Great. Thank you, everybody. Good morning. Thank you for joining us for the first mid-cap bank fireside chat. We're pleased to have Webster Financial and John Ciulla, CEO. We hope this could be a little interactive as well. We'll have a few questions for the audience that you can use your BlackBerry there to respond. If you have any questions yourself, there will be an opportunity to raise your hand and ask questions. Maybe just to start off, John, thank you for joining us.
Great to see you, Jared.
Maybe just a little bit of an update on how things have been playing out so far quarter to date, and any general update you want to give.
Be happy to do that. I think most of you know Webster. We're an $82 billion regional bank. Our sort of in-footprint geography is Boston to Philadelphia. We've got about 200 branches densely through New York, up through Boston. Our businesses are about 75% in that geographic region. We've got a bunch of national verticals that make up the 25% rest of the bank. We feel, as we've said often, that we have a differentiated business model because of our unique deposit funding profile that includes traditional bank deposits, but also a really nice low-cost, long-duration, sticky deposit base in our healthcare vertical, which includes HSA Bank and Ametros. We also operate interSYNC and a direct bank called BrioDirect, and we feel like that's really given us a great advantage over the course of the last five years with all the volatility in the industry.
We operated at an 80% loan-to-deposit ratio. We've got a lot of deposit flexibility. Financial performance for the year has been really good. We're really pleased, and we think that's continuing into the third quarter. We have high returns. We're growing the balance sheet on both sides, and I think delivering for shareholders, our colleagues, and our customers. I think it's important as the financial performance shared as some of the strategic progress we've made. We're benefiting from the big beautiful bill with respect to an expansion of the addressable market in HSA Bank. We talked about that and opportunities for accelerated deposit growth there. We went live with our joint venture partnership with Marathon Asset Management, which we believe, while not really contributing to financials in 2025, will reinvigorate loan growth in our sponsor and specialty business.
Fortunately, our credit inflection point occurred at the second quarter, and we continue to see improvements in risk rating migration and resolution of problem credits in the third quarter. We have a lot of capital, a lot of liquidity. I think we're operating on all cylinders and feel pretty good about where we are. You know, top-of-tier return metrics, a really efficient operating model with an efficiency ratio in the mid-40s, and some good momentum on balance sheet growth.
Great. Thanks. I think maybe why don't we do the audience questions first, and I think some of that can help drive some of the conversation as well. We have five questions for you all. The first is, what is your current position in Webster shares? Overweight or long, market weight, underweight or short, or not involved?
I'm overweight and long.
Yes. Okay. It looks like some opportunity. You have 41% not involved, 41% long, and a couple of people maybe can change their mind.
Yeah, a lot. Not interested, but they showed up for the meeting, which is good.
Maybe we could rephrase that. The second question, which would have the largest impact on improving the relative valuation of shares of Webster? Number one, better relative margin performance. Two, above peer loan growth. Three, better expense control. Four, credit quality outperformance. Five, more active share repurchases. Six, an accrued bank acquisition.
Yeah, I'm not surprised by that. If I may make one comment, I think seven on that list would be what we anticipate to be a change in the indexing of the category four bank threshold, which I think you probably heard this morning and you've heard a lot. We think that that $100 billion mark is going to move up, and we think there will be a whole bunch of banks in the $80 - $100 billion range that have been trading at a discount that may re-rate if that regulatory threshold changes. We work hard on credit quality. I think sometimes people don't fully understand the makeup of our portfolio, but we're hoping that with continued positive risk rating migration, that that overhang will eliminate.
Great. We do have a question on category four a little further. Number three, what will organic loan growth be at Webster in 2026? We're one, 3% - 5%, two, 5 % -7%, three, 7 %- 9%, or four, 9+%.
I'm not commenting on that.
5 %- 7%, 50%, then 3 %- 5%, number two. Yeah, I mean, it feels like, you know, that's a general trend for most of the banks.
Agreed.
Okay. Number four. To what do you attribute Webster's current valuation discount relative to peers? Number one, size and category four concerns as John just spoke about. Two, general asset quality. Three, the Sterling merger overhang. Four, uncertain margin and NII trajectory. Similar to before, the asset quality. Hopefully, as we see continued positive trends there, that will be less of an overhang. Okay. Our final question, what do you think happens to category four bank regulation, or what do you think happens to the size threshold for category four? One, nothing. Two, the size increases with inflation. Three, it moves to $250 billion. Four, an asset size test is generally removed and it goes more to qualitative. Almost half of you think it moves to $250 billion.
I think if you force me to take a guess, I would agree with the audience.
Great. Maybe, you know, with all the conversations you've been having with your commercial clients primarily over the last six months, how has all the noise been sort of translated into how they're running their businesses, and what's the sort of the economic impact on the noise in the broader economy?
Yeah, I think it's interesting. Our clients have been quite resilient. If we had this conversation six months ago, we would have said that people were generally optimistic about policy for the new administration, but given all the tariffs, they're being a little bit slow in accelerating the investment cycle. I think we are clearly seeing, as an industry, in the second and third quarter, continuing an acceleration of investment, more loan demand across all categories, definitely a tick up in M&A as well. I think that a lot of our businesses, when we talk to them, we go out and survey them with respect to tariff impact and other elements, tax policy. I think they've just all been more thoughtful in how they're managing their expense base and managing their expenses. I think there's less fear, more optimism, and people are being cautiously optimistic.
You're seeing that translate into more loan growth in the industry. We're certainly seeing that at Webster and a continued build of the pipelines.
Is that translating yet into higher utilization rates? Are you seeing people drawing down existing lines to make those investments, or is it more taking market share and incremental?
I think for us, it's been more transactionally driven by M&A, property changes, and sales increase. I would say that right now, at least for what we've seen, and we haven't really done a detailed look at the third quarter, but as of second quarter, sort of a stable utilization rate. I'm not sure that all the working capital impact has flown into our utilization rates.
Okay, great. You know, you were one of the first, if not the first, mid-cap bank to really have a formal relationship with private credit with the announcement with Marathon Asset Management. I guess, you know, you'd mentioned that it's a little early to say what the impact or maybe there's not as much impact for this year, but how do you see that relationship developing over time? What are the opportunities for Webster coming out of that and other partnerships that could potentially be out there?
Yeah, I'll answer your last question first. I think we're not interested. This is an exclusive arrangement right now, and I think we need some time to kind of prove out the success of the partnership. For us, it primarily starts not with the investment income from the joint venture, but from giving us an implied bigger balance sheet in our sponsor and specialty group. There is no question, and I think I've been maybe in the minority of CEOs to say that private credit has mattered, and it has disintermediated some of the activity in that book, and I think across the industry. This is a way for us to continue to keep our risk profile and our risk appetite low, but be able to compete on a larger scale with respect to supporting private equity sponsors in their acquisition of platform companies.
As we've talked about, we're always very thoughtful in not putting too much risk into our balance sheet, but now we can go speak for a $100 million deal, keep $30 million or $40 million on our balance sheet, which is kind of our target hold sizes, and put $60 million of that in the joint venture, off of the balance sheet. Hopefully, that will increase our swings at the plate. When we do private equity lending, we get full relationships in treasury management and escrow and swap income as well. We'll be able to maintain those relationships and manage our risk on the balance sheet. There are originators on the other side of that at Marathon Asset Management as well. Once the funds get fully formed and mature, we should see a nice, reasonable flow of investment income, which we need.
Webster, we're always looking for trying to get sources of fee income. As I said, we'll be providing more detail on the economic impact as we get into 2026. Right now, we think it's already helping us in terms of building the pipeline in sponsor.
While we wait for more of that detail, do you see the more immediate benefits coming through in terms of fees and the ancillary services that you mentioned, or actually helping drive a faster, higher growth rate on lending?
I think it's a combination of those two. We hope to see, as these pipelines build, as we crest the year-end, stronger loan growth in those higher-yielding loan categories that we're very good at. We've been doing that business for over 24 years now. That comes with those loan relationships, deposits and cash management and swap and FX fees and others.
Okay, great. Webster does business serving the broader Northeast and the Eastern Seaboard as well as nationally with a lot of your national businesses, but you are headquartered in Connecticut and you're also a New England bank. Can you talk a little bit about how the local economy is doing? It seems like, as a Connecticut resident myself, the last 10 years were a little bit more of a struggle. It seems like things are improving. What are you seeing in terms of the local economy?
Yeah, it's interesting. I think it's quite strong. Connecticut in general, I think Governor Lamont's done actually a terrific job in terms of making sure that he keeps the business environment. I serve on the Connecticut Business Roundtable with the 10 biggest Connecticut CEOs and the Travelers and the Hartford and, you know, Electric Boat, some of the big companies. I think we've been effective at creating jobs. Connecticut, which had, as you said, had once sort of dragged the nation, seems to be doing well. That's benefiting us. I think it's an interesting trade-off always for us because you see a lot of banks that want to go strong in the Southeast and they're thinking about Texas and higher growth areas. All of a sudden you're seeing some kind of discounting of property values in Texas and Florida and some of those high growth.
We've never benefited from those same really robust growth rates, but we have benefited from an incredibly strong socioeconomic and stable environment. Like there's not too many places you want to be from a wealth perspective. From Boston to Philadelphia, it's terrific. I would say now we're seeing good growth. We're building local pipelines. I would say from a credit performance, the great news is that while there's not as much new business formation, property values have remained really strong, a very, very stable economic operating environment. We think it's a great place to be and we think we benefit from it.
You had mentioned earlier, Webster has been nimble with deposit funding and growing new areas of funding sources like HSA and Ametros and interSYNC. How do you see the growth dynamic on the deposits playing out in terms of where those sources are coming from, and are there opportunities for additional, maybe new deposit vectors like that?
Yeah, I mean, I think it's a focus for us. I think we realize deposits are the show, right? It's the most important thing, and we feel really well positioned versus peers. As I said, an 80% loan-to-deposit ratio, you know, in that healthcare vertical, we've got about $10 billion of deposits that probably have an average cost of 15 basis points, long duration, sticky, and that's a real advantage. I think we're a preferred partner or buyer in that healthcare space because we've demonstrated to people that we know how to execute. We are looking inorganically at growing that healthcare vertical, and we think we have a decidedly strong advantage in terms of doing that. It's also important to obviously focus on our traditional deposit sources as well.
We're investing heavily in our treasury and payment capabilities, drive commercial deposits, verticals like law firm banking and escrow continue to grow disproportionately to market growth. On the retail side, we continue to build out our digital acquisition capabilities. Clearly focused on growing the traditional bank channels, trying to continue to diversify and grow our healthcare vertical, which we think is differentiating. As I mentioned and you mentioned, we have interSYNC, which doesn't have a deposit cost advantage, but they are core deposits and they're a low cost of acquisition. We have, I think, six people working at interSYNC, and we have several billion dollars of deposits there. We can turn on and off our direct bank, Brio, when we need extra deposits in certain areas.
I think we've got this broad tapestry of deposits that when you put them all together, we have low cost, long duration, sticky deposits, but we don't kid ourselves that we can't rest on that. If we want to grow the balance sheet at a reasonable rate over the course of the next several years, we want to also continue to explore our ability to build out our diversified healthcare vertical.
Great. Maybe shifting to the margin, what are some of the major drivers of the margin here going forward, and how are you positioning for what seems like a likely few rate cuts certainly in the near term?
You know, I usually defer NIM questions and refuse to answer them as CEO. I defer them to Neil, but no, we'll take a shot at that. Look, we've got a robust NIM relative to peers. I think we ended the second quarter in the low 3.40%s. You've heard Neil talk about our exit NIM at the end of the year being a few basis points below that. It's really driven pretty simply by the sub-debt issuance, which we were very proud of that we announced last week, that dilutes NIM by a basis point or two. It has to do with the seasonality of our government deposits in the fourth quarter, where they tend to be seasonally lower, and the fact that we continue to onboard high quality, lower yielding loans. We think we can maintain that NIM in that 3.30%s range, 3.35%ish range as we go forward.
With respect to the impact of rate cuts, one of the things I'm really proud of the team is, pre-merger, going back five years now, Webster was very asset sensitive and it was very, very difficult to manage because we had these really low-cost HSA Bank deposits driving most of the growth and a lot of our loan growth was coming in higher yielding variable rate sponsor loans. The balance sheet changed, became more neutral through the MOE itself. Fast forward almost four years later, we've also done a whole bunch of things internally in terms of loan mix, in terms of hedging so that we are pretty much neutral to rate cuts. When we talk about the NIM being slightly lower in the fourth quarter, it's not driven by our expectation and our base case on rate cuts. It's simply driven by those dynamics that I mentioned earlier.
We're pretty neutral and we feel good about positioning with respect to the Fed actions coming at us.
In terms of expected deposit beta, still feeling that you're able to maintain that as we move through the next year.
Yeah, I think Neil's been unique and accurate in talking about the beta on the way down to a higher neutral rate being a little bit lower than the beta on the way up because people at a 4% Fed rate still have different deposit behaviors than they did when rates are zero. Yes, our guidance in the second quarter there holds. I'd make one comment that with respect to deposit pricing, going back to my earlier statement about it being the show, right? The only people that are growing deposits, core traditional banking deposits, are the G-SIBs right now, right? All of us are competing for price. I think we've all taken a lot of really good actions to lower deposit costs, and there may be another leg down when the Fed moves.
We don't anticipate or put in our base case significant opportunity in deposit pricing over the next couple of quarters because that competition is kind of offsetting the rate moves.
Let me see if there's anybody in the audience that has any questions. Just please raise your hand and we can get you a microphone.
Hi, thanks. For the industry, maybe, what do you anticipate future loan growth in terms of, like you described it as being strong due to transaction volumes, consumer economy slowing a little bit, maybe we get a Fed cut that could free up some more CRE transactions, but like two years out, what are your thoughts? Thank you for Webster or the industry. Appreciate it.
Yeah, obviously not going to give guidance going into 2026 and 2027, but I think where the audience got that question is probably the right range, 5% - 7%-ish, as you think about shifts in mix and you think about private credit being a little bit of a damper on bank industry loan growth in certain categories. I think if you see a good, robust economy growing, maybe a little slower than it's growing now, we don't see a recession. I think that kind of mid-single digits to 7% is probably the right range for the industry.
Anyone else? Just to repeat the question, on the HSA Bank side, what are you specifically doing to help grow that?
Yeah, I think there's a number of things. Obviously, we continue to build scale and staff and sales and relationship management capabilities that, in essence, will be able to capture what the expanded universe is in terms of what the new eligible participants are, making sure that we continue to be a leader in educating people as to why HSA is such a valuable tool for helping people manage their wealth and their health. We're looking at a few new interesting opportunities in the Medicare space across both Ametros and HSA that we think will continue to grow.
We also, and I know we've been talking about this for a while, so it may sound a little hollow or flat, but given all the work we've done on our digital capabilities, we are as close as we've been to being able to try and offer additional banking products, deposit services, emergency saving accounts, and other digital banking products to the 3.5 million HSA account holders we have, which we think could provide opportunity going forward as well.
Maybe following up on the HSA, you know, we did see the improved or the higher addressable market from the big beautiful bill, but that was cut back from some of the initial proposals. Do you feel that those are fully dead, that there's no sort of readdressing some of the other avenues such as raising the limits for contributions, or do you think that there could still be additional improvements to come?
I think, let me put it this way, I think that, you know, there have been times over the last 10 years when we've talked to you all and there was a risk to performance from a policy perspective and then real opportunities. I think the good news now is that all of the balance goes towards future tailwinds, although I'm always hesitant to say. I think that there's actually bipartisan support for some of those other elements that were in the big beautiful bill, like higher contribution limits and other elements. I don't think it's high on Congress's priority list now. The ABA Council on HSA, us and the other big four or big five players in the HSA industry continue to be very active in terms of talking to Congress.
I think the bias is towards, yes, there can be more opportunity, but realistically, I would say in the short term, we don't see it happening.
Any other questions out in the audience? I'm sorry, if you could use the microphone just so we could hear it. Thanks.
Yeah, the JV with Marathon Asset Management, how would that, could you speak about how would that work when you originate new loans? Is it them originating and you taking a piece of it or joint originating?
Yeah, I mean, it's kind of a combination. The strength that it's live now, right? It has a separate credit committee. There's no risk put back to the bank. It's at the holding company ownership, right? Our strength and our contribution at Webster to that joint venture is our origination capabilities. I would say if you think about it, we would be doing more of the origination. Their strengths are on the administration side, fundraising side. There's a separate credit committee. They have to make decisions. The way we look at this is our origination capabilities. It gives us the ability to go out and speak for a larger transaction and a more complex transaction without having risk build up on our balance sheet that's outside of our risk appetite.
You think of us as being the primary originator, although they will be originating some loans for the fund and that they know how to do this because they've got many, many funds already raised, already operational, and already administered. There's a question way in the back. Oh, sorry. Sorry, Jared, you're running the show.
Hi, thank you. I think, you know, so far we've seen a pretty substantial expansion of capital markets activity. Broadly, there's been an improvement in M&A activities. I would love to hear how that's impacting your sponsor and specialty business and potential improvement of volumes there. Thank you.
Yeah, it's a great question. I'd love to say that we're seeing right now our sales and syndication activities are really strong in commercial real estate, interestingly enough. When we built out our capital markets capabilities, we were able to generate a lot of underwriting fees out of the gate in sponsor and specialty. The reality is most of the middle market private equity sponsors we're dealing with right now don't want to deal with syndication processes, multi-bank bank groups.
One of the reasons we've entered into this asset manager partnership with Marathon Asset Management is that we think we can be more competitive without having to go through a syndication process so that we can take down transactions, $75 - $125 million, give that one-stop shop feel that all the private credit folks are delivering to the middle market sponsors now and be able to be as seamless as they are. Yes, we are seeing more capital markets activities. Our capital markets fees have increased over the last couple of quarters with respect to activity and broader activity in the loan market. There really hasn't been a silver bullet that we're jumping on the bandwagon and expecting significant syndication fee growth over the remainder of the year because of some of those dynamics I just mentioned with private credits.
Maybe, is there another?
No, maybe not.
Okay. Maybe shifting to credit quality, that showed up as two of the areas that could drive valuation improvement for Webster. As we look over the last few years, you have seen an uptick in non-performers and criticized and classified. You sounded optimistic on the last few calls that you have everything identified and now things are resolving. Maybe just walk through a little bit thoughts on credit, both as the former Chief Credit Officer and as the current CEO, and how we should, from the outside, be expecting to see sort of mile markers for resolution.
Yeah, the credit question has been really interesting for me over time because, you know, we have operated generally in our expected loss range, and we've guided towards that 25 to 35 basis points in charge offs. I don't know whether people in the room, whether it's having not been through credit cycles or having different views, I think people feel like there was significant credit deterioration. We certainly don't feel that way. If you look at us putting up high teens ROATCs with provisions, you know, in the $50 million mark, we can operate and still deliver top-of-tier performance at the credit performance we've had over the last 12 months.
I've talked a lot about the fact that in a $50 billion loan portfolio, the vast majority of our non-accruals, charges, and classified commercial assets have come from two relatively small discrete portfolios, one being office, and we've taken that portfolio down from $1.8 billion to under $800 million at a pretty good economic cost, if you will. That portfolio, we feel like we've got it at least ring-fenced. Obviously, we still work through a few credits there, but you're starting to see some of the troubled credits work down. The other portfolio was under a $1 billion portfolio in healthcare services and really about $300 - $400 million in doctor's practices and other roll-ups that contributed significantly, and we're seeing some stabilization there. For me, you know, we had outsized contributions from very small portfolios.
Our risk rating profile has continued to improve even during that period of time in terms of the fact that we're onboarding credits with better weighted average risk ratings than the existing portfolio. Now, fortunately, we're seeing that inflection point that we guided to at the beginning of the year where we saw problem loan resolution, less negative risk rating migration in the second quarter. We're seeing that continue to improve in the third quarter. We feel very good about our portfolio. As you said, I think sometimes I might do us a disservice by always being conservative, but I am a former Chief Credit Risk Officer coming out of the great financial crisis. I know you can't promise credit performance, but we've got a great Chief Credit Risk Officer. We're very proactive in the way we monitor.
We've got great tools, and we don't see any kind of correlated risk in the portfolio that's making us particularly concerned right now. We anticipate there to be continued stable credit performance and improving moderately over the course of the next, you know, several quarters absent a recession.
One of the other topics that came up in the audience response was the category four bank threshold. You've done a lot of work preparing for, you know, a larger balance sheet. If we do see some tangible change to what category four is or what's required, how does that impact your expense trajectory, and how does that impact maybe the areas you would look to spend money in the future?
Yeah, it's a great question. I think, you know, what we've said publicly and we've said to all of you is that the work we're doing on liquidity and capital management, on reporting, on data, and some of the other areas that are really the big categories, the big rock categories on LFI and category four, you'd want us to be doing as owners of our bank anyway because it makes us more resilient, gives us more optionality to go on offense and to grow the bank safely and soundly. There is no question that if, in fact, that moves to $200 - $250 billion, that does give us opportunity because in every regulatory bill, there are some check-the-box activities that we wouldn't have to do. Clearly, we would be much more able to dictate the pace of those expenses and those investments over time.
I think if you do see it in the short term, and there seems to be some expectation that in the next several months, we may get a really good signal as to where that line ends up. We do have some opportunity to impact our P&L in the short term by either eliminating, but maybe more frequently extending and rolling out the investment period to those bills. We think it could be favorable for us. We'll talk about that. As we know more, we can talk about formally more of the impact on the P&L.
One of the other, I guess, benefits of an improving regulatory environment is we're seeing more bank M&A. We're seeing banks feel more comfortable utilizing some of that capital that's been built up over the past few years. What are your thoughts on capital deployment in general, capital levels from here, as well as what role Webster plays in M&A going forward?
Yeah, it's a great question. Obviously, I think we're going to see more. We saw another deal announced this morning. We're going to see more consolidation. I think that's natural, and there's this window. Let me start with capital management. You know, we stick to our story. If we can see accelerated loan growth and we have organic opportunities to deploy capital, that's first prize. From a secondary perspective, we talked about continuing to build out our differentiated deposit verticals. If we saw opportunities to do tuck-in acquisitions in the healthcare space with excess capital, that would be something that's interesting. Obviously, if there's nothing that makes sense economically for us, then we look at returning capital to shareholders. We've been very active in our share buybacks in the first half of the year.
We have continued to repurchase shares in the third quarter, and we will continue to do that absent other places to deploy capital. We have a short-term operating goal at 11%. We're generating a lot of capital. We think we can operate long-term at 10.5%, and I think we're getting to that inflection point where we can make that decision. We will continue to, you know, look at the regulatory landscape, look at the opportunities in front of us, look at the economic trajectory, and, you know, continue to use that as our guidepost. If we don't have organic uses, or tuck-in acquisitions, we'll look to continue to return capital to shareholders. As it relates to Webster's view in M&A, you know, I think we are decidedly, we're going into our October, you know, board, three-year strategic plan.
Bank M&A is not at the top of that list in terms of what we want to do. We feel like we've got a lot of good running room to continue to post better than market returns, continue to demonstrate that this 90-year-old bank in October, 90-year-old bank, you know, had a successful MOA and transformed the bank into a larger financial company and that we've got really good organic growth capabilities, a very efficient operating model, the ability to generate tons of capital. That's not to say we're going to have our heads in the sand. If we saw strategically the ability to add to our deposit franchise or do things, obviously we would have to look at that if it was economically compelling. I once again say that I would not expect Webster to participate in a transformational bank M&A deal in the short term.
Any other questions for John in the last few minutes? Any closing comments in the last minute here?
No, I don't think so. I think it's a really interesting time for the industry. We were commenting as a management team, it just feels a little calmer. I think within that calmness, obviously there are a bunch of things that we need to navigate and the industry needs to navigate. There doesn't seem to be that immediate external negative impact that we're trying to navigate through. I think Webster's uniquely positioned to take advantage of the landscape and the operating environment over the next four to six quarters.
Great. Thanks very much.
Thank you. Thanks for having me, Jared. I really appreciate it. Thank you.