Webster Financial Corp Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Chris McGratty - KBW - Analyst : Hey, good morning, John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Good morning.

Question: Chris McGratty - KBW - Analyst : Okay. Perfect. And then my follow up John, you alluded to the capital return flexibility. Could you maybe just rank order and also the timing, I wish you think you might be able to return more capital? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah, I mean, I think we always talk about kind of prioritizing for organic balance sheet growth, thinking about doing things like we've done with Ametros and Interlink and [Bend]. And then obviously if there's no other productive use of capital, I do think given where we are and the fact that we do think with interest rates coming down that we should see an inflection point in credit as we get into this quarter in the first half of '25 that we're more likely to begin repurchases again. Absent other organic opportunities to deploy that capital, Chris. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 1:00PM, WBS.N - Q3 2024 Webster Financial Corp Earnings Call So I think we're there. We feel really good about our capital levels now and we have some more flexibility. So we're more likely than we were before in the next quarter or to begin share with purchases absent other uses of organic deployment.

Question: Jared Shaw - Barclays - Analyst : Hey, good morning, guys. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Hey, Jared.

Question: Jared Shaw - Barclays - Analyst : That's great color. Thanks. And then maybe for my follow up on the deposit side, you know, really good trends there. You know, as we're entering the enrollment season, what are your thoughts on maybe (technical difficulty) What do you think that. There could be some pressures or opportunity?

Question: Jared Shaw - Barclays - Analyst : Great, thanks a lot. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Thank you.

Question: Mark Fitzgibbon - Piper Sandler Companies - Analyst : Hey guys, good morning. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Hey, Mark. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 1:00PM, WBS.N - Q3 2024 Webster Financial Corp Earnings Call

Question: Mark Fitzgibbon - Piper Sandler Companies - Analyst : Okay. That's great. And then just as a follow up, John. You guys have done a great job shrinking the office book. I guess I wondered if you could share with us what the reserve on the office portfolio is right now? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah, I think it's up 6%, Mark. I'll give you -- again, I'll repeat what I said Jason had talked to me when the portfolio was a billion dollars a quarter or so ago. You know, we talked about there being about a third of that, which is kind of hand-to-hand combat that we're working through these two credits that I just referenced, and you asked about. We are obviously in that kind of third of difficult working through. We've got about a third of the portfolio that we don't worry about, that's highly leased that have long dated maturities and then the stuff in the middle, we continue to kind of just actively manage and we think we've got enough second and tertiary support as well as in place leases to kind of work through. So when you think about 6% on the overall $917 million that's left, remember, there are some specific reserves as well and when you think about the reserving, we feel comfortable about it because it's really against that one-third of the portfolio, that's most problematic for us.

Question: Matthew Breese - Stephens Inc. - Analyst : Hey, good morning, everybody. And I was hoping you could talk a little bit about expectations around loan and deposit betas over the next year or so. Whether you've had any early success tweaking and lowering deposit costs. If so where? And then the other side of the coin is just given over the quarters, you've reduced asset sensitivity, whether or not you think full cycle loan beta will match what we've seen during the hiking cycle, which was kind of the low 50% range. Unidentified Company Representative Yeah, I'll jump in there. I think obviously we had our first cut in the cycle of 50 basis points and we took pretty quick action on the deposit portfolio and we repriced down $27 billion-$28 billion of that portfolio about of our deposit portfolio at about a 60% beta. So it's kind of $16 billion at 100% beta or if you look at our total book about 25% beta so far, is -- our interlink deposits basically 100% almost immediate beta and those are over $7 billion. We saw some nice pricing down in our commercial deposit portfolio now, 60% beta so far on our online portfolio with Brio. And then a bunch of different moves on our consumer portfolio through the first cut. So, so we're feeling pretty good there. As you take a step back and look at our overall portfolio, within the next year, we expect approximately $30 billion of our loans and securities and cash to reprice. That's $28 billion in loans and a $1billion dollars in security. So our securities book is fixed and long with less than a billion out of our $17 billion portfolio there variable. So we kind of look at that as the repricing side on the loans. And if you flip to the deposit side in the first five quarters of the up cycle with a 34% beta. And we're anticipating approximately 30 -- beta of 30 in the first five quarters down. And if you think about a 30% beta on a $65 billion portfolio, you do the quick math there. That's about $19 billion to $20 billion at 100% beta. We have short borrowings, $3 billion and $4 billion will mature this quarter. And next, we've got a $5 billion hedge portfolio that helps support our current positioning. And then there's another large factor for us is that we have approximately $5 billion of fixed rate securities that mature and churn annually. And those are anticipated to roll over, roll off at about 4% and roll back on with new originations in the 6% range. So the 200 basis points or so up. So when you kind of put all that together, we have a pretty well balanced position going into next year. And as you can see in our model results, a very neutral positioning despite us having a fairly large portion of variable rate load. So a long answer there, but I know it's an important topic and I think that the team has done a really good job positioning us for this down rate environment.

Question: Matthew Breese - Stephens Inc. - Analyst : I appreciate all that. Thank you. That's all I have. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Thank you, Matt.

Question: Daniel Tamayo - Raymonds James - Analyst : Thank you. Good morning, everyone. I guess first, just a follow up on the credit side. John, I think you mentioned an inflection in credit could lead to the possibility for increased repurchases going forward. But how should we think about that? Do you think that that non-accruals are at or nearing a peak here? Obviously, there's some uncertainty with how the whole office loan environment plays out. But, just curious how we should be thinking about those non-accrual, and kind of early-stage credit levels and how that plays into your thinking on net charge offs as well. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah, it's a terrific question, and one that I loathe answering just because it's difficult to predict. You know, we mentioned last quarter that this quarter would be less worse. If you were and it was -- we were marginally less worse. We've been through the entire portfolio. We are getting to a point where I think we've identified obviously all proactively all the real issues in the portfolio that we go through. And I again remind everybody that if you look at our absolute statistics, they're kind of still in line with pre pandemic statistics. So I know a lot of CEOs are saying, we're trying to remind everybody that this hasn't been a cratering of credit. It's been sort of a return to normalcy on credit. Our hope right now and what we're looking at is, we've got interest rates coming down. We've already seen an increase in commercial real estate refinancing activity based on the behavior of the five year, and the forward curve. And so as interest rates come down, if the Fed navigates this soft landing, I do think that we should see running through bank P&Ls and bank balance sheets, an inflection point in credit, certainly in the first half of '25. It's tough to call a particular quarter. We have seen some negative risk rating migration. We've been pleased that migration has not continued to result in higher levels of annualized charge offs. And so it would be difficult for me to say, hey, we think 4Q is the bottom. But I do think all the macro factors and our understanding of our portfolio that the first half of '25 we should start to see kind of absolute improvement in the balance sheet. And obviously, we have a forward look based on where we're trading. If you're asking the question with respect to capital allocation and return of capital, we've got lots of earnings, we've got really good reserves. So, you know, we'll put that all into the box and decide whether or not in the fourth quarter we start buybacks or whether or not that's the first half of '25 activity.

Question: Daniel Tamayo - Raymonds James - Analyst : Okay, great. Thanks for all that color.

Question: Bernard Gizycki - Deutsche Bank - Analyst : Hey guys, good morning. So on page 6 of the deck, you noted that you've identified and documented certain loans eligible to optimize RWI treatment. And I know you've been talking about this on the call, but just to elaborate a bit more on these actions. And if you could size how big this was to the capital improvement during the quarter.

Question: Bernard Gizycki - Deutsche Bank - Analyst : Okay. Yeah, that's helpful. So, and then on expenses obviously with technology, you basically highlighted you've been making significant investments in the tech stack, modernizing the core banking platform, the BSA ML cyber security cloud capabilities. During the quarter you also highlighted the tech spend increase sequentially, commercial services and occupancy costs. Could you just provide some color on those for the quarter on the tech professional and occupancy, REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 1:00PM, WBS.N - Q3 2024 Webster Financial Corp Earnings Call John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Specific, Bernard, your question being like specific expenses related to those initiatives for the quarter?

Question: Bernard Gizycki - Deutsche Bank - Analyst : Okay, great. Thanks for taking my questions. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Thanks, Bernard.

Question: Laurie Hunsicker - Seaport Global Securities - Analyst : Yeah. Hi, good morning, gentlemen and Neal welcome. Just to go back to office here and certainly appreciate office is only 2% of your book. And you've been very proactive and transparent, but on your $54 million of loan loss provisions that you took this quarter, how much of that was office? And then of the two loans that are new and non-performing that $45 million and $25 million, can you help us think a little bit about what is the occupancy, what's the new debt service there and then specific reserves on those two loans? You know, certainly under the backdrop that you gave Mark office reserves for 6% or $55 million basically. Of your $55 million, what are the specific reserves on those two loans? And then just sort of final question here on office. And specifically that $45 million exposure, that bank we just filed, they're a part of it. And you guys, it looks like we're the lead i.e., Sterling was the lead. Can you just help us think about, again, this is just for the bank well filing, that there was REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 1:00PM, WBS.N - Q3 2024 Webster Financial Corp Earnings Call a refresh property appraisal done in April at $105 million. And then five months later, that property is now worth $36 million. So if you could just help us think through any parts of that, that would be really helpful. Thanks. John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah, Laurie. I don't think -- first of all, I don't have all of that information and I don't think I can give you very good answers there. I mean, I'll tell you with respect to [Cecil] and the provisioning for the quarter, there's so many in and out, right? That -- you can't identify the amount of the provision related to a specific credit or even to a specific portfolio because what you're doing is refreshing and updating your risk ratings along with your qualitative factors. And you're coming up with a refreshed life of loan losses for a $52 billion portfolio. So certainly, the amount of charge offs impacts what you provide, but it doesn't necessarily immediately correlate with where the charge off came from. So I don't think I can draw a connection to those two loans to our provision. I gave you the fact that the charge offs in the quarter, about 55% of the charge offs were related to office loans. Those loans we mentioned being the largest drivers. We actually had debt recovery in consumer, which offset our overall charge off a little bit. So, again, it's tough to draw those conclusions. I certainly don't have the in place that service coverage and LTVs on those two specific loans now. What I can tell you from the CEO seat is that if they're on non-accrual, it means that there's a question as to whether or not the underlying cash flows can repay the loan as agreed. So, we might be able to get you some of that off line with Emilyn and Jason, but I can't give you the specifics on those two transactions. We were the lead lender. You're correct. It was, I think a 2019 or 2018 origination significantly pre-merger. So, I can tell you that we were the agent on those two credits, and I think that's the information that I have available to me here, Laurie.

Question: Samuel Varga - UBS - Analyst : Hey, good morning. I just wanted to go back to the securities book, and you commented on the roll-on yields being around 6% expected on the sort of the $5 billion of annual cash flows on that. Obviously, this quarter was $584 million. So can you just comment on why this quarter was lower? Why you expect it to move higher over the next 12 months?

Question: Samuel Varga - UBS - Analyst : Got it. Thanks for the clarification on that. And then on the Brio deposit base, you said the 60% beta. Just to clarify as well, is that on the new production for this quarter, is that the overall book given the short duration of it that's already realized 60%.

Question: Samuel Varga - UBS - Analyst : Okay. And then in terms of new production, have you been able to get to near 100% or potentially over 100%?

Question: Samuel Varga - UBS - Analyst : Got it. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 1:00PM, WBS.N - Q3 2024 Webster Financial Corp Earnings Call