🔒Ciulla: Scale key to Webster Bank-Sterling merger as banks face major digital investment pressures

John Ciulla is now overseeing the largest federally-insured bank headquartered in Connecticut.

And soon, the in-state competition won’t be close in size.

Ciulla is the president and CEO of Webster Bank and Webster Financial Corp., which recently completed its $10 billion merger of equals with New York-based Sterling Bancorp, parent of Sterling National Bank.

The newly-combined company now has $65 billion in assets, $44 billion in loans, 202 branches and a new Stamford headquarters. Its closest in-state competitor, People’s United Bank, with $63.5 billion in assets, is in the process of being acquired by New York-based M&T Bank. Once that deal is completed, Webster Bank’s closest in-state rival will be Middletown-based Liberty Bank, with $7.4 billion in assets.

Of course, Webster has other national and regional competitors — Bank of America, JPMorgan Chase, Citizens Bank, etc. — that are still larger.

And to Ciulla, size matters, especially in a world where investment in technology is never ending, and the ability to make larger loans to growing commercial customers offers a competitive advantage.

“There is a lot of M&A activity in the banking space right now,” Ciulla said in a recent interview with the Hartford Business Journal. “We were really thoughtful about this deal. It wasn’t necessarily the first priority but there was a priority to gain scale.”

Webster Bank has a long history in Connecticut having been founded in 1935 by Harold Webster Smith, who ran the company until the late 1980s, before turning over the reins to his son, Jim Smith. Ciulla, 56, was named CEO in 2018, after a 14-year career at the bank, rising the ranks from vice president for middle market lending to chief credit risk officer, before being named chief executive.

Ciulla said keeping the bank headquartered in Connecticut was a key part of the merger negotiations.

And the bank is coming off a strong fourth quarter, nearly doubling its profits to $108.4 million, or $1.20 per diluted share, helped by strong commercial loan growth, which is the company’s key focus area.

In fact, pre-merger, 68% of Webster Bank’s $22.3 billion loan portfolio was tied up in commercial loans, a higher percentage than many competitors. It grew its commercial loan portfolio 9.7% in 2021, excluding Paycheck Protection Program loans.

And while its new retail branch footprint remains concentrated regionally in the Northeast — stretching from Philadelphia to Boston, up and down the I-95 corridor — it has a more national commercial lending strategy.

Webster Bank also owns HSA Bank in Milwaukee, which provides administrative services and support for health savings accounts.

“We have historically been able to do 10% in annual loan growth, which has been kind of unique, but in the fourth quarter we also benefited from some of the reopening activity, people seeing the potential end of the pandemic despite what happened with omicron,” Ciulla said.

Here’s what else Ciulla had to say about the bank’s recent merger and go-forward strategy:

Q: You’ve talked a lot about scale being important in the banking industry and being a key reason you merged with Sterling National Bank. Why does scale matter?

A: Scale matters for several reasons. First technology is becoming increasingly important and so having a larger revenue base and leveraging some economies of scale frees up investment dollars for technology.

Also, for us, unlike many of our competitors, we are largely commercially focused. A disproportionate amount of our revenue and customer base comes from commercial banking activity dealing with small businesses, middle market companies and corporations as opposed to retail banking.

Sterling is similarly situated. The scale and size of putting the two banks together really gives us an advantage in commercial banking because with a $35 billion balance sheet, which is what we had prior to the deal, when you are competing against Bank of America, JPMorgan Chase, Wells Fargo, Citizens Bank, we were sometimes constrained by the size of the loans we could make.

Now, at $65 billion we can really compete on even levels with a lot of those bigger banks.

Q: Can you provide some context for how much more the bank can do in terms of commercial loan size?

A: Prior to the deal, in traditional commercial and industrial and commercial real estate lending, we would commit to an average loan size of $30 million, but it could go up to $50 million for really strong credits.

We aren’t going to double that now because that wouldn’t be prudent from a credit perspective, but you can certainly see those average $30 million loans go to $50 million and the $50 million loans go to $75 million.

Q. Where are you with the integration of the banks?

A. We officially closed on the deal Feb. 1. We did a lot of planning before that, so a lot of the organizational structure is integrated as of legal day one, the executive teams are in place.

I think the two biggest things we are working on now is culture and technology integration.

We’ve done a lot of work and planning around culture and aligning at the highest levels of the organization what we want our company to look like and represent and how we want people to behave.

Right now we are cascading a lot of culture work down through the combined organization to help bring people together and set expectations.

We are taking a slower, more deliberate approach on technology integration. We have a 12- to 18-month plan to consolidate all the technology into one core system and to consolidate many loan systems into just a few key systems.

Q: Why did the company move its headquarters from Waterbury to Stamford? What does your presence look like in Waterbury and Hartford?

A: We have a distributed campus model. We had our headquarters in Waterbury forever, since the bank was founded, but if you look at our new retail footprint, going from Philadelphia to Boston, up and down that I-95 corridor, Stamford is kind of in the middle. That’s why we decided to move the headquarters there.

It has the benefit of being more strategically located between New York, and that’s where the executives we are bringing in from Sterling live and commute.

Practically, moving the headquarters was the right move, in terms of location, attracting talent, and being a center point for executives of both banks.

We still maintain our former headquarters office on Bank Street in Waterbury and actually we have been bringing more people into that office. We are still committed to our hometown and will continue to support Waterbury and our physical presence there.

Interestingly, Hartford is really where our commercial banking headquarters has always been. Chris Motl, the president of commercial banking, operates out of the Hartford office in City Place I.

My office has been in Stamford for awhile, but we don’t have plans to move a lot of people to the Stamford headquarters.

Q: On your recent fourth quarter earnings call you mentioned that management expects to save around $120 million in costs following the merger. Where will those savings come from?

A: We expect to realize that savings by the end of 2023, and a chunk of it will be in technology, consolidating to one core operating system and other loan systems.

Then we will have some savings from real estate, consolidation of corporate offices, continued automation and consolidation of call centers.

We are also moving to a hybrid work model, which will have an impact on how much real estate we use. That gives us an opportunity to take less square footage over time.

Both banks did a nice job with attrition, when planning for the merger, which helped us to lessen the impact on employees with respect to dislocation. As we move forward we will figure out what the right level of employees is, but we are hoping to disrupt as few of our colleagues as possible.

Q: So, have there been any layoffs associated with the merger?

A: We are still working through that. You haven’t seen any big dislocation of employees related directly to the merger. Both banks did a really good job leading up to the merger with not filling open positions that we knew we could fill with the combined organization.

With any transaction, where there is overlap of activity or responsibility, we will have to make the right decisions there, but we aren’t through all of that yet.

Q: What do you view as the future of work? Are you currently in a hybrid model?

A: We have more people coming back to the office, but we haven’t been requiring it. Omicron set us back like everyone else. We prioritized keeping our colleagues and clients safe.

The interesting thing about banking is we’ve had banking centers and branches open throughout the pandemic.

Our corporate workforce is a mixed bag and we’ve been encouraging people to come back to the office. We’ve been signaling toward a March 1 beginning of our hybrid model.

I think new idea generation, collaboration, mentorship, employee development, and when you are trying to build a culture in a new organization, it’s really hard to do all that when you are completely remote.

We are going to be putting a little more emphasis on making sure people are back in the office two to three days of the week beginning March 1.

Q: Last year Webster Bank completed 26 branch closures and shrunk its overall square footage by about 16%. Will that continue?

A: Both Webster and Sterling have historically been focused on commercial banking and were on a path to reduce retail square footage and reinvest in technology. However, this merger was not focused on closing branches since both banks didn’t have a big overlap in branch footprints.

Our view is for the next 12 months we don’t see a lot of desire to have material branch consolidation. I do think if you go out over the next five to 10 years, the trendline you will see is Webster and the rest of the industry continuing to reduce retail square footage and reinvest those dollars into technology and other digital channels that customers are using more frequently.

Q: What drove your commercial loan growth in the fourth quarter and where do you see the biggest growth opportunities moving forward?

A: I think the benefit we always had at Webster is the diversification of geography, asset classes and business lines, which enable us to go where the demand is, rather than having to push a few areas or rely on a few business lines.

We’ve got a lot of local businesses spread across (the Northeast) and then we have national business clients and industry specializations, and when you add on Sterling, they have asset-based lending, mortgage warehouse lending, payroll and finance.

There are a number of different asset classes, business lines and geographies where we compete. We are not too deep into one geographic area or asset class. That’s really benefited us.

And we are definitely seeing increased consumer and commercial confidence coming out of the pandemic as well.

Q: So what technology is Webster investing in?

A: One is in our differentiated businesses. For example, our HSA Bank, where we want to differentiate our customer experience, so that’s an area where we want to invest. (On Feb. 16, Webster Bank announced it signed a deal to buy Bend Financial Inc., a cloud-based platform provider for health savings accounts.)

Another focus area is making sure we can have a seamless and frictionless account opening process for retail customers. Sterling brought with it a digital bank, which is a direct-to-consumer bank where we can work on gaining deposits in and around our footprint, or outside it.

We are not always going to be a leading-edge technology company but we need to have at-market abilities, whether that’s for payments, deposit transfer, fraud management.