Webster Financial Corporation Q1 FY2025 earnings call

• Balance sheet growth: total assets $80 billion, deposits up over $800 million, loan-to-deposit ratio 81%. - NIM: up four basis points to 3.48% despite two fewer days in the quarter. - Income statement: NII up slightly, noninterest income down due to unique transaction in prior quarter, expenses up $3 million with efficiency ratio 45.8%. - Credit trends: underlying credit trends met expectations, criticized loans declined in 1Q, nonaccrual and classified migration expected to inflect in 2025 absent substantial macro change, CRE office and healthcare are drivers of charge-offs and sticky NPAs. - Deposit growth: diverse, five major areas grew deposits, DDA slightly down but expected to stabilize full-year.

Webster's first quarter financial performance was solid. Deposit growth was 1.3% with robust core deposit growth, and loan growth was 1% across business lines. Loan-to-deposit ratio was 81%. NIM expanded by four basis points, efficiency ratio was 45.8%. Reported EPS was 1.3, return on assets 1.15%, return on tangible common equity just below 16%. The company repurchased 3,600,000 shares during the quarter. Provision increased by $20 million due to increasing the recession case probability to 30% in CECL process. Deposit growth was diverse with five major areas growing, corporate deposits the only decline. Loan growth was better than market, diverse across categories.

• Full-year 2025 outlook unchanged from January except for small change in Fed funds expectations. - Plan to deploy capital into organic growth, potential tuck-in acquisitions in healthcare vertical and others. - Will buy back shares if economic environment allows, with base case being stable slowing economic environment without recession. - Expect NIM to be around 3.40% for full year, with earning asset growth and slight margin compression.

• Macro uncertainty affecting loan growth and economic activity, delaying investment cycle. - Exposure to CRE office and healthcare asset classes, potential impact from tariffs not yet material but monitored. - Uncertainty in economic scenario affecting provisioning levels, as seen with increased provision due to higher recession probability in CECL process.

Q: How's the timing of credit stabilization still on track and details on NPL increase in office and healthcare?

A: John Ciulla said criticized asset levels declined quarter over quarter, indicating positive rating migration trends. Nonperforming assets increase was due to small groups in healthcare and office portfolios, which are relatively small, and they anticipate growth to slow.

Q: How are you thinking about the buyback given economic uncertainty and discounted stock valuation?

A: John Ciulla said stock is undervalued, they bought back shares in Q1, plan to deploy capital into organic growth or buy back shares depending on economic environment.

Q: On credit side, why didn't growth in commercial classified drive provision?

A: Neal Holland explained CECL process has offsets, many loans had previously reserved losses, and the $20 million increase in provision was mainly due to change in recession scenario weighting.

Q: How do you expect to work through nonperformers, through sales, charge-offs or resolutions?

A: John Ciulla said it's a combination, with anticipation of 25 to 35 basis point annualized charge-off rate.

Q: Color on HSA renewal season and deposit costs/fees?

A: Luis Massiani said no pressure on deposit costs, enrollment season was good, first year with full product suite, and feel good about 2026 pipeline.

Q: How much spent to prepare for becoming category four bank and timeline?

A: Neal Holland said spending ~$5 million, timeline around two years, and will be ready with regulatory changes considered.

Q: Loan growth and pipeline, appetite for CRE, Marathon partnership, resi?

A: John Ciulla said pipelines are solid, uncertainty slowed loan growth, but underlying demand exists, CRE participation selective, Marathon joint venture on track, resi is an important asset class.

Q: Thoughts on provisioning for rest of year?

A: John Ciulla said hope for stabilization to give tailwinds on provisioning side but uncertainty remains.

Q: What's preventing proactive risk rating and NPA identification?

A: John Ciulla said they are proactive, examples like office credit being current but moved to nonperformer due to tenant change, and are managing risks conservatively.

Q: Updated NIM outlook?

A: Neal Holland said expecting NIM around 3.40% for full year, with earning asset growth and slight margin compression.

Q: Client strategies to mitigate supply chain shocks?

A: John Ciulla said clients have strategies to source from other areas, plan on pricing, and are resilient.

Q: Flex on expense base if revenue weaker?

A: Neal Holland said have flexibility to slow investments in category four readiness and look for efficiencies.

Q: Loan growth contribution from sponsor side?

A: John Ciulla said sponsor business expected to rebound in second half if economic activity picks up.

Q: Clarification on charge off assumption and CECL modeling?

A: John Ciulla said 25 to 35 basis point charge-off assumption is base case, CECL modeling looks at cumulative life of loan losses.

Q: Office nonperformers and charge offs?

A: Emlen Harmon clarified decimal place misprint on slide, traditional office nonperformers not as high as misstated.

Q: Allowance for recession probability and securities yield?

A: Neal Holland said well reserved, expect to continue seeing opportunity in securities yield repricing.

Q: Focus on credit and normalized NPA level?

A: John Ciulla said normalized NPA level should be materially below 1%, and criticized asset levels declining is encouraging.

Q: Capital repurchase program and CET1 target?

A: John Ciulla said will buy back shares if economic stable, and would be willing to operate below 11% CET1 in right circumstances.

Q: Loan growth end of quarter and NII guide?

A: Neal Holland said loan growth end of quarter due to closing large transactions, NII guide influenced by earning asset growth and margin compression.