Good morning. Welcome to the Webster Financial Corporation Second Quarter 2022 Earnings Call. Please note this event is being recorded. 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 one-time merger-related costs, we generated EPS of $1.29 with a return on assets 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 geography and a growing number of industry verticals, our talented colleagues can continue to safely and prudently grow loans. The rationale behind this merger of equals was and is relatively straightforward, as I stated several times. We have created a company with an incredibly diverse funding profile, including our HSA Bank franchise. We have a proven track record of growing loans across a broad set of asset classes and geographies at or above market growth rates. With a bigger balance sheet to deepen our relationships with existing sponsors and businesses, we materially improve our ability to drive net interest income, capital markets revenue and swap and cash management fees. In 2Q, we saw early proof points validating the power of combining the two companies. On Slide 3, while we continue to achieve key milestones in the integration, our colleagues also remain laser focused on our clients and maintaining the day-to-day operations of the bank and revenue momentum. Our ability to do both was evident in this quarter. We remain confident in our ability to achieve or exceed the key merger financial metrics we set forth at deal announcement over a year ago, including 8% to 10% annual loan growth, $120 million in expense savings over the first two years and the completion of our technology conversion by mid 2023. While we continue to manage expenses and look for synergistic opportunities, we remain focused on profitable growth and will not shy away from investments in our differentiated, high return businesses that will add franchise value and economic profit over time. We continue to see opportunities to attract key talent and launch initiatives across all of our high performing business lines. In the second quarter, we began to consolidate several back office systems, including mortgage servicing, treasury management and payroll. We finalized the structure of our executive management team, and we're making great progress on the corporate office consolidations we outlined last quarter. Finally, given our increased scale, we have been able to formally establish an office of corporate responsibility to oversee the company's community investment, philanthropy efforts and sustainability work. Collectively, we have the ability to provide more for our communities. In the quarter, we announced a $6.5 billion three year community investment program that includes investment in affordable housing and community development, small business lending and other philanthropic and community engagement efforts. With that, I'm going to turn it over to Glenn to review our financial performance for the quarter.

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 one-time after-tax expenses of $50 million. The one-time 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 commercial and industrial 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 the 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. Portions of the borrowings will be paid down as public funds rebuild, and we continue to gather new deposits. HSA deposits were effectively flat on a quarter and up 6.2% year-over-year. Excluding third-party administrative accounts, deposits increased 8.4% year-over-year. The impact of TPA runoff on overall growth is becoming much less significant as that book mirrors an end state. Additional detail for the HSA Bank is on Slide 19 in the appendix. Beginning on Slide 8, I'll review the details of our income statement. We provided our reported to adjusted income statement by line item and compared our adjusted earnings to pro forma first quarter earnings. Notably, on an adjusted basis, each of the major line items of our income statement exhibited improvement on a quarter-over-quarter basis when compared to the aggregated results of Sterling and Webster last quarter. I'll cover the individual line items in more detail on subsequent slides. Our pre provision net revenue on an adjusted basis was $316 million, up $39 million when compared to the combined first quarter results. Net interest margin was 3.28% on a reported basis and our combined efficiency ratio is now 45%. On Slide 9, net interest income grew by $22.8 million relative to the pro forma first quarter. Adjusting for accretion in both periods, net interest income was up $29.9 million quarter-over-quarter. Net interest margin, excluding accretion income, increased 11 basis points to 3.09%. Given the current forward curve, we expect further expansion to our core net interest margin throughout the year. As illustrated on an earlier slide, the cost of deposits increased 2 basis points quarter-over-quarter. We expect deposit pricing in certain categories to start to move more materially in the future quarters with subsequent Fed actions. On a year-over-year basis, deposit costs were flat. On Slide 10, we show our fee income for the quarter and on a year-over-year basis. Fees were up $6 million linked quarter and $18 million year-over-year. The improvement in fee income was driven primarily by customer interest rate hedging activity in the commercial bank. Year-over-year improvement was also driven by increased deposit related fees as transaction activity increased relative to pandemic impacted periods. Slide 11 summarizes noninterest expense. We reported adjusted expense of $292 million relative to $302 million on adjusted pro forma expense last quarter. The decline is driven by the initiatives John outlined in his integration update, including the finalization of the organization structure, corporate real estate consolidation and the elimination of duplicate systems and vendors. Slide 12 highlights our allowance for credit losses where we recorded provision expense of $12 million and a $2 million increase in our allowance driven by loan growth. The provision expense also reflects an improvement in individual credit performance and loan mix, which was partially offset by a modestly lower outlook on macroeconomic variables. As a result, the allowance coverage ratio fell as a percent of loans to 1.25%. As highlighted on Slide 13, you can see the underlying credit metrics remain strong. We reported linked quarter declines in both nonperforming assets and classified loans, down $1 million and $41 million, respectively. I would also note our delinquencies declined to $52 million from $71 million last quarter. Net charge-offs of 9 basis points declined 1 basis point from last quarter and remain at low levels. Slide 14 highlights our strong capital levels. All capital ratios remain well in excess of regulatory and internal targets. Consistent with our previously stated capital targets, we repurchased over 2 million shares in the quarter and we'll continue to be opportunistic with repurchases going forward. The net of all capital effects this quarter resulted in a slight decline in our tangible book value per share, which decreased to $28.31, primarily driven by AOCI losses, the share repurchases and partially offset by our strong earnings. Our common equity Tier 1 ratio remained strong at 11.04% is still well above our minimum term operating target of 10.5%. We anticipate we will prudently and opportunistically return capital to shareholders, given the strong internal capital generation from improving profitability, sound underwriting credit metrics and the ample reserve on our market and well diligence loan portfolio. I'll wrap up my comments with a refresh on our outlook for full year 2022. We are increasing our guidance on net interest income to $1.9 billion, driven by our projections for the rate environment and strong loan growth. This full year outlook excludes $90 million of realized and scheduled purchase accounting accretion, the details of which can be found on Slide 28 in the appendix. Our projections assume a Fed funds rate ends the year at 3.25%, implying another 150 basis points of rate increases. And as a reminder, our interest income outlook is on a non-FTE basis. We now expect loan growth to be near the top end of our 8% to 10% range. Fees should be in the range of $430 million to $450 million. We continue to feel confident in achieving our full year adjusted expense target of $1.1 billion to $1.12 billion. That being said, we will continue to monitor inflationary headwinds and of course, continue to invest in our businesses, and we are forecasting an effective tax rate of 23% to 24%. With that, I'll turn things back over to John for closing remarks.

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 a 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 substantial 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 a merger of equals. I want to give a big thanks to all of our colleagues and their tremendous efforts. Operator, Glenn and I will now take questions.

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 our perspective. We currently have $53.2 billion in deposits, including approximately $1.2 billion in public funds, which we expect to see return due to seasonality. As we've mentioned before, we have various strategies for funding, both through digital and commercial channels, and we believe we'll begin attracting new funds through these avenues, which will help offset some of the challenges. Our DDA balances indicate that total deposits are high due to liquidity, and we anticipate some decrease in that. Overall, we are aiming for a loan-to-deposit ratio of 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, 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 showing slight improvement. In March, they increased by about 2%, and by June, they were up approximately 8%. Compared to last June, this is an 8% increase, and from the previous quarter, it's about a 3% rise. We're observing this trend across the board, which seems consistent with the industry. Notably, in asset-based lending, we see promising signs of changes in working capital.

And then secondly, John, we recently observed a small HSA book being sold to a competitor. I'm interested to know if such deals are still a priority for Webster and whether you believe it's likely that we will see more transactions like this in the upcoming quarters.

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 leverage. 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?

It's a combination, Steven. We've seen our loan-to-deposit ratio rise from 80% to 86% this quarter, with around 4% of that attributed to loan growth and 2% from a decline in municipal deposits and public funds. We anticipate a strong recovery in those deposits later this year. Our key focus areas are digital channels and the commercial sector, including treasury management and transactional accounts. As we approach enrollment season, we expect to see an influx from HSAs as well. While we see positives from multiple channels, we also have some pressure on DDA since it appears elevated at the moment. All these factors combined should help us reach that 85% loan-to-deposit ratio. However, as noted in the first quarter, we have raised our forecast for deposit beta over the next four quarters. Last quarter, we anticipated it would be 21%, but we're beginning to see that number increase, and we're adjusting our expectation toward 30%. This change reflects our goal to fund loan growth, and we feel confident about our current positioning at the top end of our stated range.

Steven, I'll just provide 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 address your last question first. The customer experience has been very positive because we haven't made any significant operational changes. Since this deal complements our existing operations, our frontline staff remains the same, and our customers are still interacting with the same representatives. This continuity is one reason we’ve outperformed market growth in loans. Overall, the customer experience has been good. Our technology conversion scheduled for mid-2023 is designed to avoid disruption for our customers, which is why we are taking a careful, measured approach. Regarding culture, five months after closing the transaction, I would rate our progress as an A or A minus, and I'm quite pleased. I believe we are achieving good alignment at the top management level and effectively communicating our message throughout the organization. However, integrating two cultures is challenging. Ensuring that all of our 4,000 colleagues feel part of one cohesive team requires significant effort, intentional training, and time. I wouldn't be honest if I said that everyone in our organization feels like they have been here for the last 20 years. We are making strong efforts in this area, and so far, we’ve seen positive results. There's good alignment, our teams are executing well, our risk management framework is solid, and our relationships with regulators are strong. We haven’t experienced attrition in critical areas, which makes me very happy, but I'm also aware that there's still a long journey ahead to reach our ideal state.

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.

Is the way the pipeline looks indicating that growth could 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, asset-based lending, 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 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 believe we’re not overly worried at this moment because our collateral coverage is quite solid. Merging these two equipment finance businesses is interesting; we have a comprehensive range. It includes smaller, volume-based transactions as well as larger participations with major banks in equipment finance. Some of these areas are more cyclical, as one might expect. There’s nothing that raises systemic concerns regarding credit performance currently. As you can see, we haven’t expanded the business much; we’re implementing a new strategy to approach the market and gradually working on increasing originations in profitable and specific areas. Overall, I can say that it hasn’t significantly contributed to our growth. We are not particularly worried due to the collateralized nature of the business and the substantial losses in the portfolio, and we will provide more details on our strategic plans for the combined operation moving forward.

Our next question comes from Laurie Hunsicker with Compass Point.

Can you provide an update on your leveraged loan portfolio, specifically the portion related to sponsors and specialty areas? Additionally, how are you addressing balance, credit charge-offs, and the emerging warning signals? Also, please remind us how your current situation differs from what you experienced during the Great Financial Crisis.

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.

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 offhand, but I will 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 approximately $2.2 billion in office exposure in total. Of that, about $550,000 to $600,000 is in medical-related office, which has different characteristics, bringing the total down to around $1.6 billion. This amount is split between Class A and Class B and C properties, underwritten at 50% loan-to-value ratios. These LTVs may have adjusted slightly based on current value perceptions, with an average debt service coverage of 1.7 times. Approximately $522 million of this exposure is located in New York City and its five boroughs. Excluding medical office, the traditional office exposure in the five boroughs is about $400 million, and it is performing in a range from classified watch to nonperformer. This situation is similar across our overall footprint, which I would describe as slightly worse than the average risk rating for commercial properties, including classified and criticized levels. It's a relatively small portion of our portfolio, and we dedicate considerable attention to it. On a positive note, less than 10% of our rent rolls are scheduled to roll off in the next two years, suggesting we have some time to address potential issues and collaborate with borrowers regarding these properties.

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

I have a quick question regarding the overall tone of the portfolio and borrower behavior. We've heard from various sectors and even some private equity borrowers that many of their clients are becoming quite cautious about the economy's future to the extent that they are considering selling off assets to reduce debt. Are you noticing any trends in your borrowers becoming more conservative, especially as it seems you are pursuing growth aggressively, potentially ahead of a major economic downturn?

Bernie, in some sectors, we certainly are. Our portfolio managers are also taking similar steps. When opportunities arise, especially with a lot of private liquidity available, we focus on areas of our loan book that might be vulnerable in the long term. We are in full preparedness mode, considering a wide range of potential outcomes. Our base case still suggests that if a recession occurs, it will have a relatively mild impact on broad credit, although we recognize that a more severe downturn is possible. As mentioned earlier, our approach to origination isn’t about aggressive loan growth at any cost; we are prioritizing care for our borrowers in specific geographies and sectors and nurturing our existing relationships while seizing appropriate opportunities. However, we are cautious in certain areas like real estate, especially hotels, and we are not pursuing anything in the office sector right now. Our growth focus is on multifamily and industrial distribution, which remain healthy. In terms of commercial and industrial, we are being very cautious with cyclical contractors and those exposed to energy and transportation costs, particularly those affected by supply chain disruptions and labor shortages. We don’t apply a broad restriction but instead rely on our exceptional credit team, led by our Chief Credit Officer Jason Soto, who is aware of where vulnerabilities lie. This awareness reflects in our risk selection, which is why we are not projecting the same level of loan growth for the remainder of the year. We anticipate decent loan demand, but as we approach the end of this cycle, we expect demand to decrease because both borrowers and we will be more cautious.

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.