Webster Financial Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Results Recap: Solid results with return on tangible common equity 18%, ROAA nearly 1.3%, loans and deposits up over 1% linked quarter. Revenue grew 1.6% over prior quarter.
• Capital Position: Common equity Tier 1 ratio increased, Board authorized $700 million share repurchases, bought back 1.5 million shares in the quarter.
• Asset Quality: Inflection point in asset quality materializing, criticized commercial loans and non-accruals down, net charge-off ratio 27 basis points within normalized range.
• Strategic Opportunities: HSA Bank benefits from reconciliation bill provisions, potential $1-2.5 billion in additional deposits over 5 years. Asset management joint venture with Marathon Asset Management operationalizing, moving $242 million of loans to held-for-sale for the joint venture. Continued investments in technology, business development, and various verticals.
• Leadership Changes: Jason Schugel joined as Chief Risk Officer; Dan Bley retired after 15 years. Fred Crawford added to Board.

Segment Performance

• Balance Sheet: Total assets were $82 billion at period end, up $1.6 billion from last quarter. Loans grew $616 million (1.2% linked quarter), deposits up over $700 million. Loan-to-deposit ratio held flat at 81%. Tangible book value per common share increased to $35.13, up over 3% from prior quarter.
• Income Statement: Interest income up $9 million from Q1, non-interest income up $2.1 million, expenses up $2 million. Net income to common shareholders up $31 million, EPS $1.52 vs $1.30 in Q1. Net interest income increased $9 million, NIM 3.44% (down 4 basis points from prior quarter). Non-interest income $95 million, up $3 million. Efficiency ratio 45.4%.
• Deposit Mix: Total deposits grew $739 million. Deposit costs up 3 basis points. Healthcare Financial Services segment (HSA Bank and Ametros) is a key source of low-cost, long-duration deposits. InterSYNC provides granular deposits.

Guidance

• Full Year 2025: Expect NII of $2.47 billion to $2.5 billion on non-FTE basis, assuming 2 Fed funds rate cuts beginning in September. Full year tax rate expected 20%-21%, returning to 21% in second half.
• Share Repurchases: Board authorized $700 million in share repurchases, bought back 1.5 million shares in the quarter.
• Loan Growth: Anticipate loan growth to accelerate in back half of 2025 with diversified commercial and consumer loan and deposit opportunities.

Risks

• Macroeconomic Uncertainty: Less certain macroeconomic picture in first half of year, but company on track to meet outlook.
• Tariffs: No disproportionate exposure to industries impacted by tariffs, borrowers had time to develop strategies.
• Deposit Competition: Significant competition on deposit side, team actively monitoring deposit costs.
• Regulatory Changes: Potential changes in banking regulations, but company attuned to impacts and positioned to adapt.

Question and Answer

• Q: On capital and buyback pace A: Target CET1 ratio 11% for balance of 2025, disciplined approach to share repurchases, focusing on organic growth and tuck-in acquisitions if first two options not available.
• Q: NIM outlook and deposit costs A: Positioned neutral to interest rates, expect deposit costs to move down with rate cuts, but monitoring competition on deposit side.
• Q: Bank M&A importance A: Attuned to potential indexing/elimination of $100 billion threshold, but primary focus on organic growth and tuck-in acquisitions, unlikely to engage in active bank M&A in short to medium term.
• Q: HSA market expansion and expenses A: HSA market expansion driven by Bronze ACA plan participants, minimal impact on expense trajectory, some marketing spend needed for education.
• Q: Credit quality metrics A: Credit quality metrics stabilizing, no new pockets of problems, NPLs and classifieds concentrated in specific portfolios, expecting further improvement.
• Q: Marathon joint venture and fee income A: Joint venture to enhance competitive position in private credit markets, fee income from asset management expected to ramp in 2026, initially small but recurring.
• Q: Share buyback price and rent-regulated multifamily A: Q2 share repurchases at $51.69, debt service coverage ratio on rent-regulated multifamily portfolio 1.56x, maturities normal course.