Webster Financial Corp Q4 2024 Earnings Call Transcript

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

Question: Mark Fitzgibbon - Piper Sandler - Analyst : John, it sounds like the Treasury Secretary nominee is disposed to easing regulations on banks like Webster. I guess if -- I'm curious if the Category 4 threshold is raised, is it likely that Webster would again become a buyer of small banks? Would that sort of move up on your priority list? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah. I mean, Mark, I think it stands right now, we're obviously really excited about our kind of path forward from an organic perspective. And you are right that the Category 4 kind of bright line hurdle at $100 billion really takes some of the optionality to be acquisitive out of the equation right now. Our expectation is that it will take some time to really get a good sense of what the regulatory paradigm will look like after the administration change. But to the extent M&A is easier, more allowable or the restrictions or the additional work that we need to do for Category 4 has lessened over time, that would certainly put us in an opportunity to build more franchise inorganically. So I guess the short answer is, yes, a change in the regulatory paradigm could accelerate our looking at inorganic growth. But it's not in our '25 plan right now. And I think we take a pretty conservative view as to how quickly things will change over the course of the next year.

Question: Jared Shaw - Barclays - Analyst : Just looking at the margin trajectory, how should we be thinking about that, I guess, maybe with the backdrop of that securities repositioning and when that was in the quarter?

Question: Jared Shaw - Barclays - Analyst : Okay. All right. That's great color. And then I guess just circling back on sort of capital from a different angle. You have that 11% near-term target, 10.5% longer-term target. What would have to happen for you to feel comfortable, I guess, with bring that even maybe down to 10% or so? And should we expect you to be looking at buybacks maybe a little more aggressively here? 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're pretty disciplined around our normal capital management program. I think you're right. We're looking at credit moderating. We're still kind of anticipating our best guess right now. I'm always reticent to make predictions on credit and timing, but kind of a mid-25 inflection point on credit. We are sitting at a pretty robust CET1 ratio right now. And we hope for more loan growth. I think we're in line with most of the people that have reported so far and still anticipating kind of mid-single-digit loan growth. If we get a bump in economic activity and loan demand, we'll deploy capital there first. We have an opportunity to enhance our healthcare franchise. For example, we do another tuck-in acquisition. But absent use of capital for there, we are in a position where we anticipate that we would return capital to shareholders during the course of 2025.

Question: Matthew Breese - Stephens Inc - Analyst : Neal, I was hoping within kind of the margin guide for the year, you could just discuss expectations around deposit costs and betas and maybe some insight as to where deposit costs sit here in mid-January? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call

Question: Matthew Breese - Stephens Inc - Analyst : Yeah. Very helpful. And then my second one is more strategic. John, understanding some of the more national businesses you've grown and expanded into over the years, I was hoping you could talk a little bit about Webster from a geography standpoint. How happy are you with the current footprint? And might we see you kind of embark on any sort of geography expansion near or medium term? If so, where? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah, that's an interesting question. I don't think we have any specific plans to sort of take our local businesses outside of our kind of branch footprint, Philadelphia to Boston, which is where we do most of our local commercial real estate, middle market business banking, that kind of activity. I think we found over time, it's very difficult to be a new entrant and have good credit quality and grow by parachuting people into new markets. I think what we have done differently than others who have taken that approach and opening up LPOs and so forth is, as you mentioned, have a good mix of kind of local, regional, and national businesses. And we're pretty pleased with that. So you think about things like we do, all of our sponsor businesses kind of national, public sector finance, ABL, equipment finance are generally national in business. We understand the geographies. We understand the businesses. So I think you probably see us continue to expand some of those more regional and national businesses. And unless and until the M&A environment was ripe and we had really good opportunities to potentially kind of expand our core branch footprint or our local footprint, I think you'd probably see us just continue to invest in our national businesses as our kind of pipeline for geographic expansion.

Question: Timur Braziler - Wells Fargo Securities - Analyst : My first one, I just wanted to circle back on margin. The fourth quarter results, you're kind of near the top end of the range that you already laid out. You mentioned that first quarter is going to be pretty strong again. are we implying that the rest of the year, there's going to be enough pressure to kind of get it back within the range? Or could that range prove to be conservative here? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call

Question: Timur Braziler - Wells Fargo Securities - Analyst : Okay. Great. And then I just wanted to dig in a little bit on credit inflection and how we should think about quantifying that? Does that imply that 25 basis points to 30 basis points that John, you called out as being a normalized level? Is it a step function towards that level kind of off of this current base? And I'm just wondering what your thoughts are around the yield curve. And if rates stay where they are, continue to move higher what kind of tail risk that might attribute to some of your CRE properties? 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 great question. Obviously, a relatively difficult one to answer with respect to credit cost and provisioning. But if you look at the first three quarters of '24, we were in that 25 basis point to 30 basis point range in terms of charge-offs. That's kind of our base case assumption as we go across '25, hoping obviously that we can outperform that over time. And so I think while obviously, the provision itself is also reliant on the Moody's forward outlook of economics. What type of credit quality we're onboarding in new originations, the pace of loan growth and so forth. But if you peg it to kind of the charge-off level, I think our expectation is that we'll be somewhere around that 25 basis points to 30 basis points in each of these next quarters and for the full year in '25, with the caveat that we always say because we have a huge commercial banking portfolio, you can get some lumpiness and outperform and underperform in any one given quarter. So I would -- the way I look at it is the number three quarters of '24 is more of a proxy for what we expect to happen during the course of '25. So if you were pegging that, I think, in our base case models, we're back to the way you envisioned our performance in the first three quarters. Underneath that, right, in terms of risk migration, we did see some green shoots in the fourth quarter just in terms of risk ratings. So on the C&I side, for example, we moved closer in the direction of more neutral in terms of seeing upgrades and downgrades. We didn't have a big bump in criticized loans in C&I. We think we've gotten our arms around the portfolios that I mentioned earlier. And obviously, we know every credit there. And if you look underneath the actual credit metrics in terms of classified and non-accruals in that office portfolio have actually improved. So what we have left, we feel better about than we did a year ago in terms of what was remaining. So I think there are reasons when we look at our pipeline, and I talked to Jason about this all the time. Obviously, we still think kind of mid-25 as getting sort of a more balanced on upgrades and downgrades in the portfolio, which should have a positive impact on provisioning. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call And if we hit that range of charge-offs, you should see provision levels kind of go back to where they were in the first three quarters and hopefully lower over time if we get better economic data and an acceleration of improvement in the portfolio. The good news for us is we're very profitable. We have been even in a high charge-off quarter in the fourth quarter, we had really terrific return profile and good profitability.

Question: Chris McGratty - Keefe, Bruyette & Woods North America - Analyst : John if you look at the guide -- the loan growth guide 4% to 5% last year, I think it was 5% to 7% and that -- the macro kind of worked against you. What was interesting to me is you saw the sponsored book grow in the quarter. And I think that has been a variable for the last year. So can you just give a comment or two on trends in that portfolio? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah, so -- and I am snake bitten to go out on a limb on these things, Chris. So what I will tell you is that the pipeline is stronger, that we are seeing some more activity. More activity for us is interesting because it not only means more origination, but it means more payoffs because there's more activity in the portfolio with sponsors selling their platform companies when there's an active M&A environment. So if you ask me again not to make a prediction, I feel better about the momentum we have in that business going into '25 with more economic activity, a better M&A environment, and a bigger pipeline. But you see in our overall loan growth numbers, I think, still a relatively balanced and conservative view. And interestingly, we only had the benefit of a few banks obviously reporting before us, but it's been interesting to see everybody kind of in this, whether it's 3% to 6%, 4% to 5%, whatever that range is. And I think it's because there's obviously the Trump bump exuberance that came right after the election. But I think when you look through it, you talk to customers, you look at pipeline, there's a decidedly positive bias and optimism going forward. But I think it's cautious. And I think if people feel like it will take time to see how all of these dynamics play out, what happens with tariffs, what happens with rates before people really start investing aggressively. And so that's why I think we still think the best guess is kind of that mid-single digits with a growth perspective. But I am more encouraged by what we're seeing as we head into '25 in the sponsor book than I was a year ago.

Question: Chris McGratty - Keefe, Bruyette & Woods North America - Analyst : Given your capital iteration, you could do both, right? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yes, we can. Yes, we can. And I would say, to your last question, we've actually internally spent a lot of time on this with respect to trying to peg a time or an inflection point where we move to 10.5%. And I think if we do see credit moderate and we see a more normalized operating environment and we get a better sense of what the regulatory landscape looks like for us as '25 progresses, we will be then comfortable to move that capital target ratio down to our long-term 10.5% target.

Question: Laurie Hunsicker - Seaport Global Securities LLC - Analyst : If we can just go back to charge-offs, can you share with us on the charge-off amount, the $61 million or so of commercial net charge-offs, how much of that was office versus how much of that was actually in the healthcare services? And then also just a little bit of comment in terms of -- you had a pretty sharp drop in office linked quarter, which was great, $917 million down to $824 million. How much of that obviously was charge-offs sale? Or what exactly is happening? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Sure. So I would say that it's a relative office -- office-related charge-offs were around $15 million, and the healthcare charges were around $20 million, to give you a sense in that $60 million of the $60 million in charge-offs. The others were smaller contributions, one-offs, fraud, different things that were management and kind of idiosyncratic if you will. Your question on office, we did not have any charges related to loan sales in the quarter. So that was sort of a natural reduction. I gave you the charge-off numbers. So the rest of it is good. It's payoffs and pay downs over time. And we definitely saw more activity, which I think portends to support some of our discussions around moderating credit migration and activity. So we are seeing -- we saw a good amount of commercial real estate and C&I payoffs in the quarter. And so that was -- there were more natural remediation, if you will, a natural reduction in the portfolio this quarter, which is good.

Question: Anthony Elian - JPMorgan - Analyst : Your NII guidance assumes two cuts beginning in March. But if we don't get cuts until the second half of this year, could you talk about the impact to the NII guide range you provided?

Question: Anthony Elian - JPMorgan - Analyst : Then my follow-up on your loan growth guide of 4% to 5%, is that back half weighted? Or do you expect continued growth in the first half? And I know you mentioned diversified sources of loan growth. But can you just talk about specific areas and portfolios you expect to drive loan growth this year? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Sure. I would say, number one, it's more seasonal than kind of back end into the fourth quarter is generally slower for us. And so I would think that off of that, you'd see growth for the remainder of the year. I think when you look at our portfolio, we're assuming growth across categories. Obviously, we've spent a lot of time. We are two quarters ahead in our commercial real estate concentration reduction. We're now at that [250] target. We are seeing more payoffs there. So we are in the commercial real estate business, and we have capacity to replace what's rolling off. And even quarter-to-quarter, potentially have some growth in commercial real estate, but that should grow more slowly than our C&I categories. Otherwise, it's across sponsor, it's across our national businesses, it's across regional middle market, business banking, and mortgage as well on the consumer side.

Question: Nick Holowko - UBS - Analyst : Maybe just to start coming back to the expense outlook and thinking about the investment spend related to the regulatory front, if it did become clear that there were going to be more meaningful changes in the regulatory backdrop, how would that change how you're thinking about the $40 million to $60 million in incremental run rate expenses? 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 great question. And I think what I'd say, and then I'll turn it over to Neal to actually answer the hard part of the question. One of the things we're doing as we build out our road map here, if we are taking into consideration the fact that there may be changes the elimination of some requirements. And so what we're doing is all the investments we're making in '25 are clearly important investments for us to make, and you would want us to make as an analyst or as an investor to continue to build out the resiliency and the strength of the infrastructure of the bank, both on the risk side, on a technology side, on a data side. And what we're back ending in our prioritization and our Gantt chart are those that may not be required or could change with respect to the dynamics or the extent to which we need to invest. So I think for us, many of these investments that are there, we're making regardless of what the Category 4 requirements are. And then we're trying to back end and kind of deprioritize in our three-year journey, those investments that we may be able to pull back because they're either more check the box or perfunctory or we don't think they add significant value to the strength of our franchise. So I don't know whether Neal will be able to give you kind of dollars there. It's very difficult, like things like TLAC are obvious, right? If you don't have to issue TLAC that's a savings. But the other stuff is sort of nuanced, and I don't know whether we'd be prepared to tell you what savings we would have based on what regulatory changes are there.

Question: Nick Holowko - UBS - Analyst : Perfect. And then maybe coming back to another strategy-related question. Last year, you had the announced JV with Marathon to get involved in the direct lending arena. Is that partnership now up and running? And is there any potential that it could be incremental to how you're thinking about growth in 2025? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Right. Great question. We anticipate the partnership to be alive and active in 2Q. That's our best guess. We're still bullish. I will tell you that there is no economic advantage or value added into our current guidance. We want to be able to, once we're up and running, get a good insight as to what that will mean for loan growth, loan balances and investment income to us, which will obviously be delayed from the opening. But we are still excited about it, but it doesn't drive any meaningful economics in our guidance. So it's potential upside. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call

Question: Bernard Von Gizycki - Deutsche Bank - Analyst : Just on expenses. Appreciate the color on the $15 million to $20 million of large bank costs incorporated in the '25 guide. Could you just provide any additional color on the contributions of expense growth? John, you noted the focus on the initiatives growing Ametros. Maybe how much growth is related there or what other incremental investments you're making? Just any color you can provide on the contributions.

Question: Bernard Von Gizycki - Deutsche Bank - Analyst : Okay. Great. And then just on the deposits. I know there were some contributions from the 1031 exchange relationships you noted. Was that more seasonal, like more [forward] to you? What are expectations for growing that maybe in '25? And then just some commentary on the digital channels. It seems you're leaning in there. Just any thoughts on growth and how the cost of those deposits from that platform kind of play out? John Ciulla - Webster Financial Corp - Chairman of the Board, Chief Executive Officer of the Company and Bank, President of the Bank Yeah. On the 1031 side, it was back ended in 2024 and activity there is going to be driven by whatever happens broadly in commercial real estate activity. So if we get back to a place where there's more buys and sells and more transaction activity, you're going to see naturally some -- we have good relationships there, and you're going to start seeing properties exchanging and so forth. So 1031 business should be -- should grow in 2025 relative to where it was today. On the digital channel side, we had good solid growth this year. And I'd really say that across the board, when you set aside consumer and commercial, and you just look at what we did on the digital, on the healthcare and broadly on the healthcare side, we anticipate that '25 is going to be in line or better than what we did in 2024, and we've made a fair amount of investments across the board in all of those business lines to ensure that we stay competitive. The product offering is good. The pricing and service proposition is working really well. We're pretty excited about what we can do in those diversified deposit verticals across each and every one of them.

Question: Ben Gerlinger - Citigroup - Analyst : Those expenses are the [wall of worry] for you guys. It seems like the guidance here is pretty reasonable, so a better upside on revenue. I know you gave the guidance of $15 million to $20 million for incremental just preparation [can be a step] forward. I said rules don't change, i.e., the steady REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call state, is it fair to kind of think that's like [17.5] incremental is '26 and '27 as well on a three-year outlook? Or is it kind of frontloaded? I'm just trying to do sound like assuming rules don't change in this sense.

Question: Ben Gerlinger - Citigroup - Analyst : That was kind of the point that I know if one year could be a little bit less than the other, but it makes a lot of sense. And then with that, do you think there's any synergies? Or is that kind of that $40 million to $60 million a net number? Like if you at least spend $10 million on investments, you could save $5 million somewhere else. You're counting that $10 million or would it be the net number that we should be -- this $40 million to $60 million is net of all the above?

Question: Daniel Tamayo - Raymond James - Analyst : Most of my questions have been asked and answered. But maybe just a couple of specific ones. First, you talked about the 30% deposit beta assumption for the rate cut cycle. And I think you've talked about kind of what you're thinking in terms of maybe the non-interest-bearing not getting back to where it was pre cycle. Correct me if I'm wrong on that. But just curious on kind of what's underlying that assumption given the beta was higher, about 40% on the way up? And maybe what could improve that projection from the 30%? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call

Question: Daniel Tamayo - Raymond James - Analyst : Okay. I appreciate that. And then as we think kind of longer term around the margin, you talked about the new forecast 3.35% to 3.40% this year. You're making changes to the balance sheet as you get larger, you talked about adding debt. I mean is that reasonable kind of assumption for a normalized margin you think for you guys at this point as you look to the future? Obviously, there's a lot of things that can change. But given kind of a normal yield curve and where you envision the balance sheet ending by the end of the year, does that seem like a reasonable place for the margin to kind of stabilize?

Question: Jon Arfstrom - RBC Capital Markets Wealth Management - Analyst : Can you touch a little bit -- you mentioned -- I think you mentioned green shoots in office, and you talked about some stabilization there. Can you give us some examples of what you're seeing happening and maybe your confidence that the worst is over there? 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 guess what we're seeing -- I mentioned earlier, we're definitely seeing more natural resolution to credits. We're seeing restructuring and amendments to deals where borrowers feel like they've got equity still in the building, so they're willing to rightsize the loan. And so I would just say the borrower behavior and some of what we're seeing in terms of refinancings away from us paydowns and payoffs give us a pretty good indication. And then just basically if you look at the level of classified criticized and non-accruals in the office portfolio, they've come down. They've come down as a result, unfortunately, right, through charge-offs over time, but they've also come down because of some of these refinancings, restructures and refinancing. So we've seen an absolute change kind of in some behaviors. And that's to say -- not to say that we still don't have heightened levels of classified and non-accruals in the office portfolio and that we're still kind of working through it. But we do think that we've kind of turned the corner and that the existing portfolio we have there now is stronger than the portfolio we had, say, at the beginning of last year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:00PM, WBS.N - Q4 2024 Webster Financial Corp Earnings Call