WEBSTER FINANCIAL CORP Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Community Initiatives: Launched the You're Home program for down payment assistance to first-time homebuyers, and the Webster Finance Labs Initiative with 9 labs deployed by year-end, having invested over $1.7 million. Webster volunteers contributed nearly 17,000 hours of service.
• Financial Performance: On an adjusted basis, the company achieved a return on average assets of 1.26% and return on tangible common equity of 17.9%, with adjusted EPS of $1.35. Client deposits grew by $1.8 billion, loans originated $1.6 billion, and the efficiency ratio was 45%.
• Ametros Acquisition: The acquisition of Ametros added $870 million in deposit balances and is expected to contribute fee income, with growth potential through existing partnerships and market penetration.
• Credit Monitoring: The company monitors credit performance, noting negative risk rating migration. The commercial real estate portfolio is diversified and performing well, with office exposure managed through maturities and extensions.

Segment Performance

• Healthcare Financial Services: Ametros has grown deposit balances to $870 million from $805 million since acquisition, expected to grow at a 25% CAGR over the next five years. Combined with HSA Bank, this segment contributes to the deposit base with transactional and low-cost balances making up 46% of the total deposit base.
• Commercial Real Estate: The commercial real estate portfolio is diversified by geography and product type, with a weighted average origination LTV of 56% and an amortizing debt service coverage ratio of 1.5 times. Classified loans make up 1.5% of the portfolio, with non-accruals at 10 basis points. Office exposure has been reduced, with New York City office exposure at $217 million.
• Loan and Deposit Trends: Loans grew ~$373 million quarter-over-quarter, with growth driven by commercial categories. Core deposits grew $1.5 billion, retail CDs increased by $350 million, and brokered deposits were reduced, resulting in effectively flat total deposits quarter-over-quarter.

Guidance

• Loans: Expected to grow ~5% for the full year, with growth driven by commercial categories.
• Net Interest Income: Projected to be ~$2.4 billion, at the low end of prior guidance, with expectations of two Fed funds rate cuts in September and December.
• Non-Interest Income: Forecasted to be in the range of $375 million to $400 million.
• Expenses: Adjusted expenses expected to be in the range of $1.3 billion to $1.325 billion, with an efficiency ratio in the low to mid-40s.
• Capital: Common equity Tier 1 ratio targeted at ~11% in the near term, with a long-term target of 10.5%.

Risks

• Credit Performance: Negative risk rating migration and potential shallow credit correction, with charge-offs slightly higher than previous quarters but still absorbable.
• Deposit Costs: Continued pressure from deposit repricing, with deposit costs expected to peak in the second and third quarters.
• Market Dynamics: Uncertainty in prepayments and other market factors affecting net interest income.

Question and Answer

• Q: On NIM and NII, where is the snapback expected? A: Snapback expected from loan growth, securities portfolio repricing, and fixed rate loan repricing, but offset by deposit cost pressure.
• Q: On credit, common threads in C&I book? A: Idiosyncratic one-offs across industries, not widespread, with charge-offs still below pre-pandemic levels.
• Q: On loan sales for CRE targets? A: Selective and opportunistic, depending on interest rate environment and market conditions.
• Q: On margin bottom and NIM trend? A: Margin flat quarter-over-quarter, expected to improve by end of year with potential for higher NIM from loan growth and asset repricing.
• Q: On deposits and DDA decline? A: DDA decline flattened, with growth expected from Ametros, HSA Bank, Interlink, and CD growth.
• Q: On ROA and ROATCE targets? A: Through-the-cycle targets sustained by an efficient operating model and diverse funding sources.
• Q: On CRE office reserves? A: Reserves for CRE office portfolio moved up to 5% of the portfolio.
• Q: On C&I non-performers? A: Idiosyncratic across industries, not correlated, with non-performers still below pre-pandemic levels.
• Q: On FHLB borrowings and margin? A: FHLB borrowings used for flexibility, with spot NIM at ~3.35% and deposit costs at ~2.24%.