Good morning. Welcome to the Webster Financial Corporation Second Quarter 2022 Earnings Call. Please note this event is being recorded [Operator Instructions]. Comments made by Webster Financial's management team may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about the risks and uncertainties which may affect us. The presentation accompanying management's remarks can be found on the company's Investor Relations site at investors.websterbank.com. I will now turn the call over to Webster Financial's Chief Executive Officer, John Ciulla. Mr. Ciulla, please go ahead.

Thank you, Chantelle. Good morning, and thank you for joining us for our second quarter earnings call. I am excited to be speaking with you this morning on our quarterly results as I think they are a great illustration of the potential of our company, the quality of our execution, the team we put together and our colleagues’ focus and dedication as we progress through the integration. I am going to start with a high level overview of our financial performance in the quarter, review the progress of our integration and other strategic initiatives, and then I’ll turn it over to Glenn for a review of the quarter’s results and the outlook. I’ll wrap it up at the end with a few additional comments including some perspectives on the uncertain macroeconomic environment. I'm on Slide 2. As I mentioned just a moment ago, the second quarter is a great reflection of Webster's potential. The earnings power of our new company is materializing in the first full quarter following the close of our merger with Sterling. We exhibited strong and diverse loan growth, the quality of our core deposit franchise led by HSA Bank and our consumer banking team with a rising rate environment, and we maintained an advantageous capital position. On an adjusted basis, eliminating onetime merger-related costs, we generated EPS of $1.29 with a return of sets of 1.41% and a return on tangible common equity of 18.5%. Our efficiency ratio was 45% as we continue to execute on the synergies our merger provides and leverage the diverse competencies of our company. Our loans and total assets grew 4.8% and 3.8% respectively in the quarter. Loan growth was generated across broad industry sectors, business lines, geographies and asset classes, and our asset quality metrics remain favorable. With an expanded…

Thanks, John, and good morning, everyone. I will start with the reconciliation of core earnings on Slide 4. We reported GAAP net income to common shareholders of $178 million with EPS of $1. As John noted, on an adjusted basis, we reported net income to common shareholders of $229 million and EPS of $1.29, which excluded onetime after-tax expenses of $50 million. The onetime charges were related to real estate consolidation, severance and other merger and integration charges. Next, I'll review the balance sheet trends before moving on to the income statement. On Slide 5, our total assets were $67.6 billion, with total loans of $45.6 billion and total deposits of $53.1 billion. As you see, we delivered strong loan growth on a quarter-over-quarter basis in commercial and consumer categories. The linked quarter decline in deposits was primarily due to seasonal effects of public funds, which I'll cover in more detail on a later slide. On Slide 6, we highlighted the diversity of our loan growth, which is an illustration of the potential of Webster's post merger business mix. In total, we grew loans $2.1 billion or 4.8% on a linked quarter basis. By category, the largest contributors to the increase were C&I with $603 million, commercial real estate with $557 million and residential mortgages with $426 million. Switching to the deposits on Slide 7. Total deposit balances declined by $1.3 billion or 2.4% relative to prior quarter. The primary driver was a seasonal decline in public funds with balances down $1.2 billion. We expect to see a reversal in the third quarter as tax collections drive higher liquidity at public entities. Short term borrowings were leveraged to fund growth in the quarter. Portion of the borrowings will be paid down as public funds rebuild, and we continue to gather…

Thanks, Glenn. Five months after closing our merger, we've made material progress. While we have a ton of work in front of us bringing systems, products and processes together, we are operating as one organization and the strategic merits of bringing the two companies together is reflected in our accomplishments so far this year. We've created a bank with growth capabilities and unique asset classes Our commercial loan portfolio has grown 12% year-to-date on an annualized basis. We have a bank with the unique funding engine. Our deposit costs increased 2 basis points this quarter. At the same time, the Fed is increasing short term rates at a fast pace. We've created a bank with superior capital generation capability. The adjusted return on tangible common equity of over [18%] this quarter illustrates the potential we have to deliver outsized returns. And we have repurchased over $200 million in Webster shares since the transaction closed, all while maintaining capital levels that provide us with significant flexibility as we move forward. Finally, I do want to address the operating environment and our preparedness. As many of our peers have remarked, things feel good on the ground today despite tangible macro headwinds and an increased risk of recession. We have maintained a consistent and prudent risk management framework that will serve us well in any economic environment. Specifically as it relates to credit, our loan portfolio is diverse with the merger actually serving to eliminate concentrations in asset classes, businesses and geographies. I'm very pleased with how quickly we have been able to consolidate and harmonize portfolio management practices across the new organization. And in fact, we plan to consolidate our credit risk management tech platform in the third quarter. We have a robust allowance for loan losses with coverage in the top quartile of our peer proxy peer group. We have benefited from internal and third party diligence on our loan portfolio associated with merger work last year. We incurred purchase accounting marks on the loan book. We have significant buffers in our capital ratios well above regulatory minimums, and our company should continue to generate substantial excess capital moving forward. We believe that this provides us significant flexibility to adapt to the constantly changing operating environment. In short, we believe our strengths position the company to operate through macro cycles and generate solid returns to shareholders in both the near and long term. We believe this was a very strong quarter for Webster and it's a direct result of the hard work and great execution of our colleagues, all during the challenging process of integrating an MOE. I want to give a big thanks to all of our colleagues and their tremendous efforts. Operator, Glenn and I will now take questions.

[Operator Instructions] Our first question comes from Chris McGratty with Keefe, Bruyette, & Woods.

Glenn, maybe to start with you on just the balance sheet. I appreciate the comments on the public funds. I guess a trend that we've all noticed this quarter is just the challenge of growing deposits. And I'm interested in kind of an outlook commentary about retention of deposits, what you might see in the portfolio that could be at risk, and how we should be thinking about funding this improved growth?

So here's how we're thinking about it. So we're at [$53.2] billion in deposits. We mentioned the public funds, which is about $1.2 billion. We think that's going to -- that's seasonality, so that will come back to us. But as we talked about in the past, I mean, we have multiple levers to pull on the funding side, whether it's digital or commercial. And so we think that we'll begin to attract new funds in those two channels and some of that will be partially [offset]. And if you look at things like our DDA balances, it represented total deposits, are elevated because of all the liquidity and we're factoring some of that coming down. But at the end of the day, we think if you put it all together, we're still targeting a loan-to-deposit ratio somewhere around 85%.

And in terms of the investment portfolio, is it fair to assume that [it] kind of gradually works lower as you kind of find more profitable ways to…

Yes. So $15 billion, it's about 25% of our earning assets. And so over time, over the course of time primarily through prepayments and cash flow, we think that will probably drift down to like a 20% level. But that's probably going to take some time to get there.

Maybe just a last one and I'll hop back, the betas. Can you just remind me what you're assuming for through the cycle betas on the combined company?

So look, I think over the next four quarters, we would think our effective beta on a full deposit base would be closer to 30%. And that takes into effect the fact that we're capturing new deposits from the various channels that we have. So that's how we're thinking of it. You'll recall, last quarter, we were about 21%. We now have another quarter underneath us. And so we're thinking that over a [four] quarter process, it would probably be close to 30%.

Our next question comes from Mark Fitzgibbon with Piper Sandler.

I wondered if you could first share with us your commercial line utilization rates, what those look like right now?

Yes, they're improving marginally. So up -- in March, they were up about 2%. In June, they were up about 8%. So we're seeing from June -- from last June, they’re up about 8%. From the prior quarter, they're up about 3%. So we're seeing that across the board. I think that's kind of consistent with the industry. And we're seeing it in ABL where we kind of see the best sign of working capital changes.

And then secondly, John, we saw a small HSA book gets sold to a competitor recently. I'm curious if these kinds of deals continue to be a priority for Webster? And you know how you -- whether you think it's likely in the quarters ahead, we'll see some more of these kinds of transactions?

Yes, Mark, I think that's a great question, and we've been pretty transparent about it. Obviously, as the top five player and you know the top five own 65% of the market. We obviously see all the transactions, the pricing and the value on many of these transactions are pretty steep. So I'd say, yes, it's a priority to us. You saw us do the Bend acquisition, which was a combination of a portfolio and technology that we can lever. But we're also trying to be disciplined with respect to tangible book value dilution and balancing it against the cost of acquiring other deposits. So the answer is yes. It is a significant priority. You've seen deals go up in the market and price has generally been the reason we haven't won some of those transactions.

And then lastly, I wondered if you could talk a little bit about your franchise footprint and maybe which geographies you see as having the best growth potential and maybe areas where you might look to prune?

It always sounds like a pun answer, but the truth is I felt this quarter was really, really evident of all levers kind of working at the same time. And so you think about the concentrations, legacy Sterling in New York City, sponsor and specialty at Webster, commercial real estate in some areas. And so this was a broad quarter of loan growth and we're seeing strength and activity in all areas. So what I would say is geographically both in our core retail footprint, core middle market footprint, in more of our regional businesses like commercial real estate or even national businesses like public sector finance or sponsor and specialty, we see real opportunity, and we don't see any geographic areas where we're concerned or looking to pull back. I would say it's more in the asset classes where we're being a little bit more careful. Cyclical businesses, businesses that are potentially at risk to higher energy prices, cyclicality, supply chain disruption, office, we're obviously looking keenly as to whether or not there's a real paradigm shift going on there with the way people work. So I would say it's more industry sector, more borrower specific than any geography. And right now, besides a couple of those areas where we're keeping an eye on and probably reducing new origination in office, in some of the more cyclical businesses, all of our geographies are still robust and healthy.

Our next question comes from Steven Alexopoulos with JPMorgan.

I wanted to first follow up on Chris' question on the deposit side. So Glenn, you pointed to 85% loan-to-deposit ratio target, you're basically there. Can you give more color on your ability to generate low cost deposits, right? You're saying you have a more diverse deposit base, which is fine. But which category should we expect going forward to support and fund loan growth?

So I think it's a mix, Steven. And so you get some of the texture we have gone from like a loan-to-deposit ratio of 80% to 86% this quarter, and about 4% of that was driven by the loan growth, 2% from the decline in municipal deposits and public funds. And we do expect that to come back in pretty strong for the back part of the year. I think the key channels for us are going to be on digital and are going to be in the commercial business, whether it's treasury management or whether it's transactional type of accounts. We will have the natural -- over the course of the four quarters, we'll have HSA coming in too, as we get into the enrollment season. And so I have a lot of pluses coming in from the multiple channels, but I also have an offset in DDA because I think it's sort of elevated right now. So the combination of all those, I think, is what's going to bring us to that 85% loan-to-deposit ratio. That being said, as you can see from the first quarter, I mean, we did raise or increase our -- what we think our forecasted deposit beta is going to be over four quarters. So now where we thought last quarter was going to be 21%. We're starting to see things heat up a little bit more, but that doesn't mean that this is an expensive source of funding on the deposit side. But we've moved that 21 closer to 30 over a for quarter cycle. So that's how we're thinking about it right now. And it's all to fund the loan growth, which we feel as you saw in this quarter, we feel really confident about where we are and operating at the top end of our stated range.

Steven, I'll just put context from a business perspective as well. As Glenn mentioned, the vast majority of the reduction in deposits was seasonal outflows from public sector and government deposits. We're adding, as you can see, 4.8% loan growth, also a lot of new logos, a lot of new companies, a lot of new relationships in business banking and commercial and we really require our teams out there to make sure those are full relationships with deposits and cash management. So you'll see more deposits roll in and have a natural growth in commercial because of the number of relationships, maybe not because of what's going on in the macro environment from a liquidity perspective. But Chris Motl is out there right now, making sure that these folks are focused on deposits, and we can refine our pricing a bit to make sure that we're able to continue to raise deposits.

And the last thing I would add, Steve, is that our investment portfolio, as you know, is elevated right now at 25%. We think the more natural level for our investment portfolio is probably closer to 20%. And so as we get the cash flow out of the investment portfolio, which is running about $350 million a quarter, that's going to go into the fund to loan growth as well. And so that will take some time to come off but we're basically picking up 140, 150 basis points on that trade as it flows more into the loan book.

I want to shift direction and talk about HSA Bank for a minute. So if I look at the year-over-year growth metrics, this basically went from one of your fastest growing segments or if not the fastest growing segment to one of the slowest even after I adjust for the third party administration stuff. How much of the downshift do you see as structural versus cyclical and what's the environment we need to transform this again into a growth engine for the company?

I think that's a great question, Steve. And you know that we're focused on it because we think it's a terrific asset. So I think if you cut through, we're really pleased with the performance in terms of on-the-ground execution in winning RFPs and going out to direct-to-employer relationships. And the data that we showed said that we do a really good kind of at market. Some of our bigger relationships with health care providers have grown a little bit slower than market. So the net result of all of that is the whole market, the HSA industry has slowed, obviously, from kind of that 20% growth rate more towards high single digits, low teens. And we've been trailing that by a couple of percentage points given the mix of our business. So it has slowed. I think the drivers are much more industry wide. And we obviously growing deposits at 8% year-over-year is still a wonderful thing, particularly with the characteristics of the long duration and low cost nature of those deposits. So one of the things we're doing, Steve, the Bend acquisition. We are right now integrating that technology with our own customer portal and we're rolling that out to clients as we speak over the next six months. And in beta testing, our customers and our employers really like that. We think that will increase participation and increase funding amounts. It's providing a great digital experience and education to our existing 3 million plus account holders about why they should be savers and not spenders. And we think that there will be a material uplift in average deposits. So we're kind of working everything. We're working transparency tools, products, we're working better technology experience, we're focused on sales. And so our goal is to be able to come to the market and say, we're growing at market rates. And as it relates to the market, we do think coming out of the pandemic that we'll see a strengthening of that kind of market industry growth rate as well. So we want to make sure when that happens that we can be a strong participant.

And if I could ask one final one, John John. Big picture question. Talk to us about how the integration of the two cultures is going. What's gone well? What needs more attention? And I know you haven't done the system conversion yet, but how is the customer experience been thus far?

I'll start with your last question. The customer experience has been really, really good, because we haven't disrupted anything really from an operational perspective. So because this deal was so complementary, all of our frontline folks are here. All of our customers are dealing with the same people they were dealing with and I think that's one of the reasons we were able to kind of beat market growth on loans. So customer experience so far good. One of the reasons why we are having our technology conversion in mid 2023 is because we are determined not to disrupt our customers. And I think that's why we're taking a slower and more deliberate approach. As it relates to culture, if I sat here right now five months after closing in the transaction, I give us kind of A, A minus, and I'm really happy. I can't believe we would be better off with respect to alignment at the top, with the management team, the way we're cascading messaging down. All that being said, an MOE is hard. And so the idea of making sure that every last one of our 4,000 colleagues feels as if they're part of one singular team takes a lot of hard work, a lot of purposeful training, but it also takes time. And so I'd be lying to you if I told you that if you walked around our entire organization everyone would feel like this was the place they worked in for the last 20 years. So we're working really hard at that. And so far, it's [worked] really well. We’ve got great alignment, people are executing, our risk framework is great, our relationships, the regulators are great. We have not seen attrition in key areas. So I couldn't be more pleased, but I'm also -- I don't have my head in the sand and I know that it's a long road to get to the perfect spot.

Our next question comes from Matthew Breese with Stephens.

Just thinking about the loan growth guide versus what you've already accomplished year-to-date. Is the 8% to 10% growth range, is that a safe annualized rate from here or should we incorporate the tremendous amount of growth you've already seen?

I mean, we're looking at it incorporating the growth. I'm not sure we can put up another 4.8% organic growth rate. So look, Glenn guided to the high end of that range. There's a chance we could outperform it if the environment stays strong. The reason we always talk about that 8% to 10%, and we go back and forth on people telling us we'll never make it and then telling us it's too much and then figuring out whether or not we're going to go above that is, I think we've been able to sustainably grow our loans, particularly on the commercial side and now we're getting good traction on the consumer side as well in that 8% to 10% range. So I think what you can do, Matt, is push that out into '23 as well. So I think we're looking every quarter to try and post an 8% to 10% annualized growth rate. Some quarters will be higher and lower, depending on prepayments and certain origination characteristics. But we're not saying we're going to grow loans to another 10% in the next six months. We're saying that we're sticking to our 8% to 10% loan range for the year. But obviously, we have an opportunity to be at the high end of the range or outperform.

And is your -- the way the pipeline looks, does it seem like growth can be as diverse as it was this quarter?

You know it does right now and I kind of say that with a smile. Yes, I'm thrilled because it appears that the teams across this franchise and the different asset classes have a lot of energy and their pipelines are healthy. And I think we're being really disciplined, Matt, on risk selection as well. I think we're understanding pockets of asset classes that could be vulnerable to a downturn, and I think we're being disciplined in making sure we're not reaching too far or throwing the bomb in any one area. So we still see broad growth. We had broad growth in commercial real estate, middle market, sponsor and specialty, public sector finance, ABL, and all of our mortgage and consumer lending, all really kind of in that 4% plus area. So it was really nice to see the granular growth.

And then I was hoping you could talk a little bit about the Banking as a Service effort at Webster and what was brought over from legacy Sterling, what that entails. Curious the amount of deposits, it's important to the overall funding effort and the outlook for growth. I guess I didn't fully appreciate how important that was towards the end days of Sterling. And I'm curious if that's going to be one of the primary drivers of deposit growth as we head deeper into this rate hiking cycle?

And as you can tell, probably from Glenn's earlier response on deposits, we are not sort of factoring that in as a major driver in the next couple of quarters, although, we do see a clear path to $1 billion pipeline in that area of relatively low cost deposits with existing relationships that we're working with. So what I'd say is that's kind of gravy on our plate. It is what we believe to be another strategic lever that hopefully will kind of have operational for a period of time. And so I think that what we're saying is it's not a major driver of deposit growth over the next quarter or two, but it could be significant.

And then my last one. I noticed that ABL NPAs increased a bit quarter-over-quarter. It looks like some of it transitioned from 30 to 89 day. Obviously, not a huge number, but I am focused on equipment lending near term as an area that could see some stress across the industry. So I was just curious, could you give us some background on the combined equipment book, the exposures, the types of equipment you underwrite historical losses. And then just an overall sense for how that book is shaping up from a stress perspective in this environment?

I think we're not too concerned right now because we've got pretty good collateral coverage. It's an interesting -- bringing these two equipment finance businesses together, there's almost everything there, Matt. So there's granular low ticket stuff that's volume based, there's also participations in larger banks, larger transactions in equipment finance. So I think some more cyclical businesses, as you can imagine. There's nothing in there from a kind of a systemic perspective that scares us with respect to kind of credit performance right now. And as you can see, we really haven't grown the business. We're kind of putting over a new framework on how we're going to attack the market and we've kind of been slowly trying to build back up originations in profitable and granular areas. So all I can say right now it hasn't been a big driver of growth. We're not particularly concerned given the collateralized nature of the business and kind of outsized loss in the portfolio and more to come on kind of strategically how we move forward with that combined business.

[Operator Instructions] Our next question comes from Laurie Hunsicker with Compass Point.

Question if we -- and it’s sort of a bigger question, if we could stay on loan and credit here. Can you give us a refresh on your leverage loan book, and then how much of that is in the sponsor and specialty areas just with respect to balance, credit charge offs and more importantly, with the warning signal starting to flash how you're thinking about that? And just remind us how it's different versus where you sat during the GFC?

How much time do we have, Laurie? No, I'm only [kidding]. Good question. So I'll give you the kind of the fund facts. So our leverage loans end-of-period balance is around $3 billion, representing 6.5% of total loans and about 8% of commercial loans as of June 30th, which is roughly in line from a percentage perspective with what it's historically been. And as you know, when we talked about the merger, one of the wonderful things is it reduced the overall concentration in the numbers with a bigger balance sheet and bigger loans. I will tell you that the portfolio of leveraged loans is about 85% to 90% in the sponsor and specialty world, which is good news because it's in industries and sectors that have repeatable, protectable, sustainable cash flows, those are tech and infrastructure, health care services, stuff that we've been doing for a long time with sponsors we've known for 15 or 20 years. The portfolio continues to perform at or around the overall performance level of the rest of the commercial bank, which has been the case through both the Great Recession and the pandemic. There is a little bit more volatility in the risk ratings in the leverage book because obviously, those risk ratings start a little bit lower. And with leverage, there can be a little more variability in risk ratings. However, the strength of the financial sponsors behind the deals have continued to have that not result in higher levels of non-accruals or losses. The other thing I'll say about the book is it's more granular. So if you think about the leveraged loans making up 8% of the commercial loan book, they only make up about 3.5% of our aggregate exposure in top 100 exposures and names. So if you think about that, our leveraged loans tend not to be the highest commitments and single point exposures in the organization and that's obviously intentional. So we'll keep you posted. But so far, our premise has worked really well, and we've also been disciplined about where we do that activity, about the people who we allow to do that activity and how much of that activity is in the organization as a percentage of Tier 1 capital plus reserves [or] the overall portfolio.

And do you have what your balance of nonperformers is relative to that $3 billion book and what charge-offs are? And then I just have one more quick follow-up.

I don't have those numbers off things but a little loss in that book,I know over the last five years, but we can reach back out to you Laurie with that.

And then just one last question, office. Can you remind us what is the balance that you have in office? And how much of that is in New York City?

We have about $2.2 billion in office exposure, all around. If you take 5.5 -- $550,000, $600,000 of office -- medical related office, which has a completely different characteristic, you're about down to $1.6 billion or so. Split half between Class A and Class B and C, underwritten at 50% LTVs. Obviously, those are at underwriting. So those LTVs are probably moved up a bit depending on what your view of value is there with a 1.7 times average debt service coverage. About $522 million of that exposure is in New York City and the five boroughs. If you take out medical office again, it's about $400 million in traditional office in the five boroughs, and it is performing from a classified watch and worse to nonperformer. Similar to the office exposure across the rest of our footprint, which I would say is slightly worse than the overall commercial weighted average risk rating and levels of classified and criticized. So that's where we are. It's a relatively small portion. We spend a lot of time on it, as you can imagine. The other good news there is we have less than 10% of rent rolls rolling off in each of the next two years, which means that there's probably some time before real issues, if there really is a permanent paradigm shift arise and it gives us some time to work with the borrowers on those properties.

Our next question comes from Bernie Horn with Polaris Capital Management.

I had a quick question on this general tone of the portfolio or the behavior of borrowers. We've heard from some sectors, companies that we're speaking to and even some borrowers in the PE space that some of their borrowers are getting very cautious about the future of the economy to the point where they're actually trying to sell off some assets to pay down debt. So I guess the question is, are you seeing -- it seems like you're going in kind of very heavy into the growth mode, potentially before a big economic [crisis], I'm not saying it's going to be huge. But I guess the point is that some borrowers are out there getting more conservative. Are you seeing any of that kind of behavior in your borrowers?

Bernie, I think in some sectors, we are, absolutely. And at portfolio managers, we're doing the same thing. If we have opportunities because there's still a lot of private liquidity out there to lower areas in our loan book that we think might be vulnerable in the long term, we're taking actions as well. So I don't want you to get the sense that we're not in full preparedness mode, the potential number of outcomes here is wide. Our base case is still -- if there is a recession, it's relatively mild in terms of impact on broad credit, but we obviously know that there could be a worse downturn. So as I said earlier, all of our origination, we're not pedal down, meaning that its loan growth at all costs, we’re taking care of our borrowers in the geographies and sectors and our existing relationships and opportunities we should, but we're trying to avoid like in real estate, we're cautious in hotel, we're cautious and really not doing anything in office right now. And so there are property types we're focused on where our growth is multifamily, industrial distribution, which is still pretty healthy. And in C&I, I'd say we're really careful about cyclical contractors. We're careful about folks that are exposed to energy costs, transportation costs who have been significantly impacted by supply chain disruption, so -- who've been impacted actually by labor shortages and the tight labor market. So what we do is we don't put a blanket on everything and put up the red light or the yellow life, but our credit folks who are just terrific. Jason Soto, our Chief Credit Officer and his team, they're well aware of where there is more vulnerability and it's coming through, I think, in our risk selection, which is why a little bit, we're not projecting the same level of loan growth for the balance of the year. We still think there will be decent loan demand. But we think as we move closer to whatever this cycle is, that there will be less demand because our borrowers will be more cautious and so are we.

That's terrific detail, thanks for that additional commentary, because I obviously anticipated my follow up as to where you're being cautious.

We have reached the end of the question-and-answer session. I will turn the call back over to John Ciulla for closing remarks.

Thanks, Chantelle. I really appreciate it. I want to thank everyone for joining us this morning, and thank you for your interest in Webster. Have a great day.

This concludes today's conference call. You may now disconnect.