Webster Financial Corporation Q3 FY2025 earnings call

Highlights include strong results with a return on tangible common equity of 18% and an ROA of nearly 1.3%, along with loan and deposit growth of over 2% quarter over quarter. Overall revenue grew by 2.3%. The company's strategic position fuels performance, featuring diverse balance sheet growth, substantial liquidity, and conservative credit positioning. Capital generation is a strategic advantage, with 2.2 million shares repurchased and tangible book value increasing by 3.7%. Asset quality has improved, with criticized loans decreasing by over 7%, non-accrual loans remaining flat, and charge-offs near the normalized range. Business lines had positive activity in the third quarter, including growth in the commercial lending pipeline, well-performing diversified deposits, an operational private credit joint venture with Marathon, and HSA Bank benefiting from new legislation expanding the addressable market.

Total assets were $83 billion at period end. Loans and deposits both increased by over 2% during the quarter. Loan growth amounted to $1.4 billion or 2.6%, with all loan categories showing growth. Deposit growth was diverse, with public funds seeing seasonal growth and commercial and healthcare financial services also experiencing growth. Overall revenue grew by 2.3% compared to the prior quarter. Return on tangible common equity was 18% and ROA was nearly 1.3%. Loan growth was driven by the diversity of categories with all portfolios increasing, and deposit growth was also diverse, including growth in commercial and healthcare financial services books in addition to the seasonal growth in public funds.

The company expects net interest income to be effectively flat compared to the third quarter, with balance sheet growth offset by a lower quarterly net interest margin (NIM). Seasonal outflows of deposits and higher debt costs until subordinate notes are redeemed are anticipated. Fees are likely to decline without the benefit of another legal settlement. There is a roughly 1% seasonal decline in deposits, but excluding this, deposits are expected to grow by approximately 1% this quarter. Full-year loan growth is above the range, NII guidance is at the top end, and fees and expenses are higher than the midpoint.

Tariffs and labor market uncertainty are not significantly impacting the credit performance currently, but vigilance is required. Potential risks exist from the New York City mayor election and its impact on business activity and credit performance over the long term.

Q: Jared Shaw asked about the Marathon partnership and the trajectory of deposit growth.

A: Luis Massiani stated the Marathon partnership is going well with a good pipeline, and Neal Holland mentioned they prefer Intersink balances over broker deposits, using broker deposits to offset swings in public deposits.

Q: Mark Fitzgibbon inquired about private credit exposure and bank M&A.

A: John Ciulla said NDFI exposure is mostly in fund banking and lender finance with no losses, and the company is not interested in whole bank M&A currently but may consider smaller healthcare-related acquisitions.

Q: Andrew Leischner asked about loan growth pipelines and CET1.

A: John Ciulla said pipelines are robust but expects lower fourth-quarter loan growth due to prepayments, and CET1 is above the target with capital allocation focused on loan growth and potential healthcare inorganic growth.

Q: Matthew Breese asked about loan spreads and commercial loan yields.

A: John Ciulla and Neal Holland said it is a combination of risk selection and tighter credit spreads in originations, with commercial loan yields decreasing due to the mix and tighter spreads.

Q: Casey Haire asked about countermeasures for double pledging and the credit quality outlook.

A: John Ciulla said it starts with dealing with high-quality asset managers and diligent underwriting, and credit quality is trending in the right direction with improving risk rating migration.

Q: Anthony Elian asked about CRE loan originations and credit quality review.

A: Luis Massiani said CRE originations had pent-up activity in the third quarter with a good mix, and John Ciulla said they are comfortable with CRE concentration and growth will be thoughtful.

Q: Bernard Von Gizycki asked about the NIM exit run rate and the HSA fee income opportunity.

A: Neal Holland said Q4 NIM guidance was adjusted due to various factors, and Luis Massiani said HSA has growth opportunities with direct-to-consumer potential but limited current cross-selling.

Q: David Smith asked about investment opportunities and the category four threshold.

A: John Ciulla said the lifting of the category four threshold may free up investment dollars for new business initiatives such as digitization and HSA adjacent opportunities.

Q: Daniel Tamayo asked about the impact of the rate cut on spreads and the Marathon JV.

A: Neal Holland said they are balancing the impact of the rate cut on spreads, and John Ciulla said the Marathon JV is not affected by private credit headlines.

Q: Janet Lee asked about the growth appetite for NDFI exposure and the NYC mayor election risk.

A: John Ciulla said the company is comfortable with NDFI exposure growth as long as underwriting is solid, and John Ciulla and Luis Massiani said the NYC mayor election risk is not material to the financial impact.

Q: Jon Arfstrom asked about noninterest income drivers and the NYC mayor election.

A: Neal Holland said noninterest income growth comes from client activity and swap income, and John Ciulla said the NYC mayor election risk is manageable with diversified business lines.