever the future holds for us. And then there might be 25% of those expenses that are a little bit regulatory check the box, right? Not tailored. And what we're trying to do is stagger those expenses so that if the $100 billion barrier goes away or if the requirements of becoming a large financial institution change, we can kind of pivot away and defer some of those out year expenses. So we've been thoughtful in, first of all, planning the journey, but also trying to prioritize and layer those expenses in so that if the regulatory paradigm changes, we can not make those expenses that we feel are more regulatory check the box rather than building resiliency and building a great infrastructure for the bank.
Okay, good. It's interesting. It's an arbitrary line, but at your asset size, do you feel like you have any advantages or disadvantages at your current asset size and you feel like you're fully competitive to your larger competitors?
We do. You know, when we first did this merger of equals three years ago with Sterling, I really thought it was kind of Goldilocks. I felt like we had a big enough balance sheet to support our relative to peers' sophisticated commercial banking activities, including sponsor and specialty, but yet we'd be small enough and nimble enough to be able to kind of outmaneuver some of the bigger regional banks. Obviously, after March madness and some of the events of last year, the regulatory scrutiny at all the banks our size, say between 75 billion and 100 billion, got a little bit sharper and some of that advantage went away.
But specifically to your question, I think that at our size, given our treasury management products, the size of our balance sheet, the sophistication of our bankers, our capital markets activities, that we are in a good position to compete with anybody in our marketplace from the very big guys, to people smaller than us.
Okay, great. You called it Healthcare Financial Services is an objective business for you to grow. Talk a little bit about that, the appeal of that business. And I think there's also maybe some fee synergies and potential other areas that you can grow there.
Yeah, absolutely. The core businesses there, HSA and Ametros, have some real. They're different businesses with different end users, obviously, but they have some similarities. They're both B2B to C. We know how to manage that. In other words, we acquire clients basically through large employers or through insurance companies in the case of Ametros. But then our relationship really goes to the end user, the individual that has the account. And as I mentioned earlier, I think our focus is number one, continuing to drive deposit growth and fees in those two businesses because they come with both. And that helps us because we want more fee income. But we also have an opportunity to, for example, we're exploring emergency savings accounts and other lending products to HSA clients. We're looking at providing more traditional banking products to some of our Ametros clients.
So we do think that there are opportunities to kind of manage that space and explore the large client base that we have and penetrate and provide more solutions and services to those clients. And there are some sort of broad synergies in terms of managing those companies as well. I also think, and Neal, our really talented new CFO always mentions that because we're active in that market, we're kind of a preferred acquirer. I mean, I think we've got, you know, Ametros was not done through an auction. You know, we paid for it, obviously, but, you know, we think we're a preferred buyer because of our experience in the space.
We think investors should be confident that when we do a tuck-in acquisition in that space, that we have the ability to actually deliver the financial results that we expect, because of our experience in doing it through HSA and through Ametros.
HSA is an interesting business. I mean, there was a lot of noise around it a couple of years ago, given the high value of that in a higher rate environment. But how do you think about the value of that business? Do you see any threats to that other than maybe just tough competition?
Yeah, we really don't. It is a great business. Do I think that, you know, it's significant, it's not as appreciated as it might be, certainly in terms of some of its standalone peers and so forth and some of the valuations. As you know, and I've said this on almost every earnings call when people ask, every quarter we do evaluations to make sure that what we're doing with HSA and our strategies deliver the most value to shareholders.
It is clear that from our vantage point, having $9 billion in deposits and $5 billion of assets under management and our ability to deploy that funding and our ability to manage and the fact manage those businesses and the fact that our clients like their money to be with a bank, that it's best inside of Webster. I always tell people, even though the industry's slowed from those who remember five years ago, 20% CAGR, to more of mid to high single digits in terms of account and deposit growth, it's still a channel that for a bank, if you can grow 17 bp s deposits at 5%, it's still the most productive deposit gathering channel we have. I don't see any immediate threats. You know, we obviously are very much involved from a lobbying perspective in Washington.
In my eight years in this seat, it's been interesting. It went from, boy, they're gonna, there's gonna be legislation to open up HSAs to everyone with increased contribution limits. It could be decoupled from high deductible health plans. Then, of course, when Bernie Sanders and others were running, it was, it could be in trouble because we might move to a single payer system. You know, throughout we felt very comfortable that HSA accounts have become very much like 401(k)s. The penetration is significant. And people are relying on that as a great way to control their own destiny from a healthcare perspective, and a great way to save for the future as well. So we don't see anything on the legislative docket. We don't see anything in DOGE or in savings with respect to government cuts that would impact HSA negatively.
Great. Thank you for that. Loan growth outlook. What, what do you think will be the key drivers of your mid-single digit loan growth outlook?
Yeah, I mean, I think, you know, we did 4% loan growth last year and we basically shut down commercial real estate for a while when all the focus was on CRE concentration. So I think our 4% to 5% year-long loan growth, we think is pretty balanced and doesn't have us betting on, you know, a huge M&A spike or incredible hockey stick at the end of next year. So I think it's the fact that we've got a whole bunch of verticals. We're doing some mortgage origination. So I think given the portfolio of origination channels, it's kind of BAU based in with good solid optimism in our commercial client base. I will say that the first quarter, and you've heard, and we've heard at your conference, has been a bit slower from an industry perspective.
You know, my take on that is first quarter, number one, is always the seasonally slowest quarter. And then it goes back to the aforementioned volatility, if you will, in the new administration. I think that's keeping people a little bit on the sidelines from an investor perspective. So first quarter loan growth may be a little slower, but we feel pretty confident in our 4% to 5% annualized loan growth.
Okay. Thank you. You've talked about a modest increase in the margin throughout the year. You have a couple of cuts embedded in there. Maybe talk about some of the puts and takes to the margin outlook and, and how you feel about the current rate environment.
Yeah, our NIM is gonna be higher in the first quarter. We talked about that. We kind of exited the fourth quarter with a high NIM rate. And the first quarter for us, we get the vast majority of our HSA deposits in. We have a seasonal high point in our government DDA. It's offset a little bit by our traditional DDA, which is seasonally lower. But those dynamics and the impact on cost of deposits should allow us to have an increased NIM. And you heard Neal talk about that on the last earnings call. It then sort of moderates a little bit for the course of the year. So we're 335 to 340 for the balance of the year. We've done a terrific job for those of you who followed us for a long time.
Webster was extremely asset sensitive and we had a tough time kind of moderating that because we had these fast growing, you know, SOFR +4 sponsor and specialty loans, that were variable being funded by HSA deposits. And when rates came down quickly, we've done a great job organically and through targeted caps and collars and swaps, been able to kind of get us neutral to the short end. So we're feeling pretty good about no matter what happens from an interest rate perspective, that we've managed the balance sheet appropriately so that it won't crush us or benefit us too much in either way. I will tell you that the steepness of the curve and the shape of the curve matters.
You know, right now the long end's down a bit and that's a, that's a bit of a headwind to us, but it doesn't have us changing our full year guidance on NII or NIM at this point. I think, you know, the way we look at it, we feel really good about our execution capabilities. It's really asset growth and the shape of the curve that could be, you know, industry loan demand and the shape of the curve that could be headwinds or tailwinds on either way, but we still don't see it taking us out of our low to high end of the range.
Okay. Ideal rate environment would be a steeper curve. How about on the short end? Any preference there?
That's it. I think we're relatively agnostic now to the short end of the curve, but we would love to see a steeper curve as we move forward.
Okay. What are you seeing on deposit pricing? You've been able to bring, continue to bring the deposit pricing down?
Yeah, we have, and I think we're being thoughtful about it. You know, we wanna cut a great bargain with all of our, our depositors, but we have continued to see opportunities on exception rate pricing, on CD repricing, to continue to move deposit pricing down. And we have not yet seen sort of reluctance on the, the part of the depositor, or seeing any significant pushback. So I think that will continue throughout the year. Obviously, we think that the, what, where short rates end up will maybe allow us to, to be more aggressive if there are more cuts than we anticipate. But obviously that also has an impact on our SOFR- based variable rate loan. So I would say we're generally agnostic and we've been able to thus far meet or slightly outperform our deposit pricing decreases.
So it sounds like you're pretty, pretty comfortable with the net interest income outlook that you've laid out.
Yes. Yes.
Okay. Good. Anything else that you wanna highlight in terms of how the quarter is shaping up? We've covered net interest income, but anything else you wanna flag?
Yeah, maybe on credit. You know, I've gotten a lot of questions at various conferences and on the phone just about, we made a statement that we thought 2025 would be kind of an inflection point in our credit journey. And I, you know, I think we still stand by that. And I think what we're seeing already is some stabilization in underlying negative risk rating migration. So we're seeing that sort of balance out. I do think that, you know, it'll take us a couple of quarters to work through higher NPAs and these higher charge-offs we've experienced the last couple quarters. But again, it doesn't really change our outlook or the fundamental run rate on our provisioning. And it shouldn't, given our strong capital generation and profitability impact our guidance with respect to performance.
So we do think 2025 will be a stabilizing year for credit. And it may take us a couple of quarters to get through some of the more stubborn portfolios with respect to NPAs and charges.
Okay. That was the next topic I wanted to go to was credit. So you took a lot of it, but that's fine. Just key areas of concern. I mean, a year ago we sat here and we were all thinking about one of your peers and how that might impact you. And it unfortunately impacted your stock price, but it, what are the key areas of concerns from here?
Yeah, I think it's interesting. And I'm always reticent to make great promises on credit. And sometimes I get accused of being too conservative. I was the former chief credit risk officer coming out of the Great Recession. You know, for us, the story has been around credit costs have really been around two discrete portfolios that people have heard me mention over the last year. It's our office portfolio. So we're in the same boat as others and our healthcare services portfolio. And that's really a question of inflation, higher input costs, lower reimbursement costs. And so both of those portfolios are pretty discrete. I think our healthcare services portfolio is in the $700 million range. And our office is now down around $800 million. And, you know, what's left in those portfolios has better credit metrics than the things we've been working through.
So I'm encouraged by the fact that we haven't seen any other sort of discrete portfolios pop up as a place of problem. Obviously, I think that if we do get lower rates over time, it will help on all of the real estate, you know, refinancings that the industry has to take. I think that's more industry-related than us. So I think if we do see lower rates, I think it takes some risk off the table on real estate, as we move forward. But, you know, otherwise the portfolio is performing pretty well. And I just hope, you know, I'm talking to some people that don't remember the Great Recession, they're wondering whether this is a credit correction or not a credit correction. You know, we really haven't seen a real credit correction really since 2008 and 2009.
As long as we get sort of this balanced economic growth over time, I feel pretty good about the portfolio performance.
Okay. Back on some of the migration you're expecting, anything surprising there? And I, what I'm getting at is the reserve levels and the kind of the provision outlook. It feels like it's not surprising. You're expecting a crest and an inflection later in the year. Am I thinking about that the right way?
Yeah, I think that's right. I think that's right. And you know, it's tough under CECL to be giving people, we do not give guidance, obviously on our provisioning. You know, I look at where the market has us right now. I think our expectations, we keep talking about that 25 to 35 bp kind of annual, annualized charge-off rate. And then you look at what's commensurate with the provisioning. But obviously under CECL, if you start to get more aggressive and optimistic future economic forecasts, that impacts your model. But for us in our base case, we sort of think of 2025 very much like we thought of 2024. So I think that would give some people kind of some guardrails around where we think, credit costs and provisioning will be.
Okay. Very helpful. Touch on Private Credit a little bit and the Marathon Joint Venture, just quick description of it and what kind of objectives and outlook you have for that business.
Yeah, sure. I mean, private credit is, you know, here to stay, unlimited pools of capital, unregulated, and continuing to, I think, compete formidably with banks across more asset classes than people probably think. For us, and we talked about it on our calls, the competition has been stiffest in our sponsor and specialty business. One of the moves we've decided to make as a management team, which I think is thoughtful, and we've taken our time to make sure we have the right partnership is a joint venture with Marathon Asset Management, an established private credit provider, and we should go live sometime in the second quarter.
Very simply, what we believe that joint venture will allow us to do is sort of have an inherent larger balance sheet to be able to compete on middle market sponsor credits at a higher level than we do now without having us put any additional credit exposure on the balance sheet because we wanna make sure that we're managing our credit appropriately. Then ultimately, once the joint venture gets up and running as a GP, we will get nice investment income coming back, which should enhance our, our non-interest income as well. So we think there are a number of benefits to that.
Give us a little bit more flexibility on structure, allow us to participate 'cause our clients want us to in larger transactions without going larger with respect to our on-balance sheet credit exposure and ultimately getting a nice source, and flow of fee income in. We have not layered any of that into our 2025 guidance. And what we've decided to do, and we've told all of you on our calls, is that as soon as we have it up and running and we seed the fund, we will get a little bit more granular on what it means for us economically.
Okay. Great. Couple minutes left if anybody has anything. Okay. On capital, what's the Ciulla, Holland view on capital at this point? You have a fair amount of capital, but how would you like to eventually get down to your target?
The good news is the same, but Holland and Ciulla, we're aligned. It's similar to what we've said. I think we've been pretty disciplined around, obviously we wanna finance organic growth to the extent we have higher balance sheet growth and loan growth. I think we are absolutely interested in enhancing our healthcare services vertical and looking for other businesses that might be good tuck-ins, and have good, obviously economic return profile and don't dilute tangible book value too much to continue to expand our advantage from a deposit and fee perspective. That would be a second use of capital. And then if neither of those are there, we obviously have generated a lot of capital and we have 11.5% CET1. So you should see us return capital to shareholders through buybacks if number one and number two are not using capital for us.
Okay. What is your thinking on M&A? There's a lot of discussion around it. I guess maybe the theme is there are a lot of potential buyers and no potential sellers, but how do you feel about M&A and is it of interest to Webster?
Yeah, I mean, I think it is. I think we're building a really great franchise and I think scale continues to matter in another, a number of dynamics. What I've said very transparently and honestly is that right now, given the regulatory paradigm and the work we're doing on building the infrastructure of the organization, it's highly unlikely over the next, let's say, four to eight quarters that we would be engaged in whole bank acquisition. We believe we have a reason to exist and that we've got a good path organically, to be an independent bank and to continue to deliver outsized returns to our shareholders. So I think what we're doing and our view internally right now is if there are tuck-in acquisitions to strengthen the deposit and fee franchise, we look at it.
Then all the other work we do puts us in a position of optionality that if the regulatory landscape gets a bit more constructive on M&A and we're ready because we feel like we've got the right technology and risk and data infrastructure, that we'll be in a really good position to be a buyer for eight, 12 quarters out.
Okay. Great. Almost at the end of time, we can end it here, but is there anything else that you feel like we haven't covered that you'd like to cover?
No, that was pretty robust. I appreciate everybody's interest in the company, and I look forward to seeing. I know a lot of you in one-on-ones, and thank you very much for hosting us today.
Thank you. Wonderful.
Thanks.