Webster Financial Corporation (NYSE:WBS) Q1 2025 Earnings Call Transcript

Webster Financial Corporation (NYSE:WBS) Q1 2025 Earnings Call Transcript April 24, 2025

Webster Financial Corporation misses on earnings expectations. Reported EPS is $1.3 EPS, expectations were $1.38.

Operator: Morning, and welcome to Webster Financial Corporation First Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to introduce Webster’s Director of Investor Relations, Emlen Harmon, to introduce the call. Mr. Harmon, please go ahead.

Emlen Harmon: Good morning. Before we begin our remarks, I want to remind you that the comments made by management 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 risks and uncertainties which may affect us. The presentation accompanying management’s remarks can be found on the company’s Relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I will now turn it over to Webster Financial’s CEO and Chairman, John Ciulla.

John Ciulla: Thanks, Emlen. Good morning, and welcome to Webster Financial Corporation’s first quarter 2025 Earnings Call. We appreciate you joining us this morning. I will provide some high-level remarks on our performance, after which our CFO, Neal Holland, will cover the financials in more detail. Our President and Chief Operating Officer, Luis Massiani, is also joining us for the Q&A portion of the call today. Webster’s first quarter financial performance was fundamentally solid with consistent execution across each of our business segments. As illustrated on Slide two, we had good balance sheet growth and pre-provision net revenue trends that put us on path to achieve the full-year guidance provided to you at the beginning of the year.

Deposit growth of 1.3% included robust core deposit growth. Our loan-to-deposit ratio of 81% provides significant flexibility as we move forward. Better than market loan growth of 1% was achieved with contributions across business lines and loan categories, including meaningful growth in traditional full-relationship middle market banking. Our NIM expanded by four basis points and with an efficiency ratio of 45.8%, we continue to operate a highly profitable company even as we invest in our differentiated businesses, risk, technology, and back-office infrastructure. Reported EPS of 1.3, a return on assets of 1.15%, and a return on tangible common equity just below 16%. Our sound operating position allows us to be opportunistic. Given significant excess capital and stable fundamentals, we elected to repurchase 3,600,000 shares during the quarter.

During our CECL process this quarter, we increased our recession case probability to 30%, resulting in us adding approximately $20 million to this quarter’s provision. We believe that this was a prudent move given the significant uncertainty surrounding the path of our economy following recent policy announcements. Had we not made the change in economic scenario weightings, our provision would have been roughly in line with charge-offs given stabilizing trends in risk rating migration. Absent the macro-driven additional reserves, our ROATC for the quarter would have been approximately 17% and our ROA would have been 1.25% in the range of our adjusted returns for the past several quarters. Our underlying credit trends and risk rating migration met our internal expectations and were consistent with the comments we made in January and comments that I made at an industry conference in March, namely we continue to anticipate an inflection point in nonaccrual and classified migration during 2025 absent a substantial change in the macro environment.

Two, we saw a material slowdown in negative migration and importantly, overall criticized loans actually declined in 1Q. And finally, the drivers of our charge-offs and sticky NPAs continue to be centered in CRE office and healthcare asset classes. We’ve yet to see any real impact on credit related to the tariff announcements but as you can imagine, we’re spending a ton of time consulting with our clients on potential impacts and looking for potential vulnerabilities in our portfolio. We don’t have disproportionate exposure to industries we believe will be most directly impacted and many of our borrowers have strategies in place to manage costs and supply chain and pass along price increases. While our borrowers remain in generally good financial health, we have selectively seen clients delay strategic actions as they assess the potential impacts of the proposed tariffs.

We entered 2025 with a cautious view on accelerating economic activity, and the current environment falls within the realm of our initial expectations. Turning to slide three. Webster continues to generate diverse and granular deposit growth. Every one of the five major business areas we highlight on this slide grew deposits this quarter, with corporate deposits the only category to exhibit a decline. The quality of our deposit franchise allows Webster to pursue persistent and profitable balance sheet growth through a variety of operating environments. Executing on initiatives that enhance our funding profile will continue to be a primary focus of our management team. With that, I’ll turn it over to Neal to provide some additional detail on our financial performance in the quarter.

Neal Holland: Thanks, John, and good morning, everyone. I’ll start on slide four with a review of our balance sheet. Total assets were $80 billion at period end, up over $1 billion from last quarter, with growth in cash, securities, and loans. Deposits were up over $800 million. The loan-to-deposit ratio held flat at 81% as we maintain a favorable liquidity position. Our capital ratios remain well-positioned; we grew our tangible book value per common share to $33.97, up over 3% from last quarter. Loan trends are highlighted on slide five. In total, loans were up $551 million, or 1% linked quarter. The yield on the loan portfolio was down 13 basis points, as the effects of the fourth quarter Fed funds cuts were partially offset by fixed-rate asset repricing and new loan originations.

We provide additional detail on deposits on slide six. We grew total deposits by over $800 million with growth in core deposit categories of $1.5 billion, in part related to seasonal trends. We did see a slight decline in DDA in the first quarter, though we continue to expect DDAs have structurally stabilized and should be effectively flat on a full-year basis. Turning to slide seven. Our income statement trends. NII was up slightly from Q4. While we did see a moderate decline in noninterest income as we had a unique transaction in Q4 that we did not expect to repeat. Expenses were up $3 million, at an efficiency ratio of 45.8% we maintain solid profitability while investing in the growth of our franchise. Overall, net income was down $24 million relative to the prior quarter, and earnings per share was $1.30 versus the adjusted figure of $1.43 in the fourth quarter.

The higher provision was a significant contributor to the decline. The increase in provision was due to increased weighting of recessionary scenarios in our modeling, as opposed to asset quality trends. Our tax rate was 20%.

Emlen Harmon: On slide eight,

Neal Holland: we highlight net interest income, which increased $4 million despite two fewer days in the quarter driven by balance sheet growth and an increase in the net interest margin. We changed the annualization factors for the NIM calculation to better represent the full-year NIM, with prior periods recast as well. Incorporating this change for both periods, the NIM was up four basis points over the prior quarter to 3.48%. Our average cash position increased by roughly $650 million this and we anticipate we will hold higher cash levels going forward. This was roughly a three basis point drag on the NIM this quarter. We reduced our total deposit cost by six basis points in the quarter and to date, the cycle to date beta is 32%.

We expect to end the year around 33%. Slide nine illustrates our interest income sensitivity to rates. We saw a slight pickup in asset sensitivity since year end, largely driven by the increase in our cash position and a small reduction in the average life of our securities portfolio. On slide 10, is noninterest income. Noninterest income was $93 million, down $7 million over the prior quarter. Excluding a direct investment gain in the fourth quarter, and changes in our credit valuation adjustment, noninterest income would have been roughly flat to the prior quarter. Underlying business activity remained consistent. Slide 11 has noninterest expense. Reported expenses of $343 million, up from $340 million in 4Q. The largest driver of the change was a seasonal increase in benefits expense.

In addition to regular way operating expense, we are also incurring expenses that enhance our operational foundation as we prepare to cross a hundred billion in assets. This quarter, we complete a strategic initiative to modernize our general ledger. Streamlining onto a cloud-native solution allows us to scale with improved analytic capabilities and financial controls. Slide 12 details components of our allowance for credit losses, which was up $23 million relative to the prior quarter. After booking $55 million in net charge-offs, we recorded a $78 million provision. This increased our allowance for loan losses to $713 million or 1.34% of loans. The increase in the provision is not driven by underlying asset quality trends but instead, we elected to place a greater consideration for downside economic scenarios in our allowance calculation.

Under these new scenario weightings, our allowance calculation now assumes the US unemployment rate increases to 5.5% with a considerable slowdown in real GDP growth. Slide 13 highlights our key asset quality metrics. As you can see on the left-hand side of the page, nonperforming assets were up 22% and commercial classified loans up 6%. The nonperforming asset increase was largely related to a small group of credits in healthcare and office portfolios. And we anticipate the growth here to slow going forward. On slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital to our publicly stated targets. Our regulatory capital ratios were down modestly as share repurchases and RWA growth outweighed retained earnings growth in the quarter.

Our TCE ratio was effectively flat as it also benefited from AOCI improvement. Our tangible book value per share increased to $33.97 from $32.95, with net income and AOCI improvements, offset by shareholder capital returns. Our full-year 2025 outlook which appears on slides 15, is unchanged relative to the outlook we provided in January, with the exception of a small change in Fed funds expectations. Our outlook assumes an operating environment similar to that we have experienced so far in 2025. With that, I will turn it back to John for closing remarks.

John Ciulla: Thanks, Neal. In summary, despite market volatility, it has so far been a good start to the year with our financial performance to date tracking as we originally anticipated. The operating environment remains stable, albeit more uncertain, and our base case remains a slowing, nonrecessionary economic environment for the balance of the year. Our commercial and retail clients remain generally healthy and more optimistic than you might think, however, the macro uncertainty is clearly delaying an acceleration in the investment cycle. Webster is fortunate to be positioned to prosper whatever the operating environment may be. We retain and generate significant excess capital, proactively manage credit and other business risks, have a unique and advantageous funding base, and a strong liquidity profile.

We are poised to quickly adjust to changing market conditions. Finally, I’d like to thank our colleagues for their continued effort. Their hard work is reflected in our performance this quarter, including our strong deposit growth in favorable categories and diverse loan growth. It is also their effort that continually enhances Webster’s operating capabilities preparing us for the future. Thank you for joining us on the call today. Operator, we’ll open up the line for questions.

Operator: Thank you. We will now begin the question and answer session. Simply press 1 again. And as a reminder, please limit yourself to one question and one follow-up. Your first question comes from the line of Chris McGratty with KBW. Please go ahead.

Q&A Session

Andrew Leisher: Hey. How’s it going? This is Andrew Leisher on for Chris McGratty. Good morning.

John Ciulla: Hey. So I know you’ve talked previously about, you know, seeing credit stabilization by midyear. Is that timing still on track? And then on the NPL increase this year this quarter? Can you just provide more details on those credits? I know it was mainly office and healthcare, but if you can provide any comments on those, that’d be great. Thank you.

John Ciulla: Yeah. Sure. I think that the key factor for us is looking at the migration and the reason that we remain confident of seeing kind of an inflection as we move through the year is our criticized level of criticized assets actually declined quarter over quarter. So that’s kind of representative of new flows in. So I’d say, yes. You know, we talked about midyear. I know whether it’s midyear or third quarter, but I think we’re seeing positive trends in rating migration that is consistent with what we’ve talked about over the course of the last several months. Respect to looking at the in more detail on the nonaccruals, we are, you know, some of them obviously are sticky. We’re working through them. I think important to note is if you took our healthcare portfolio and our office portfolio, which are relatively small portfolios in the grand scheme of things.

I think we have about $680 million in the healthcare portfolio at quarter end and about $800 million in office. Contribute nearly half of the nonperformers. So if you think about taking those two out, our NPA ratio would be about 70 basis points rather than just over 1%. So, you know, we obviously proactively manage those portfolios. We do think that we’ve got everything sort of ring-fenced and covered that’s what gives us confidence that we’ll be able to work those classified and nonaccrual numbers down. And we’re not seeing stuff flow into the initial criticized bucket. So we still feel confident that absent a change in the economic environment to the downside, that we’ll see that inflection point over the course of the next couple quarters.

Okay. Great.

Andrew Leisher: Thank you. And if I can just do one more on capital. How are you thinking about, you know, the buyback, you know, given the current economic uncertainty, but also know, your discounted stock valuation? Thank you.

John Ciulla: Yeah. I mean, we obviously think that our stock is undervalued. We bought back a substantial amount of shares in the first quarter. We anticipate kinda sticking to our guns about, you know, deploying capital into organic growth. Looking at potential tuck-in acquisitions in our healthcare vertical and other areas. And if that’s not available, we will buy back shares certainly over the next three quarters. But we obviously have our eye on what happens in the economic environment. You know, our base case, as I mentioned earlier, is that we see a relatively stable slowing economic environment over the course of the next three quarters without a recession. If that occurs, I think you’ll see us buy back more shares as we move through the year.

Operator: Your next question comes from the line of Jared Shaw with Barclays. Please go ahead.

Jared Shaw: Hey, guys. Good morning.

John Ciulla: Hey.

Jared Shaw: Maybe just sticking with the credit side, looking at the growth in nonperformers, actually, when I look at slide 17, the growth in commercial classified, how did that not drive itself a provision? When we look at the growth in provision, you call out it being tied to the macro environment. I guess, what gives you confidence that those increases in nonperformers and increases in commercial classifieds don’t need a provision with them.

John Ciulla: Yeah. I mean, Jared, as you know, the CECL process is pretty complex. Most of the loans that are determined to be problem loans and problem assets have individual assessments of loss in them. And then there are obviously a lot of qualitative factors that go into the CECL reserve. So there were a bunch of offsets. I made the comment that when we ran the models, going through our specific reserves, going through overall weighted average risk rating in the portfolio and migration, that had we not changed the economic scenario that our provision would have been roughly in line with charge-offs. And so it’s a bunch of inputs, and I think you clearly higher levels of nonperformers and classified in and of themselves drive higher reserves, but overall portfolio, migration and weighted average risk ratings in the portfolio along with qualitative factors offset a bunch of that.

So, we were obviously not being cute in saying that when we change the recession weighting of the recession scenario from closer to zero to 30%, that really drove the $20 million in additional provisioning.

Neal Holland: Yeah. And I’ll just add on that, you know, many of the loans have migrated previously reserved for, you know, at adequate levels, so that didn’t move the model. If we ran our models without the change in weighting we did to our downside scenario, we would have seen approximately $20 million less in reserve build. So comfortable with kind of stating that $20 million of the increase was really driven by that change in weighting in the model.

Jared Shaw: Okay. Alright. Thanks. And then, you know, when we look at the you know, over the next few quarters with this desire to drive down nonperformers and work with, you know, exiting, I guess, some of these troubled loans. Do you expect that that’s going to be through sales or through charge-offs or through resolutions? Like how should we think about your, I guess, willingness to use a little bit of capital to, you know, to more rapidly fix sort of credit ratios.

John Ciulla: Yeah. I think it’s a combination. Right? And so we’re always looking at the economic benefit. Obviously, we know that the optics of those higher categories, you know, hurt us from an outside perspective, but also know, when we know that we’ve got an identified loss given default, we’re not gonna do a fire sale and give up capital too early. So I think it’s a there will be some that naturally resolve themselves. Some will take charges in our expectations and where we have to accelerate remediation through sale we’ll do that as well. You know, our anticipation and just jumping the next question, our anticipation in charge-offs, again, as we look through the course of the year, given all the factors, is that 25 to 35 basis point in annualized charge-off rate.

This quarter, we were down modestly from prior quarter, but slightly above. I think we’re around 40, 41 basis points in charge-offs. But we think, as we model through the year, that our full-year charge-offs will be somewhere in that 25 to 35 basis point range. K. Thank you. Thank you.

Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon: Hey, guys. Good morning.

John Ciulla: Mark, good morning. Good morning, John. First, I wondered if you could provide a little bit of color on how HSA renewal season is coming along. I’m curious if you’re feeling any pressure on the deposit costs or fees in that business.

Luis Massiani: Hey, Mark. It’s Luis. On the second question first, on the deposit side, no in deposit cost. The answer is no. You know, so 15 basis points, as you see in the slides that we put out there. Has stayed pretty consistent, and we continue to think that that the, you know, the path forward for, you know, for the book of business. So short answer is that there’s no no real pressure from that perspective. Enrollment season for ’25 was good. You know, the as you think and look at the numbers that we have there, this is the first quarter where you’re gonna have a little bit of a different view given that we did you know, we brought over the investment balances, the cash investment balances from Schwab last year. And so you have a little bit more movement that are slightly different than what we’ve had historically because we did not have that, you know, that part of the deposit base as part of our numbers.

You can remember that deposits used to sit outside of our of our you know, off our balance sheet and and and never factored into those numbers before. So enrollment season was good. This was the first year that we’ve had what I’ll call the full you know, full product suite that we have been developing for the past three years. Which includes new employer portal experiences, new client-facing technology, our new HSA investment platform, we’ve started to see the benefits of that in twenty five. But the first full season that we’re gonna have the entirety of the power of that of that product suite is gonna be for the 2026 pipeline cycle, and we feel very good about the ’26 pipeline cycle. So you know, early to tell because it’s still you know, this is the first year that we’re doing it, but the, you know, we feel very good about the competitive positioning that we have going into the balance of this year and into next year.

And as you think about the progression of deposits, between fourth quarter of twenty four to first quarter of twenty five and then what’s gonna happen for the balance of the year, we should see similar type of growth that’s slightly ahead of what you saw between fourth quarter and first quarter over the remainder of the of the year. So all things considered, growth rates are good. Deposit costs are staying in line where we thought they were gonna be, and we continue to feel very good that we have a we’ve improved our competitive positioning in the market, and we feel pretty good about that going into next year.

Mark Fitzgibbon: Okay. And then just a second question for Neil. Neil, wonder if you could share with us how much you spent roughly in the first quarter to prepare for becoming a category four bank and also update us on what the timeline looks like for, you know, becoming compliant.

Neal Holland: Yeah. So we talked about last quarter that we would be spending about $20 million this year, and so you could think about that as pretty proportional. I don’t have the exact number on what we spent broken out, but it’s probably right in that $5 million range. So we are investing. We’re making great hires right now and making good steps forward on all the required areas around data, around reg reporting. I mentioned that our implementation of a new GL this quarter is is a big move forward for us. We’re on the timeline in category four, we’re really, as John talked about, we have a lot of scenarios that we run. We are actively pushing to be ready with the things that we know will make us better bank, and we’re making investments as quickly as we can in those areas while, obviously, pacing those investments too to make sure that we kinda build over time, but we are moving quickly to have the flexibility for us be ready.

But we don’t have an exact timeline on when we will plan to cross an category four.

John Ciulla: Yeah. I would I’d just add. You you we think about it kind of maybe two years, obviously, with organic balance sheet growth. Our goal would be plus or minus two years to kind of be compliant. And I think an important point that Neil made is also have one eye on what’s going on in the regulatory landscape, Mark, because you know, things appear like they could change. There’s a lot of things our our our baseline is that we need to be compliant with the current rules. As we approach a hundred billion, you know, the 80 to a hundred billion as if we’re kind of almost there. Anyway. So obviously, we’re we’re stepping up our game and we have been for a period of time. If if in fact those bright line tests move either to be indexed to inflation.

You hear Mickey Bowman talking a little bit about that. We’ll be prepared to change the pace of our investment, and I think we’re being very thoughtful but right now, we figure that we need to be compliant with the rules as they’ve been in place, and we think we can get there in the next two years or so.

Neal Holland: Thank you.

Operator: Your next question comes from the line of Matthew Breese with Stephens. Please go ahead.

Matthew Breese: Hey, good morning.

John Ciulla: Hey, Matt.

Matthew Breese: Hoping we could talk a little bit about loan growth and the pipeline. I was hoping you could touch on, you know, first, your appetite for commercial real estate here. And whether whether or not the environment still remains attractive. Two, the Marathon partnership expectations for C and I growth. For the second half of the year. And then the other thing is just Resi has been a bigger driver of growth recently, and hoping you could touch on that as well.

John Ciulla: Yeah. And, you know, this is kind of a $64,000 question. Matt, for those of you old enough to know what the $64,000 question is. You know, our pipelines are solid. We obviously had a good first quarter with respect to loan growth, and it was pretty diverse across categories, as you mentioned. Consumer and commercial. So, know, I I think what I said at the outset I think you’ve heard on almost every other call, is that our commercial and consumer borrowers remain relative. They certainly remain healthy, and they remain relatively optimistic, but everybody’s kinda waiting for the dust to set. So certainly for things like in our sponsor, group, which is driven largely by m and a activity, you know, that’s kind of been put on hold.

We’re not seeing a lot of private equity activity right now, given all the tariffs and the noise in the market volatility. But we know that there’s a lot of discussions. We’ve been you know, we’ve been mandated on some deals that have been kinda put on hold. So you know? But for the passage of time, we should be, able to provide financing for those transactions. So I think to your to your first question, we’ve got the uncertainty has slowed and delayed loan growth. But there is underlying pent up economic demand, and that’s why we feel comfortable with our 45% loan growth over the course of the year. And, obviously, the first quarter, we’re kind of on track. Specifically to the other questions on CRE, we were down in CRE in the quarter. We are participating in the market.

As we said, we’re being more selective on institutional quality, commercial real estate, full relationship real estate. We believe we have capacity. You know, we drove our concentrations down to the two fifty five 2.55% area. We’re there again this quarter. It remains relatively flat from a concentration perspective. We do not feel like that is a a hard constraint because we’re able to drive way down off that regulatory bright line of 300%. So, you know, we expect there to be, let’s say, three to $500 million in commercial real estate growth, which will keep our concentrations in line with capital growth and everything else we’re doing in the portfolio. So I I will tell you, and I, you know, was reviewing some of the other transcripts we would agree with the comment that in first quarter, the CRE landscape got significantly more competitive.

We saw more of the big banks back in the CRE space. So we didn’t drive down CRE exposure on purpose. We just had, you know, runoff amortization, payoffs, and then, a level of originations that had a slightly down in the quarter, but you know, we’re not afraid to grow that category, and we’re actively participating in the market. Respect to the Marathon joint venture, our is that we still go live toward the end of the second quarter, potentially the beginning of the third quarter. And I think what we’ve been careful to do is we haven’t layered in any of the expenses, portfolio seating with loans. Nor any of the economic benefit in our forecast. Because we wanna wait and see that go live. And then on the next earning call or if we issue a press release publicly after we go live, we’ll put a little bit more meat around the bone as to the short term and more medium and long term economic benefit for us, but it’s still on track.

We’re just making sure that we you know, set up the right structure and that we’re we’re all the i’s are dotted and the t’s are crossed. And then on resi, you know, in the in the market, their fin some demand there. I think we, you know, we look at our balance sheet, which is kinda 80% commercial, and so we think it’s it’s a good idea as we start to look forward to category four to have a more balance between consumer and commercial asset classes. You know, we wanna make sure we’re getting paid fairly for our our mortgage business as well. So know, we’re kind of really monitoring pricing and and and may not see it grow as quickly over the rest of the course of the year, but, you know, it’s still an important asset class for us. And so we’re participating appropriately in the market.

Matthew Breese: Appreciate all the color there. I guess my my next one’s it’s a shorter one. And I appreciate all the color on credit. Just curious how do you think provisioning goes for the rest of the year? Should we expect it to more or less match charge-offs? And it also sounds like charge-offs could be down to the right. Your commentary there.

John Ciulla: Yeah. I mean, that’s always a tough question. Right? And I I I think that would be our hope. So if our base case comes true and we don’t go into recession, and we continue to see an inflection point and a a slowing and a cessation and an a positive upswing in risk rating migration. Which is our base case, I think you’re you’re right. I think we’ll have opportunity on the on the cost of credit and the provisioning side moving forward. But again, you know, I think there’s enough uncertainty out there that we think we made a prudent decision to change the waiting. And as we get to next quarter, we’ll we’ll evaluate. But, obviously, our hope and our base case is is that some stabilization will give us some tailwinds on the provisioning side as we move forward.

Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Please go ahead.

Casey Haire: Great. Thanks. Good morning, guys.

John Ciulla: Good morning, Casey. Great to have you back. Hey. Thanks, John. Appreciate it. So just one more on credit, and then I’ll ask the I think I’m saving question. But so I guess what is preventing you from being more proactive in the in the risk rating process and with identifying NPAs. Like, this inflection point that you speak of, John, I I know, you you guys have been candid about this, that it’s it’s coming at some point this year. But this 23% uptick in NDAs is probably a little bit more than than what, is probably gonna keep people away. But they’re a little bit more than what people were hoping for. So why not you know, in middle of the next two quarters, everyone’s gonna be kinda holding their breath on on the the level of magnitude in NPAs. Just what’s keeping you from just ripping off the Band Aid and and identifying the the problem assets today?

John Ciulla: Yeah. I think it’s a fair question. And, also, I think we are very proactive in our risk rating and conservative, and whether that’s good or bad, I think that’s true. I’ll give you we’ll I’ll give you one example to to put real meat on the bone around it. So one of the office credits that went into nonperformer we had a fully tentative and it’s it’s a current loan. It’s a we’re we’re being paid on it right now. But with the one of the major tenants completely unexpectedly and a strong credit tenant as acknowledged that they’re not gonna roll the lease going forward down the road. And so that came as I don’t wanna say a surprise to us because we’re not on top of things, but a surprise to us because I think it surprised everybody.

And so we proactively moved that to non performer and it’s current loan, and it’ll be a current loan for the next next several quarters. So those are the things where we’re not going in there and saying, hey. Can we delay putting this thing into nonaccrual? In fact, we’re we believe that we’re putting things that have material risk to repayment and current payment into non non performers right away. Those are fewer and farther between, and that’s why we have a lot more confidence that we’ll be able to reverse the trend. And, again, I’ll just remind everyone that where we are from a perspective of charge-offs and where we are from an operating and and income perspective know, people keep talking about sort of things going back to normalization.

You know, 25 to 35 basis points, we’re perfectly comfortable with that in the per per given the fact that we can still have high teens RO ATCs you know, throughout the process. These credit costs on a $55 billion commercial portfolio, we don’t think are unmanageable and we’ll be as proactive as we can. So so what you should know is that can’t you know, this is one of these tough ones. The only way we can prove credit performance is over time and to demonstrate it, but we are absolutely not sort of waiting for the last minute to move things into classified and and non accrual. We’re proactively managing that. And I think we’ve got a good line of sight on the fact that we’re not gonna have as much flow in going forward, and that’s why we’ve been talking over the last couple of quarters about seeing an inflection point.

Got it. Thank you. And then just some updated thoughts on on the NIM outlook. Neil, as you said, the deposit beta is gonna go to 33 from 32 this year. Loan yields sound a little bit tougher and, obviously, got some some bad cuts. You know, some near term and aspect ratios.

Neal Holland: I I didn’t quite catch the end of what you said there. The very last bit.

Casey Haire: Sorry. I’m I’m just looking for some updated thoughts on the NIM commentary. And outlook.

Neal Holland: That’s perfect. It I think last quarter, talked about it expectations of NIM between three thirty five and three forty for the year. Know, we felt pressure, as you mentioned, on on the loan side with a little bit flatter curve on loan yields. But we’ve been able to more than offset that with better expectations on the deposit side. So we we’re looking more at a three forty ish NIM versus three thirty five to three forty going forward here for a full year expectations. They’re feeling pretty good there. As mentioned, we now have three cuts built into our Ford forecast. You know, we’ve run projections. If we don’t get any cuts and based on our asset sensitivity position, we don’t think that would have a material impact to our guidance.

As I’ve talked about before, we’re a little bit more sensitive to the long end of the curve. Our assumption is we kinda maintain in this three four thirty five ten yield percent sorry, ten year yield range. But we we have a little bit more sensitivity to the longer end of the curve than the short end of the curve. But overall, the good performance on the deposit side, a little bit challenging on the flatter curve than we originally expected, but overall, we do expect our NIM to be, better than what we had talked about last quarter for the year.

Operator: Your next question comes from the line of Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler: Hi. Good morning. Morning. To the line of questioning. Hi. Sticking to the line of questioning on the deposits, I guess that beta expectation, does that also incorporate the three expected rate cuts this year? And then I guess, just looking at some of the higher cost products like Brio, I guess, why maybe the hesitation to lower some of those higher costing deposit products and maybe work that, the cost of deposits down a little bit more throughout the course of the

Luis Massiani: Yes. Listen, that’s a great question. And that’s, you know, that’s something that we debate, you know, consistently. And to the extent that we a combination of competitive landscape dynamics and then just requirements for funding across the balance sheet that may get that inform those decisions when we make them. We are very confident that over the course of the year, if this rate environment continues to play out and there is a kind of the rate scenarios that we’re forecasting happen, there is gonna be the ability for us to be able to reduce, you know, meaningfully, particularly in those areas of Brio and then some and potentially just backfill with some of the other higher rate product that we have on the interlinked side and some of the other, you know, channels.

So the good thing about the business the the business mix and model that that we’ve created that there’s a ton of flexibility regarding what we can do across consumer commercial and then some of these alternative, you know, deposit channels. And as we continue to view the, progression of balance sheet and loan growth through the course of the year, a tremendous amount of flexibility on what we can do on on deposit pricing. We’ve been conservative right now in in moving down, but those are products that from one day to the next can you know, we can be much, much more aggressive on. And to the extent that we want to, to do that, we certainly can, and we can move very quickly to do it. Okay. Thanks. And then

Timur Braziler: I wanna try and ask the provision question maybe a different way. Just the CECL methodology and looking at the more elevated charge off levels here recently, I guess, how much more punitive does the look back math become given the higher levels of charge offs here more recent and maybe what does that portend for future levels of provision expenses? Provision structurally go higher, just get given some of the more recent trends on the charge off side, or is it more complex on that?

John Ciulla: Yeah. It’s it’s it’s I I I I guess I would qualify to think it’s not more complex than that. But the the the two quarters of slightly higher charge offs than our 35 basis point high end of the range don’t impact the look back period, the loss given default, and factor into the model. That’s a long significantly long look back period through credit cycles of of loss in our portfolio, and loss in the industry. So that won’t have an impact on our provisioning in the next three quarters.

Neal Holland: Yep. I agree with that.

Operator: Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Manan Gosalia: Hi. Good morning. Hey. Good morning. Can you talk morning. Can you talk about NII? It looks like you’re tracking ahead of expectations, and even run rating the current quarter’s NII would get you to the high end of your guide. And you’re clearly expecting some earning asset growth from here too. So can you talk a little bit about what would could could could the current trends drive the NII higher than the high end of your guide?

Neal Holland: Yeah. So I I think if you annualize our guidance, you you get more towards the low end, but it’s still in our guidance range. If you annualize our NII. I would say that we do expect to see earning asset growth for the rest of the year. As we talked a little bit on the last call, we expect Q1 to be seasonally high on net interest margin. You know, we we posted a three forty eight for the quarter. And we’re guiding full year to around three forty. So we do expect a little bit of net interest margin, compression throughout the year. So the combination of those two factors will lead us to NII growth. But the earning assets will be slightly offset by a little bit tighter margin into Q4.

Manan Gosalia: Got it. Yeah. I was I was adjusting a little for the day count in in one Q there as well. Okay. Yep. But in in in terms of I guess, John, you noted that your clients have strategies in place to mitigate shocks in the supply chain. Can you give us some more color on what you’re hearing from them over the past couple of weeks?

John Ciulla: Yeah. It’s interesting. We did a a survey prior to Liberation Day, and we’ve gone back out to our clients. And it’s it’s interesting. As I mentioned earlier, through through luck or or good strategy, we we don’t have tons of exposure to kind of the direct impact of tariffs, but we also realize that you know, everyone could be impacted given their sourcing and supply chain and where we are. Obviously, my my concern, if there is a concern, would be really on the on the demand side if we start to get into a recessionary environment. But our our clients actually seem pretty resilient. Just in terms of, you know, what we hear back from them is planning on being able to source from other areas. Looking at what margin compression would mean, how much it pricing can they move on.

So you know, I would say everybody is concerned in going through the analysis and you know, it’s it’s almost impossible to take the qualitative feedback from clients and put that into some sort of quantitative expectation of performance of the underlying borrowers. But I would say pleasantly surprised on kind of the resilience and the planning. Obviously, things stabilize and we start to get a pullback on a little bit of the the high level tariff noise, hopefully, this will kinda blow over. But I guess I would say cautiously optimistic about what we’re hearing from our clients in terms of their preparedness and their ability to react to a different environment.

Operator: Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.

Bernard Von Gizycki: Hey, guys. Good morning. You manage the franchise well across various cycles. And you just increased the reserves to encompass various economic scenarios. You know, you’re able to keep the net interest income outlook unchanged despite another rate cut. Sounds like, you know, you could buy back shares if the revenue environment weaker than you’re expecting. Just with that, do you have any flex the expense base in case the revenue environment is weaker? To either stop or delay projects. If so, any sense that you could provide how we should think about the variable component of your expense base in both comp and noncomp?

Neal Holland: Yeah. I’ll I’ll jump in there. As you mentioned, we feel very confident in our NII guidance. But if we did hit scenario where we move from a you know, this economic slowdown we’re in, into a recession or other scenario. Do have a lot of flexibility on the expense side. And as you really look at what we talked about earlier on the call, we’re making investments in the franchise to build to category four readiness. We clearly have an easy opportunity to slow those investments. As we talked about, we’re not planning to do that right now. We wanna be ready. We wanna continue to grow and scale, but it’s a lever that we have. That we can pull if we entered into an environment like that. And then also as a leadership team, we’re always looking for ways, you know, at a 46% efficiency ratio organization, we focus on always finding ways to continue to drive efficiencies into the organization.

So there are other levers that we could pull in a scenario that is more negative macro environment than we we are today. So I would say, overall, we have a a fair amount of flexibility there on the expense side if we need to pull those levers.

Bernard Von Gizycki: Okay. Great. And then just a little follow-up. Just on the loan growth for the year, obviously, sponsored did contribute in the quarter. Just want to get your sense of just, you know, any any commentary just on, you know, activity levels and just, you know, how much of that could be contribution, for the rest of the year.

John Ciulla: Yeah. I mean, I think we look at it now as still kind of broad-based blocking and tackling across asset classes. And I would note that what you see in the sponsor category was largely lender finance and and fund banking. So you know, we haven’t really seen the pickup in our bilateral higher yielding full relationship sponsor stuff given the cessation in m and a activity. So we do see that hopefully building over the second half of the year, and, obviously, we’ll have an with the Marathon joint venture hopefully, to increase that volume. So I would say as we look at kind of building out our forecast, we’re not relying on any one category or any one business line. It sort of blocks and tackling and hopefully contributions across the board. And if we’re if we’re lucky and we get a little bit of more economic activity in a macro environment, going into the second half of the year, we should see the the sponsor business rebound as well.

Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Thank you. Good morning, everybody. Maybe first, just a a clarification. So the 25 to 35 basis point net charge off assumption you guys are talking about. I think that’s kind of a longer term assumption. And then you built in the reserves, 74,000,000, assuming a 30% chance of recession, I think, is the number you said. Yep. So that 74,000,000 is about 14 basis points of of loans. I mean, that kind of how you’re thinking about what that 30% chance of recession number is? Is that, I mean, is that more of a cumulative number? I’m just trying to size where that 25 to 35 basis points could go if we do get you know, that 30% chance of recession. I’m really parsing your words here. I apologize, but we’re late in the call.

John Ciulla: Yeah. No. No. That that’s alright. And I I I don’t think we triangulated that way. It really is a it’s it’s it’s the CECL modeling looking at the cumulative life of loan losses across the portfolio. So don’t think in the short term, you know, we we’re really well reserved now. One of the nice things that we didn’t mention on the call is if you look at our category four peers, you know, most of them have slightly higher provisions than most of the midsized banks do as we continue to grow know, we feel like that 34 basis points is is stronger than peer. We’re not really looking at it in the short term in terms of capturing current period charge offs that’s embedded in the overall provision. So I think you think about it from a more macro high level perspective, not trying to triangulate the extra reserves against what we might believe would could be a short term pop in in in charge offs, if that makes sense.

Daniel Tamayo: Right. So the so the the the 25 to 35 basis points is your base case, which assumes a recession is not happening that if if we did have a recession, obviously, or even at 30%, it would be a higher level, I guess, is the the safe way. Okay. Right. And and then presume presumably, if CECL works, you know, it’s supposed to capture life of loan losses during different different times. And so you know, you don’t you don’t necessarily it it’s it’s trying to be not procyclical, so you don’t necessarily have to see incredible increases if your charge off rates for a period time end up in 40 to 45 basis points that that shouldn’t if we’re doing c right, automatically result in significant increases in provision going forward. It’s all based on the modeling as we move forward.

Daniel Tamayo: Understood. Yeah. Thanks for the clarification. And then just another small one here on on the sponsor side. If you had the the amount of of migration, you know, kinda interested in the early stage migration of sponsor and you know, if you if you think think or expect that those flows could be differently paced than the regular the rest of the portfolio.

John Ciulla: You mean from a credit perspective?

Daniel Tamayo: Yes.

John Ciulla: Yeah. I’m I, you I think our our sponsor book outside of healthcare has, you know, sort of basically performed the way it has during all other credit cycles, which is those loans are generally rated in the lower pass categories. So if they migrate, they migrate into criticized. We’ve seen very little loss outside of the healthcare portfolio. So I don’t think there’s anything there that concerns us any differently than any other sector in the portfolio.

Operator: Your next question comes from the line of Laurie Hunsicker with Seaport. Please go ahead.

Laurie Hunsicker: Yeah. Hi, thanks. Good morning. Hey, Laurie. Is just staying with credit here, do you have a number in terms of what is nonperforming in that 7,300,000,000.0 sponsor and specialty book.

John Ciulla: I don’t know if I have it offhand.

Laurie Hunsicker: Okay. And then maybe just if you’re looking for that, I’m just slide 17. I always appreciate the color here. Just extrapolating and and just trying to understand. It looks like your traditional office went from a hundred and eight million down to 16,000,000. Just wanna make sure that that’s right. And then if you know, any comment on that any comment on that that $92,000,000 drop with that charge off? Was that cure? Was that combination? And then it looks like your ADC construction book, that $1,600,000,000 book, had a pretty sharp jump in nonperformers Any color on that?

John Ciulla: Okay. I think, actually, someone just pointed out that they NPLs is a misprint. Yes? Yes. Yep. That’s and when given me that, it’s point it’s 0.5? Yes. Percent. So that was a good catch on your thought. We’re I apologize for the inaccuracy on the slide. So there’s nothing not a big jump in the ADC construction. What was the first question on that, Laurie, on that page?

Laurie Hunsicker: Okay. So then the the same thing. The traditional office last quarter was showing up at 13% non performers, which is a hundred and 8,000,000. It looks like it dropped to, in this chart, 2%, which extrapolates to 16,000,000. So for traditional office non performers, dropped $92,000,000 in the quarter. And just wondered well, I guess, is that correct? Or or what are what are the office traditional office nonperformers? And then just office charge off. You know, of your 55,000,000 in total charge off this quarter, how much raw?

Emlen Harmon: So Yeah. Laura, who are you? Yeah. It’s Emlen. So on the on the on the traditional office non accrual loans, that’s just a decimal place is over one So let’s say the 20% non accrual rate, and that was about 15% last quarter. So there’s a little just a misplacement of the decimal place. There.

Operator: Your next question comes from the line of Samuel Varga with UPS. Please go ahead.

Samuel Varga: Hey. Good morning. Neil, I wanted to just turn back to your allowance for a quick one. I understand that the probability of recession has gone up to 30%, and I also see that the assumptions have pretty meaningfully changed. Is there any potential creep up in those assumptions to turn more negative in the second quarter, or do you think that the 1.34% allowance and your ability to change the probabilities a little bit makes it be sort of the the high end of where we can see the allowance even between this quarter and next quarter.

Neal Holland: Yeah. You know, it’s always hard to predict where the allowance will go next quarter. We feel like we have are well reserved, as John mentioned. We have 5.5% unemployment kind of peaking I feel, you know, if you look at it, the peer population, feel we’re in a pretty good spot there. And we’ve got real GDP growth at 1.31% next year. So you know, it obviously, we’ve had a lot of volatility day to day here over the last few weeks. Could could things get worse? They could. Could things get better? They could. As of today, I feel that, you know, we’re probably a little bit better than where we were when we put 30% in. So I I don’t wanna give a projection on which way it should could go, but I would say that I feel like we’re very well reserved, and we we have a a very reasonable assumption in for our CECL provision at this point in time.

Samuel Varga: Okay. That makes sense. Thank you. And then just quick one on the securities front. Nice pickup again this quarter in the yield there. Given what you see on the the purchase side, how much more room do you think there is to drift that yield higher and and potentially offset some more cash builds? On the margin?

Neal Holland: Yeah. So in Q1, we had about a half a billion dollars of purchases at 5.6%, and we had about a half a billion dollars in reductions at 4.52%. So as we turn that portfolio, we picked up a hundred basis points. We are seeing a little tighter spreads on securities we’re purchasing at this point in time. So we we do expect to continue to see some opportunity there with the repricing. So we’ll continue to, move forward in that direction. And, you know, we we we don’t plan to shrink or increase our securities mix as a percentage of our assets for the rest of the year. And as I talked about earlier, we built our cash levels up. To around 2% of assets, and so we we’ll see a little bit more cash just as average balance is catch up throughout the year, but overall, no. We don’t expect any major departures from kind of our percentage mix of cash or securities for the rest of the year.

Operator: Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom: Thanks. Good morning.

John Ciulla: Good morning, John.

Jon Arfstrom: Question for you, John. Do you feel like we’re too focused on credit I you you told us NPAs were gonna go up. And maybe we didn’t listen. But internal perception versus focus, I guess, is the question. And then what’s a more comfortable or normalized level of NPAs for Webster in your view?

John Ciulla: So the the answer to your first question is yes, particularly after this hour. I’m I’m a little bit tired of credit. No. But look, I I I’m I take a a pretty balanced approach here because it you know, promises about credit performance are are are sort of hollow. And as I said before, I think, you know, we need to continue to to to on on these portfolios. I think we’re well reserved. I think we’re in a good spot. You know, certainly, nonperformers for us from a normalized operating environment should be materially below 1%. And so I think that, you know, that’s kind of the way we we we measure it and we look at it. Some of these are it’s stickier than we thought, and we’re not willing at at this time. And we might be willing to have a completely uneconomic resolution of these non performers because there’s significant value in many of these credits.

And as I said, some of them are actually paying in their current, and so we feel like we can work through them with a good outcome for our holders of capital. So you know, I I am absent a recession and a significant downturn. I feel really good about our ability to work through these credits in orderly fashion. And as I said, the most encouraging thing for us is that our criticized asset levels actually have come down. Quarter over quarter. So we’re seeing that, you know, slower migration into classified lower, and and no migration net migration into into criticized. And so think we need to kinda continue to work through it. But as we do, I think to your earlier point, I don’t feel like we are under credit stress at all. Right? We’ve got really good operating income.

We’ve got really good fundamental operating capacity and capabilities. We’ve got a boatload of capital. And liquidity. And and I feel like the the overall credit book, which is a you know, big commercial portfolio, and our our problems are kinda situated in in two of these small buckets or small discrete portfolios. So I get it. Have higher headline numbers, and we need to continue to bring those numbers down. But that’s why we have sort of a calm confidence that as we move forward, we can just continue to operate and deliver high returns despite what these credit costs are right now, which we don’t think are particularly outsized.

Jon Arfstrom: Okay. On the capital question, you have two targets. You have the CET-one 11 longer term ten and a half. If if growth is slower in the near term, are you do you still wanna be active in the repurchase program now? Do you have any willingness to go below the 11? Thank you.

John Ciulla: Yeah. It’s a good question. I think, absolutely, if we see a stable economy with no further credit deterioration, and no other uses of capital and loan growth isn’t isn’t too robust, we will be buying back more shares because our stock is significantly undervalued. I think, you know, that 11% during current operating environment is probably the right target. Would we be willing to go, quarter to quarter below that 11%? In the right circumstances, sure. So in and around 11% would be would be good. We generate a lot of capital, and so we could buy back a lot of shares stay above that 11% level as well. So I think good question, and and the answer is yes.

Operator: Your final question comes from Anthony Elian. Please go ahead.

Anthony Elian: Hi, everyone.

John Ciulla: It’s on loan. Hey. Good morning.

Anthony Elian: Morning. First on loan, could you send me a little quarterback to late? March, I think that if I look at period end balances, they’re about half a billion higher than the average number for one Q.

John Ciulla: Yeah. I think I missed the very first part of the question, but if your question was was a lot of the done at the end of the quarter, the answer was yes. And that wasn’t obviously done on purpose. We just ended up closing a bunch of really good transactions and larger transactions towards the end of the quarter. Thank you. And then my follow-up maybe for Neil, when I look at your NII guide of $2.45 to 2,500,000,000.0, where do you see the biggest weight in fact? Is it more fewer rate cuts, deposit pricing, non interest bearing growth. Thank you.

Neal Holland: Can you can I I think you asked kinda what would move us to the low end or the high end of that guide? Is that the general question there? You were breaking up a little bit.

Anthony Elian: It is. And it is. And more so, the the biggest swing factor is that more fewer cuts, nonprospering coming in better than expected or pricing on deposits?

Neal Holland: Yeah. Talked about this a little bit before. The the team has done a nice job of reducing our asset sensitivity. We don’t have a lot of exposure to swings the short end of the curve in the near term. So as I mentioned earlier, if we don’t get any cuts versus the three in our guide, the the the modeled NII difference is not overly material. We’re a little more sensitive to the long end of the curve. You know, could see in our K every 1% excuse me, every 20 every 50 basis point move as a 1% impact or $25 million. So, if the long end of the curve moves up or down, we have a little bit of opportunity or risk in the long end. Deposit pricing is under our control. We’re pretty confident in our betas there, and it’s we talked about earlier, we’re gonna look for ways to continue to outperform our our our betas there.

I think as I take a big step back, know, if we see more robust economic activity and better industry loan growth, we could clearly move higher in the guide. If we move into a recessionary scenario, you would see the opposite impact. If yield curve steepens on the long end, obviously, that would help us. We’d see more opportunity, move towards the high end of the guide. And if curve got flatter, we’d move to the low end. So I I would kind of highlight those factors as some key things that we look at as we think about what may push us up or down off the middle of our current guide.

Operator: And that concludes our question and answer session, and I will now turn the call back over to John Ciulla for closing comments.

John Ciulla: Thank you very much. Thanks, everybody, for joining. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation and you may now disconnect.