Good morning, and welcome to Webster Financial Corporation's Fourth Quarter 2018 Earnings Conference Call. I will now introduce Webster's Director of Investor Relations, Terry Mangan. Please go ahead, sir.

Thank you, Christine. Welcome to Webster. This conference is being recorded. Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations, and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the fourth quarter of 2018. I'll now introduce Webster's President and CEO, John Ciulla.

Thanks, Terry and good morning, everyone. Welcome to Webster's fourth quarter 2018 earnings call. CFO, Glenn MacInnes and I will review business and financial performance for the quarter. HSA Bank President, Chad Wilkins, will then join us here in Waterbury for Q&A. I'll begin on Slide 2. When I became Webster's CEO just over a year ago, I felt to assure all of our stakeholders that our transitioning leadership would not entail a pivot and strategy. Our results in the fourth quarter and in all of 2018 demonstrate clearly the positive outcomes of our well-executed long-term strategy. We're very pleased with the progress we've made. Reported earnings per share were $1.05 in the fourth quarter, adjusted for one-time items EPS was $1.01 compared to $0.98 in Q3 and $0.71 a year ago. Pre-provision net revenue in Q4 grew 36% from a year ago. Loan growth and a higher net interest margin led to our 37th consecutive quarter of year-over-year revenue growth. Each quarter of 2018 saw year-over-year revenue growth in excess of 10%. In Q4 total revenue was 15% higher than a year ago, while expenses increased approximately 2%. This resulted in the seventh consecutive quarter of positive operating leverage. The efficiency ratio dropped below 57% to the lowest level in my 15 years at Webster. Webster's asset quality also remained stable. Turning to Slide 3; loans grew 5% from a year ago with commercial loans growing 12% and consumer loans declining 4%. This performance is consistent with our strategic focus on expanding commercial banking. As with the industry, consumer balances have been affected by lower mortgage origination volumes and continued reductions in home equity balance balances driven by changing customer preference. Commercial loans now represent 63% of total loans compared to 60% a year ago. Deposits grew 4% from…

Thanks, John. Slide 8 provides highlights of Webster's average balance sheet. Average loans grew 2% linked quarter to $18.4 billion and 5% year-over-year. Loan growth was led by commercial real estate which increased $242 million or 5.2% from September 30. Loan originations for the quarter totaled $1.6 billion and fundings were $1.2 billion with commercial loans accounting for $1.4 billion and $1 billion respectively. Loan pay downs totaled $1.1 billion which were up from $713 million in Q3 as we saw a higher levels of pay downs in commercial real estate and middle market. The linked quarter decline in consumer loans reflects continued pay downs of home equity lines consistent with industry trends. Year-over-year average loans increased $922 million or just over 5%. The net result of commercial loan growth of 11% partially offset by a 4% decline in consumer. Average deposits increased $20 million from Q3, this was driven by growth in consumer and business banking. The banking centered sale which reduced average deposit balances by around $100 million in seasonality and public funds. Year-over-year average deposits increased $970 million or 4.6% with HSA Bank representing over $700 million or 72% of the increase. Our loan to deposit ratio of 84% remains well below the northeast medium of 101%. Common equity Tier 1 and tangible common equity ratios remain strong supported by our earnings growth. And tangible book value per share increased more than 9% from prior year and it's increased 15 consecutive quarters. Slide 9 summarizes our Q4 income statement and drivers of quarterly earnings. Net interest income totaled $237 million and increased $7 million or 3% from Q3. Of this, $5 million was the result of higher rates and $2 million from additional volume. Versus prior year, net interest income grew to $32 million or 16%. Non-interest…

Thanks a lot, Glenn. An external proof point of our well-executed strategy came recently with Bank Director Magazine's identification of Webster as the best overall bank in the Northeast and Number 2 nationally in it's 2019 Ranking Banking Study, which was also the top bank in the Northeast in the key categories of best board, best small business strategy and best technology strategy. I'd like to take this opportunity to express my congratulations and appreciation to Webster's Board of Directors and all Webster's bankers on the Webster Bank recognition, a great quarter, and our continued commitment to the communities we serve. We'll now open it up for questions.

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Steven Alexopoulos with J.P. Morgan, please proceed with your question.

I want to start on the margin; so you had good expansion of the fourth quarter and the guidance implies good expansion coming in 1Q given we have the benefit of the December hike. Assuming that Fed's now on hold, maybe for Glenn, how do you see the NIM progressing beyond the first quarter if the Fed funds rate is pretty flat for the rest of the year?

So I think if right now our baseline forecast is for the Fed to go up in June and the long end, I mean the tenure to be about 3%, but if we assume the Fed stays put meaning funds stay at 2.50% and the tenure stays around 2.70% to 2.75%, I think what you would see is a quarter-over-quarter reduction of one to two basis points in NIM. That being said, and that's primarily driven by investment yields coming down two basis points, loan yield staying basically flat. Some additional cost on deposits as it catches up to previous like the December rate hike, so 50 basis points, maybe go up a few basis points. And then borrowing costs, again, driven by the December hike, maybe up two basis points. All that being said, our net interest income will still increase somewhere between $2 million and $3 million a quarter.

Okay, that's helpful. And then on HSA Bank maybe for Chad; so you guys had consistent growth through the year, which is great. Now that we have the fourth quarter enrollment season now done, what are you seeing -- and Chad, are you seeing any improvement to the 11% year-over-year account opening pace you've been seeing?

So the enrollment season's not quite done yet Steve, we're still in the middle of it. But in '18 as John stated, we had over 700,000 new accounts opened and so far in January we're slightly ahead of the same period last year. And the growth is greatest in our DTE channel which is where we've been investing the most, we're actually at about 28% in that channel. And we've talked about the fact that we've been building pipeline throughout the year, so we're really happy with that traction. And that's making up for some slower growth than other channels, so we think we really made the right move in investing in our capabilities there.

Okay, that's helpful. And then finally on credit, maybe for John; so there has been a ton of attention on leverage lending, even last night, Texas Capital reported charge-offs under leverage lending portfolio. And this is something that is more and more coming up for Webster. One, could you size the leverage lending portfolio, give some color around the type of leverage lending that you're doing and maybe walk us through the risk profile of those loans should the economy see a downturn? Thanks.

Sure, Steve. I think it is a timely question and before I'll provide some metrics and sizing on leverage loans, but I'd obviously like to give you some context on that first. And I always reiterate, we don't have a leverage lending desk or group dedicated to originating leverage lending in the broader market, I think that's really important. Obviously, we do in the normal course, originate loans that meet the regulatory definition of leverage and those are primarily in our sponsor and specialty group. And if you remember, and the reason I think it's differentiating for us is that we started that sponsor and specialty group. In 2004, it was Chris Modal, our current Head of Commercial Banking and myself that founded that group. We've engaged in the activity of providing financing for portfolio companies or private equity firms and directly to management teams in that group where we have most of our -- the vast majority of our leveraged lending for 15 years as an OCC regulated bank. It's been very profitable, and we've had outstanding credit performance. We've got a great leader in that group, Andre Paquette [ph], and we've been able to in our geography and given our commitment to this business over 15 years, we've been able to attract terrific teams of both originators, portfolio managers, underwriters, and importantly, credit executives who really understand the business. And so it's a differentiator for us, as you know, with HSA as a funding source, we've really been able to help perform from a NIM expansion perspective. So that group in sponsor and specialty includes industry-specific verticals, technology, media and telecom, healthcare, environmental services and a few other industries. We picked the industries that have predictable, sustainable, protectable cash flows and I've said that over 15 years when…

John, thank you. That was extremely helpful and I appreciate the thorough response. And thanks for taking my questions.

Our next question comes from the line of David Chiaverini with Wedbush. Please proceed with your question.

Just starting with the six banking centers that were sold, what's the strategy kind of going forward? Do you see any additional branches kind of that can be consolidated over the next few quarters?

I hate to give you the stock answer but in general, and as we've said, we do not have anything in the current pipeline. I will tell you that we are constantly evaluating our footprint to ultimately reduce square footage and become as efficient as we can and we say reduce square footage intentionally because we think the banking centers are still a critical delivery channel for us. We've made a lot of progress in branch consolidation over the last several years, as you know, including the sale of the six branches in Eastern Connecticut and Springfield during the fourth quarter. So we'll continue to evaluate, we may add branches and locations, we may consolidate additional locations; our ultimate goal is to reduce square footage and be able to redeploy that capital into technology spend.

My follow-up question is on loan growth. So loan growth was pretty solid in the quarter and now it is kind of surprised to see pay downs were up so significantly from $700 million in third quarter to $1.1 billion in the fourth quarter. What's kind of the outlook on pay downs looking into the first quarter here and assuming we see those pay downs subside? I imagined that's going to provide a nice boost to loan growth.

Yes. I mean -- I think that's a good perspective. You know, it was an interesting quarter for us because we had good in the commercial bank, we had good average loan growth quarter-to-quarter, but the spot was not that much because we had such significant prepays at the end of the quarter. And I would say that just to let you know it's very difficult for us to predict because a lot of our prepayment activity, particularly in commercial real estate and in Sponsor & Specialty tends to come at quarter-end because it's based on the closing of transactions that seem to close around then. I would say right now we don't see the same level of prepays that we saw at year-end which is encouraging and as we mentioned, we've got a pretty strong pipeline; so we're hoping that your perspective is accurate that we'll see a reasonable amount of originations and a muted amount of pay-off but it's too early for us to give you a really good indication.

Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.

Maybe just shifting back to the HSA for a few seconds here. How are you seeing the seasoning of the existing accounts? When I'm looking at -- call it the fee income to accounts that's continuing to march higher, are you seeing -- are the new accounts in the vintages seasoning as expected? And any color you can give there would be helpful.

I'd say yes, there are -- the trends continue to remain consistent with regard to seasoning. I think what you're seeing on the increase in the fee revenue is really more related to the mix, we've been selling more in direct to employer channel and I think that's reflected in the growth and feedback [ph].

So should that continue to march higher through this enrollment cycle you think?

It has. I mean year-over-year for instance, interchange, Jared, is up like 18% primarily driven by account growth, right. Account fees on a whole are up 10% but as John points out, there is seasonality in this, right. So as employee [indiscernible] and things like that, you'll see it and we saw some of that in the fourth quarter. But generally the trend is as we grow accounts that it would march higher.

Okay. And then Glenn, maybe -- how are you thinking about when you look at the full year 2019 loan growth given the headwinds from consumer? Should we continue to expect to see commercial be a bigger piece of the pie as we go through the year in addition to CRE [ph] maybe?

Yes. I think that both commercial and commercial real estate will be the two drivers as we go through 2019. I think residential mortgages are probably like mid-single digits and we continue even as we look forward to forecast the decline in home equity loans.

And then any color you can give on the commercial charge-offs increase this quarter?

Yes, sure. There are four credits in there, modest charges on those four credits. I'll give you my perspective on them. We had average charge-off or full year charge-offs, 16 basis points as opposed to 20 basis points, the prior year in 23 basis points. So obviously we're still seeing lower trending, overall. But on those four credits, none of them are in the same geography and none of them are in the same business unit, there doesn't seem to be any correlated risk. And I think an important point is, two of them are sort of three plus year old credits and the other two are more than five years old. So I think what I take from that is it's not demonstrating any sort of weakening discipline in credit underwriting, they are all unique circumstances and so we're obviously really pleased with where the overall commercial and total bank net charge-offs are, and the way they're trending.

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

Just to follow-up on that question; were the charge-offs in the syndicated or Sponsor & Specialty finance portfolio or are those more traditional CNI loans?

More traditional CNI loans.

Okay. And then could you comment on the -- in that bucket we also saw year-over-year some decent migration upwards in on NPLs, what was driving that?

NPLs are flat kind of quarter-to-quarter or, I’m sorry I...

Yes, year-over-year commercial non-performing loans are up $62 million from $39 million. I just wanted to get a summary of kind of what drove that $20 million, some odd million dollar increase year-over-year?

Again, it's kind of across the board situational, so it's not in any of the -- kind of general seasoning of the portfolio as it grows. So there is not an area in the bank with respect to division unit or certain industry segments that are contributing to that, it's just the normal avid [ph] flow of credit performance.

Understood, okay. Focusing on the Northern New England markets to Boston markets, a couple of smaller competitors but very competitive on the deposit side of things has been announced for take-outs. Has that lead to any sort of reprieve in deposit competition or pricing in that market?

No, it really hasn't because on the other side you see the arrival of P&C and JP Morgan, that just opened up their first branch there and they are hitting the ground very competitively. So we still -- and obviously, anticipating a question like this; Boston is still the most competitive market for us from a new customer acquisition and a deposit pricing perspective but I will add that we've had a couple of really good quarters in a row and our year-over-year performance there with respect to deposit and loan growth is tracking now back towards our original projections of $1 billion in deposits and $500 million in loans over the 5-year projection. But we're having to be more aggressive from a pricing and acquisition and offer -- new offer perspective; so we have not seen a reprieve to directly answer your question.

Is that true across your footprint; take out Boston, are you seeing any sort of change from a promotional or special product?

Some of the big banks and say Fairchester [ph], which we call Fairfield and Westchester Counties; it's really in the more mass affluent and metro markets where we see more big bang competition on the size of initial offer and on rate. And I think we're very fortunate that we have such a nice market share in sort of Central Connecticut and the competitive landscape where most of our retail deposits has been less subject to aggressive pricing.

Just last one, as we think about HSA accounts and deposit balances year-over-year; how should we be thinking about that for year-end '19 or is it too early to tell at this point?

It's too early to tell for '19. All I can tell you is that from an account standpoint and deposits we're tracking ahead of last year at the same point in time, and historically trends tend to continue; what we see in January in the first quarters tend to continue throughout the year.

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

Thank you, everybody. Have a wonderful day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.