Webster Financial Corporation

good morning and welcome to webster financial corporation first quarter 2025 earnings conference call please note this event is being recorded i would now like to introduce webster's director of investor relations and lynn harman to introduce the call mr harman please go ahead

Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. The presentation accompanying management's remarks can be found on the company's investor relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I will now turn it over to Webster Financial CEO and Chairman John Siula. Thanks, Emily.

Good morning and welcome to Webster Financial Corporation's first quarter 2025 earnings call. We appreciate you joining us this morning. I will provide some high-level remarks on our performance, after which our CFO, Neil Holland, will cover the financials in more detail. Our President and Chief Operating Officer, Luis Maciani, is also joining us for the Q&A portion of the call today. Webster's first quarter financial performance was fundamentally solid, with consistent execution across each of our business segments. As illustrated on slide two, we had good balance sheet growth and pre-provisioned net revenue trends that put us on path to achieve the full-year guidance we provided to you at the beginning of the year. Deposit growth of 1.3% included robust core deposit growth. Our loan-to-deposit ratio of 81% provides significant flexibility as we move forward. Better-than-market loan growth of 1% was achieved with contributions across business lines and loan categories, including meaningful growth in traditional full-relationship middle market banking. Our NIM expanded by four basis points, and with an efficiency ratio of 45.8%, we continue to operate a highly profitable company, even as we invest in our differentiated businesses, risks, technology, and back office infrastructure. We report an EPS of $1.30, a return on assets of 1.15%, and a return on tangible common equity just below 16%. Our sound operating position allows us to be opportunistic. Given significant excess capital and stable fundamentals, we elected to repurchase 3.6 million shares during the quarter. During our CECL process this quarter, we increased our recession case probability to 30%, resulting in us adding approximately $20 million to this quarter's provision. We believe that this was a prudent move given the significant uncertainty surrounding the path of our economy following recent policy announcements. Have we not made the change in economic scenario weightings, our provision would have been roughly in line with charge-offs given stabilizing trends in risk rating migration. Absent the macro-driven additional reserves, our ROATC for the quarter would have been approximately 17% and our ROA would have been 1.25% in the range of our adjusted returns for the past several quarters. Our underlying credit trends and risk rating migration met our internal expectations and were consistent with the comments we made in January and comments that I made at an industry conference in March. Namely, we continue to anticipate an inflection point in non-accrual and classified migration during 2025, absent a substantial change in the macro environment. Two, we saw a material slowdown in negative migration, and importantly, overall criticized loans actually declined in one queue. And finally, the drivers of our charge-offs and sticky NPAs continue to be centered in CREE office and healthcare asset classes. We've yet to see any real impact on credit related to the tariff announcements, but as you can imagine, we're spending a ton of time consulting with our clients on potential impacts and looking for potential vulnerabilities in our portfolio. We don't have disproportionate exposure to industries we believe will be most directly impacted, and many of our borrowers have strategies in place to manage costs and supply chain and pass along price increases. While our borrowers remain in generally good financial health, we have selectively seen clients delay strategic actions as they assess the potential impacts of the proposed tariffs. We entered 2025 with a cautious view on accelerating economic activity, and the current environment falls within the realm of our initial expectations. Turning to slide three, Webster continues to generate diverse and granular deposit growth. Every one of the five major business areas we highlight on this slide grew deposits this quarter, with corporate deposits the only category to exhibit a decline. The quality of our deposit franchise allows Webster to pursue persistent and profitable balance sheet growth through a variety of operating environments. Executing on initiatives that enhance our funding profile will continue to be a primary focus of our management team. With that, I'll turn it over to Neil to provide some additional detail on our financial performance in the quarter.

Thanks, John, and good morning, everyone. I'll start on slide four with a review of our balance sheet. Total assets were $80 billion at period end, up over $1 billion from last quarter, with growth in cash, securities, and loans. Deposits were up over $800 million. The loan-to-deposit ratio held flat at 81% as we maintained a favorable liquidity position. Our capital ratios remained well-positioned, and we grew our tangible book value per common share to $33.97, up over 3% from last quarter. Loan trends are highlighted on slide 5. In total, loans were up $551 million, or 1% linked quarter. The yield on the loan portfolio was down 13 basis points, as the effects of the fourth quarter fed funds cuts were partially offset by fixed rate asset repricing and new loan originations. We provide additional detail on deposits on slide six. We grew total deposits by over 800 million, with growth in core deposit categories of 1.5 billion, in part related to seasonal trends. We did see a slight decline in DDA in the first quarter, So we continue to expect DDAs have structurally stabilized and should be effectively flat on a full year basis. Turning to slide seven, our income statement trends. NII was up slightly from Q4. While we did see a moderate decline in non-interest income, as we had a unique transaction in Q4 that we did not expect to repeat. Expenses were up 3 million. At an efficiency ratio of 45.8%, we maintain solid profitability while investing in the growth of our franchise. Overall net income was down $24 million relative to the prior quarter, and earnings per share was $1.30 versus the adjusted figure of $1.43 in the fourth quarter. The higher provision was a significant contributor to the decline. The increase in provision was due to increased weighting of recessionary scenarios in our modeling as opposed to asset quality trends. Our tax rate was 20%. On slide 8, we highlight net interest income, which increased $4 million despite two fewer days in the quarter, driven by balance sheet growth and an increase in the net interest margin. We changed the annualization factors for the NIM calculation to better represent the full-year NIM, with prior periods recast as well. Incorporating this change for both periods the NIM was up four basis points over the prior quarter to 3.48%. Our average cash position increased by roughly $650 million this quarter, and we anticipate we will hold higher cash levels going forward. This was roughly a three basis point drag on the NIM this quarter. We reduced our total deposit costs by 16 basis points in the quarter, and to date, the cycle to date beta is 32%. We expect to end the year around 33%. Slide 9 illustrates our interest income sensitivity to rates. We saw a slight pickup in asset sensitivity since year end, largely driven by the increase in our cash position and a small reduction in the average life of our securities portfolio. On slide 10 is non-interest income. Non-interest income was $93 million, down $17 million over the prior quarter. Excluding a direct investment gain in the fourth quarter and changes in our credit valuation adjustment, non-interest income would have been roughly flat to the prior quarter. Underlying business activity remained consistent. Slide 11 has non-interest expense. We reported expenses of $343 million up from $340 million in 4Q. The largest driver of the change was a seasonal increase in benefits expense. In addition to regular way operating expense, we are also incurring expenses that enhance our operational foundation as we prepare to cross $100 billion in assets. This quarter, we complete a strategic initiative to modernize our general ledger. Streamlining onto a cloud-native solution allows us to scale with improved analytic capabilities and financial controls. Slide 12 details components of our allowance for credit losses. which was up $23 million relative to the prior quarter. After booking $55 million in net charge-offs, we recorded a $78 million provision. This increased our allowance for loan losses to $713 million, or 1.34% of loans. The increase in the provision is not driven by underlying asset quality trends, but instead we elected to place a greater consideration for downside economic scenarios in our allowance calculation. Under these new scenario weightings, our allowance calculation now assumes the U.S. unemployment rate increases to 5.5% with a considerable slowdown in real GDP growth. Slide 13 highlights our key asset quality metrics. As you can see on the left-hand side of the page, non-performing assets were up 22% and commercial classified loans up 6%. The non-performing asset increase was largely related to a small group of credits in the healthcare and office portfolios, and we anticipate the growth here to slow going forward. On slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital to our publicly stated targets. Our regulatory capital ratios were down modestly as share repurchases and RWA growth outweighed retained earnings growth in the quarter. Our TCE ratio was effectively flat, as it also benefited from AOCI improvement. Our tangible book value per share increased to $33.97 from $32.95, with net income and AOCI improvements offset by shareholder capital returns. Our full year 2025 outlook, which appears on slide 15, is unchanged relative to the outlook we provided in January. with the exception of a small change in Fed funds expectations. Our outlook assumes an operating environment similar to that which we have experienced so far in 2025. With that, I will turn it back to John for closing remarks.

Thanks, Neil. In summary, despite market volatility, it has so far been a good start to the year, with our financial performance today tracking as we originally anticipated. The operating environment remains stable, albeit more uncertain, and our base case remains a slowing, non-recessionary economic environment for the balance of the year. Our commercial and retail clients remain generally healthy and more optimistic than you might think. However, the macro uncertainty is clearly delaying in acceleration in the investment cycle. Webster is fortunate to be positioned to prosper, whatever the operating environment may be. We retain and generate significant excess capital proactively manage credit and other business risks, have a unique and advantageous funding base, and a strong liquidity profile. We are poised to quickly adjust to changing market conditions. Finally, I'd like to thank our colleagues for their continued effort. Their hard work is reflected in our performance this quarter, including our strong deposit growth in favorable categories and diverse loan growth. It is also their effort that continually enhances Webster's operating capabilities, preparing us for the future. Thank you for joining us on the call today. Operator, we'll open up the line for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, simply press star 1 again. And as a reminder, please limit yourself to one question and one follow-up. Your first question comes from the line of Chris McGrady with KBW. Please go ahead.

Hey, how's it going? This is Andrew Leissner on for Chris McGrady.

Good morning.

Hey, so I know you've talked previously about, you know, seeing credit stabilization by mid-year. Is that timing still on track? And then on the MPL increase this year, this quarter, can you provide more details on those credits? I know it was mainly theory office and healthcare, but if you can provide any comments on those, that'd be great. Thank you.

Yeah, sure. I think the key factor for us is looking at the migration and the reason that we remain confident of seeing kind of an inflection as we move through the year is our criticized level of criticized assets actually declined quarter over quarter. So that's kind of representative of the new flows in so I'd say, yes, we talked about mid-year. I don't know whether it's mid-year or third quarter, but I think we're seeing positive trends in risk-rating migration that is consistent with what we've talked about over the course of the last several months. With respect to looking in more detail on the non-accruals, some of them obviously are sticky. We're working through them. I think important to note is if you took Our healthcare portfolio and our office portfolio, which are relatively small portfolios in the grand scheme of things, I think we have about $680 million in the healthcare portfolio at quarter end and about $800 million in office, contribute nearly half of the non-performers. So if you think about taking those two out, our MPA ratio would be about 70 basis points rather than just over 1%. So, you know, We obviously proactively manage those portfolios. We do think that we've got everything sort of ring fenced and covered. So that's what gives us confidence that we'll be able to work those classified and non-accrual numbers down. And we're not seeing stuff flow into the initial criticized bucket. So we still feel confident that absent a change in the economic environment to the downside, that we'll see that inflection point over the course of the next couple quarters.

Okay, great. Thank you. And if I can just do one more on capital. How are you feeling about the buyback, just given the current economic uncertainty, but also your discounted stock valuation? Thank you.

Yeah, I mean, we obviously think that our stock is undervalued. We bought back a substantial amount of shares in the first quarter. We anticipate kind of sticking to our guns about deploying capital into organic growth. looking at potential tuck-in acquisitions in our healthcare vertical and other areas. And if that's not available, we will buy back shares, certainly over the next three quarters. But we obviously have our eye on what happens in the economic environment. You know, our base case, as I mentioned earlier, is that we see a relatively stable, slowing economic environment over the course of the next three quarters without a recession. If that occurs, I think you'll see us buy back more shares as we move through the year.

Okay. Your next question comes from the line of Jared Shaw with Barclays. Please go ahead.

Hey, guys. Good morning. Hey, maybe just sticking with the credit side, looking at the growth in non-performers, and actually when I look at slide 17, the growth in commercial classifieds, How does that not drive itself a provision? When we look at the growth in provision, you call out it being tied to the macro environment. I guess what gives you confidence that those increases in non-performers and increases in commercial classifieds don't need a provision with them?

Yeah, I mean, Jared, as you know, the CECL process is pretty complex. Most of the loans that are determined to be problem loans and problem assets are you know, have individual assessments of loss in them. And then there are obviously a lot of qualitative factors that go into the CECL reserves. So there were a bunch of offsets. I made the comment that when we ran the models going through our specific reserves, going through overall weighted average risk rating in the portfolio and migration, that had we not changed the economic scenario, that our provision would have been roughly in line with charge-offs. And so it's a bunch of inputs, and I think you, clearly higher levels of non-performers and classified in and of themselves drive higher reserves, but overall portfolio migration and weighted average risk ratings in the portfolio along with qualitative factors offset a bunch of that. So we're obviously not being cute in saying that when we change the recession weighting of the recession scenario from closer to zero to 30%, that really drove the $20 million in additional provisioning.

Yeah, and I'll just add on that many of the loans that migrated were previously reserved for at adequate levels, so that didn't move the model. If we ran our models without the change in weighting we did to our downside scenario, we would have seen approximately $20 million less in reserve bills. So we're comfortable with kind of stating that that $20 million of the increase was really driven by that change in weighting in the model.

Okay. All right. Thanks. And then, you know, when we look at the, you know, over the next few quarters with this desire to drive down non-performers and work with, you know, exiting, I guess, some of these trouble zones, do you expect that that's going to be through sales or through charge-offs or through resolutions? Like, how should we think about, you know, your, I guess – willingness to use a little bit of capital to, you know, to more rapidly fix sort of credit ratios?

Yeah, I think it's a combination, right? And so we're always looking at the economic benefit. Obviously, we know that the optics of those higher categories, you know, hurt us from an outside perspective. But also, you know, when we know that we've got An identified loss given default we're not going to do a fire sale and and and give up capital to too early, so I think it's a. There will be some that naturally resolve themselves some will will take charges in our expectations and where we have opportunities to accelerate remediation through sale. will will do that as well, you know our anticipation and just jumping the next question our anticipation and charge off again as we look through the course of the year. given all the factors, is that 25 to 35 basis point in annualized charge-off rate. This quarter, we were down modestly from prior quarter, but slightly above. I think we're around 40, 41 basis points in charge-offs. But we think, as we model through the year, that our full-year charge-offs will be somewhere in that 25 to 35 basis point range.

Okay. Thank you. Thank you.

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Mark, good morning.

Good morning, John. First, I wondered if you could provide a little bit of color on how HSA renewal season is coming along and curious if you're feeling any pressure on either deposit costs or fees in that business.

Hey, Mark, it's Luis. On the second question first, on the deposit side and deposit costs, the answer is no. So 15 basis points, as you see in the slides that we put out there, has stayed pretty consistent, and we continue to think that that's the path forward for the book of business. So short answer is that there's no real pressure from that perspective. Enrollment season for 25 was good. As you think and look at the numbers that we have there, This is the first quarter where you're going to have a little bit of a different view, given that we did, you know, we brought over the investment balances, the cash investment balances from Schwab last year. And so you have a little bit more movements that are slightly different to what we've had historically, because we did not have that, you know, that part of the deposit base as part of our numbers, because remember that those deposits used to sit outside of our, you know, off our balance sheet and were never factored into those numbers before. So enrollment season was good. This was the first year that we've had what I'll call the full product suite that we have been developing for the past three years, which includes new employer portal experiences, new client-facing technology, our new HSA investment platform. We started to see the benefits of that in 25, but the first full season that we're going to have the entirety of the power of that of that product suite is going to be for the 2026 pipeline cycle, and we feel very good about the 2026 pipeline cycle. So, you know, early to tell because it's still, you know, this is the first year that we're doing it, but the, you know, we feel very good about the competitive positioning that we have going into the balance of this year and into next year. And as you think about the progression of deposits between fourth quarter of 24 to first quarter of 25, and then what's going to happen for the balance of the year, we should see similar type of growth slightly ahead of what you saw between fourth quarter and first quarter over the remainder of the year. So all things considered, growth rates are good, deposit costs are staying in line where we thought they were going to be, and we continue to feel very good that we have a, we've improved our competitive positioning in the market, and we feel pretty good about that going into next year.

Okay, and then just a second question for Neil. You know, Neil, I wanted you to share with us how much you spent roughly in the first quarter to prepare for becoming a Category 4 bank, and and also update us on what the timeline looks like for becoming compliant?

Yeah. So we talked about last quarter that we would be spending about $20 million this year. And so you could think about that as pretty proportional. I don't have the exact number on what we spent broken out, but it's probably right in that $5 million range. So we are investing. We're making great hires right now and making good steps forward on all the required areas around data, around reg reporting. I mentioned that our implementation of a new GL this quarter is a big move forward for us. On the timeline of category four, we're really, as John's talked about, we have a lot of scenarios that we run. We are actively pushing to be ready with the things that we know will make us a better bank. And we're making investments as quickly as we can in those areas while obviously pacing those investments too to make sure that we kind of build over time. We are moving quickly to have the flexibility for us to be ready, but we don't have an exact timeline on when we will plan to cross into category four.

Yeah, I just that we think about it kind of maybe two years. Obviously, with organic balance sheet growth, our goal would be plus or minus two years to kind of be compliant. And I think an important point that Neil made is we also have one eye on what's going on in the regulatory landscape, Mark, because, you know, things, appear like they could change. There's a lot of things. Our baseline is that we need to be compliant with the current rules as we approach 100 billion. You know, the regulators are regulating most of the banks in our space, 80 to 100 billion, as if we're kind of almost there anyway. So obviously we're stepping up our game and we have been for a period of time. If, in fact, those bright line tests move either to be indexed to inflation, you hear Mickey Bowman talking a little bit about that, you know, we'll be prepared to change the pace of our investment, and I think we're being very thoughtful. But right now, we figure that we need to be compliant with the rules as they've been in place, and we think we can get there in the next two years or so.

Thank you.

Your next question comes from the line of Matthew Breeze with Stevens. Please go ahead.

Hey, good morning. Hey, Matt. I was hoping we could talk a little bit about loan growth and the pipeline. And I was hoping you could touch on, you know, first, your appetite for commercial real estate here and whether or not the environment still remains attractive. Two, the Marathon Partnership, expectations for C&I growth for the second half of the year. And then the other thing is just Resi has been a bigger driver of growth recently and hoping you could touch on that as well.

Yeah, and this is kind of a $64,000 question, Matt, for those of you old enough to know what the $64,000 question is. Our pipelines are solid. We obviously had a good first quarter with respect to loan growth, and it was pretty diverse across categories, as you mentioned, consumer and commercial. So I think what I said at the outset, and I think you've heard on almost every other call, is that our commercial and consumer borrowers remain relative, they certainly remain healthy and they remain relatively optimistic, but everybody's kind of waiting for the dust to settle. So certainly for things like in our sponsor group, which is driven largely by M&A activity, you know, that's kind of been put on hold. We're not seeing a lot of private equity activity right now, given all the tariffs and the noise and the market volatility. But we know that there's a lot of discussions. We've been mandated on some deals that have been kind of put on hold. But for the passage of time, we should be able to provide financing for those transactions. So I think to your first question, we've got the uncertainty has slowed and delayed loan growth. but there is underlying pent up economic demand and that's why we feel comfortable with our four to 5% loan growth over the course of the year. And obviously the first quarter we're kind of on track. Specifically to the other questions on Cree, we were down in Cree in the quarter. We are participating in the market. As we said, we're being more selective on institutional quality, commercial real estate, full relationship real estate. We believe we have capacity. You know, we drove our concentrations down to the 2.55% area. We're there, again, this quarter remains relatively flat from a concentration perspective. We do not feel like that is a hard constraint because we're able to drive way down off that regulatory bright line of 300%. So, you know, we expect there to be, let's say, $300 million to $500 million in commercial real estate growth, which will keep our concentrations in line with capital growth and everything else we're doing in the portfolio. So I will tell you, and I was reviewing some of the other transcripts, we would agree with the comment that in the first quarter, the Cree landscape got significantly more competitive. We saw more of the big banks back in the Cree space. So we didn't drive down Cree exposure on purpose. We just had runoffs, amortization, payoffs, and then a level of originations that had us slightly down in the quarter. But, you know, we're not afraid to grow that category and we're actively participating in the market. With respect to the Marathon joint venture, our expectation is that we still go live toward the end of the second quarter, potentially the beginning of the third quarter. And I think what we've been careful to do is we haven't layered in any of the expenses, portfolio seeding with loans, nor any of the economic benefit in our forecast. because we want to wait and see that go live. And then on the next earnings call, or if we issue a press release publicly after we go live, we'll put a little bit more meat around the bone as to the short-term and more medium and long-term economic benefit for us. But it's still on track. We're just making sure that we set up the right structure and that all the I's are dotted and the T's are crossed. And then on resi, Uh, you know, in the, in the market, there's been some demand there. I think we, you know, we look at our balance sheet, which is kind of 80% commercial. And so we think it's, it's a good idea as we start to look forward to category four to have a more balanced between consumer and commercial asset classes. Um, you know, we want to make sure we're getting paid fairly for, uh, our, our mortgage business as well. So, you know, we're kind of really monitoring pricing and, and, and you may not see it grow. as quickly over the rest of the course of the year, but it's still an important asset class for us. And so we're participating appropriately in the market.

I appreciate all the color there. I guess my next one is a shorter one. And I appreciate all the color on credit. Just curious, how do you think provisioning goes for the rest of the year? Should we expect it to more or less match charge-offs? And it also sounds like charge-offs could be down to the right, given your commentary there?

Yeah, I mean, that's always a tough question, right? And I think that would be our hope. So if our base case comes true and we don't go into recession and we continue to see an inflection point and a slowing and a cessation and actually a positive upswing in risk-grading migration, which is our base case, I think you're right. I think we'll have opportunity TAB, Mark McIntyre, On the on the cost of credit and the provisioning side moving forward, but again, you know I think there's enough uncertainty out there that we think we made a prudent decision. TAB, Mark McIntyre, To change the waiting and as we get to next quarter will will evaluate but obviously our hope and our base cases is that some stabilization will give us some tailwinds on the provisioning side as we move forward.

Your next question comes from the line of Casey Hare with Autonomous Research. Please go ahead.

Great. Thanks. Good morning, guys. Good morning, Casey. Great to have you back. Thanks, John. Appreciate it. So just one more on credit, and then I'll ask an income statement question. So I guess what is preventing you from being more proactive in the risk rating process and with identifying MPAs. This inflection point that you speak of, John, I know you guys have been candid about this, that it's coming at some point this year, but this 23% uptick in MPAs is probably a little bit more than what was probably going to keep people away, a little bit more than what people were hoping for. So why not, you know, over the next two quarters, everyone's going to be kind of holding their breath on the level of magnitude in MPAs. Just what's keeping you from just ripping off the Band-Aid and identifying the problem assets today?

Yeah, I think it's a fair question. And also, I think we are very proactive in our risk rating and conservative. And whether that's good or bad, I think that's true. I'll give you one example to put real meat on the bone around it. So one of the office credits that went into non-performer, we had a fully tentative, and it's a current loan. We're being paid on it right now. But one of the major tenants completely unexpectedly, and a strong credit tenant, acknowledged that they're not going to roll the lease going forward down the road. That came as, I don't want to say a surprise to us because we're not on top of things, but a surprise to us because I think it surprised everybody. And so we proactively moved that to non-performer and it's a current loan and it'll be a current loan for the next several quarters. So those are the things where we're not going in there and saying, hey, can we delay putting this thing into non-accrual? In fact, we believe that we're putting things that have material risk to repayment and current payment into non-performers right away. Those are fewer and farther between, and that's why we have a lot more confidence that we'll be able to reverse the trend. And again, I'll just remind everyone that where we are from a perspective of charge-offs and where we are from an operating and income perspective, you know, people keep talking about sort of things going back to normalization. you know, 25 to 35 basis points, we're perfectly comfortable with that into perpetuity, given the fact that we can still have high teens ROATCs, you know, throughout the process. These credit costs on a $55 billion commercial portfolio, we don't think are unmanageable and will be as proactive as we can. So what you should know is that I can't, you know, this is one of these tough ones. The only way we can prove credit performance is over time and to demonstrate it, but we are absolutely not sort of waiting for the last minute to move things into classified and non-accrual. We're proactively managing that. And I think we've got a good line of sight on the fact that we're not going to have as much flow in going forward. And that's why we've been talking over the last couple of quarters about seeing an inflection point.

Got it. Thank you. And then just some updated thoughts on the NIM outlook. Neil, as you said, the deposit beta is going to go to 33 from 32 this year. Low yields sound a little bit tougher, and obviously got some bed cuts, you know, some near-term and aspect ratios.

I didn't quite catch the end of what you said there, the very last bit.

Sorry, I'm just looking for some updated thoughts on the NIM commentary. Okay.

Let me now look. That's perfect. I think last quarter we talked about expectations of NIM between 335 and 340 for the year. You know, we felt pressure, as you mentioned, on the loan side with a little bit flatter curve on loan yields. But we've been able to more than offset that with better expectations on the deposit side. So we're looking more at a 340-ish NIM versus 335 to 340 going forward here for a full year expectation. So we're feeling pretty good there. As mentioned, we now have three cuts built into our forward forecast. You know, we've run projections. If we don't get any cuts, and based on our asset sensitivity position, we don't think that would have a material impact to our guidance. As I've talked about before, we're a little bit more sensitive to the long end of the curve. Our assumption is we kind of maintain in this 435 10-year yield range. But we have a little bit more sensitivity to the longer end of the curve than the shorter end of the curve. But overall, good performance on the deposit side, a little bit challenging on the flatter curve than we originally expected. But overall, we do expect our NIM to be better than what we had talked about last quarter for the year.

Your next question comes from the line of Timur Brasilier with Wells Fargo. Please go ahead.

Hi, good morning. Sticking to the line of questioning on the deposits, I guess that beta expectation, does that also incorporate the three expected rate cuts this year? And then I guess just looking at some of the higher cost products like Brio, I guess why maybe the hesitation to lower some of those higher costing deposit products? And TAB, Mark McIntyre, Maybe work that the cost of deposits down a little bit more throughout the course of the year.

TAB, Mark McIntyre, yeah listen that's a great question and that's you know that's something that we debate. TAB, Mark McIntyre, You know consistently and to the extent that we there's a combination of competitive landscape dynamics and then just requirements for funding across the balance sheet that make that inform those decisions when we make them. We are very confident that over the course of the year, if this rate environment continues to play out and the rates in areas that we're forecasting happen, there is going to be the ability for us to be able to reduce meaningfully, particularly in those areas of Brio and potentially just backfill with some of the other higher rate products that we have on the Interlink side and some of the other channels. The good thing about the business mix and model that we've created is that there's a ton of flexibility regarding what we can do across consumer, commercial, and then some of these alternative deposit channels. And as we continue to view the progression of balance sheet and loan growth over the course of the year, we have a tremendous amount of flexibility in what we can do on deposit pricing. We've been conservative right now in moving down, but Those are products that from one day to the next, we can be much, much more aggressive on. And to the extent that we want to do that, we certainly can, and we can move very quickly to do it.

Okay, thanks. And then I want to try and ask the provision question maybe a different way. Just the CECL methodology and looking at the more elevated charge-off levels here recently, I guess how much more punitive does the look-back mask become given the higher levels of charge-ups here more recent? And maybe what does that portend for future levels of provision expenses? Provision structurally go higher just given some of the more recent trends on the charge-up side, or is it more complex than that?

Yeah, I guess I would qualify to say it's not more complex than that. But the two quarters of slightly higher charge-offs than our 35 basis point high end of the range don't impact the look-back period, the loss given default, and factor into the model. That's a long, significantly long look-back period through credit cycles of loss in our portfolio and loss in the industry, so that won't have an impact on our provisioning in the next three quarters.

Yep, I agree with that.

Your next question comes from the line of Manan Gosillia with Morgan Stanley. Please go ahead.

Hi, good morning. Hey, good morning. Good morning. Can you talk about NII? It looks like you're tracking ahead of expectations and even run rating the current quarters NII would get you to the high end of your guide. And you're clearly expecting some learning asset growth from here too. So can you talk a little bit about what would Could the current trends drive the NII higher than the high end of your guide?

Yeah, so I think if you annualize our guidance, you get more towards the low end, but it's still in our guidance range if you annualize our NII. I would say that we do expect to see earning asset growth for the rest of the year. As we talked a little bit on the last call, we expect Q1 to be seasonally high on net interest margin. You know, we posted a 348 for the quarter, and we're guiding full year to around 340. So we do expect a little bit of net interest margin compression throughout the year. So the combination of those two factors will lead us to NII growth, but the earning assets will be slightly offset by a little bit tighter margin into Q4.

Got it. I was adjusting a little bit for the day count in one queue there as well. Okay. Yeah. But in terms of, I guess, John, you noted that your clients have strategies in place to mitigate shocks in the supply chain. Can you give us some more color on what you're hearing from them over the past couple of weeks?

Yeah, it's interesting. We did a survey prior to Liberation Day, and then we've gone back out to our clients. And, you know, it's interesting, as I mentioned earlier, through luck or good strategy, we don't have tons of exposure to kind of the direct impact of tariffs, but we also realize that, you know, everyone could be impacted given their sourcing and supply chain and where we are. Obviously, my concern, if there is a concern, would be really on the demand side if we start to get into a recessionary environment. But our clients actually seem pretty resilient just in terms of what we hear back from them is planning on being able to source from other areas, looking at what margin compression would mean, how much of pricing can they move on. So I would say everybody is concerned and going through the analysis and you know, it's almost impossible to take the qualitative feedback from clients and put that into some sort of quantitative expectation of performance of the underlying borrowers. But I would say pleasantly surprised on kind of the resilience and the planning. Obviously, if things stabilize and we start to get a pullback on a little bit of the high-level tariff noise, hopefully this will kind of blow over. But I guess I would say cautiously optimistic about the what we're hearing from our clients in terms of their preparedness and their ability to react to a different environment.

Your next question comes from the line of Bernard Von Digg-Zicke with Deutsche Bank. Please go ahead.

Hey, guys. Good morning. You manage the franchise well across various cycles, and you just increased the reserves to encompass various economic scenarios. you know you're able to keep the net interest income outlook unchanged despite another rate cut um sounds like you know you could buy back shares uh if the revenue environment is weaker than you're expecting um just with that do you have any flex in the expense space in case the revenue environment is weaker to either stop or delay projects if so any sense that you could provide how we could think about the variable components of your expense space in both comp and non-comp

Yeah, I'll jump in there. As you mentioned, we feel very confident in our NII guidance. But if we did hit a scenario where we move from this economic slowdown we're in into a recession or other scenario, we do have a lot of flexibility on the expense side. And as you really look at what we talked about earlier on the call, we're making investments in the franchise to build to Category 4 readiness. we clearly have an easy opportunity to slow those investments. As we talked about, we're not planning to do that right now. We want to be ready. We want to continue to grow and scale, but it's a lever that we have that we can pull if we entered into an environment like that. And then also as a leadership team, we're always looking for ways, you know, at a 46% efficiency ratio organization, we focus on always finding ways to continue to drive efficiencies into the organization. So there are other levers that we could pull in a scenario that is a more negative macro environment than we are today. So I would say overall we have a fair amount of flexibility there on the expense side if we needed to pull those levers.

Okay, great. And just as a follow-up, just on the loan growth for the year, obviously Sponsor did contribute in the quarter. Just want to get your sense or just, you know, any commentary just on, you know, activity levels and just, you know, how much of that could be a contribution for the rest of the year.

Yeah. I mean, I think we look at it now as still kind of broad-based blocking and tackling across asset classes. And I would note that what you see in the sponsor category was largely lender finance and fund banking. You know, we haven't really seen the pickup in our bilateral higher yielding full relationship sponsor stuff, given the cessation and M&A activity. So we do see that hopefully building over the second half of the year. And obviously, we'll have an opportunity with the marathon joint venture, hopefully to increase that volume. So I would say as we look at kind of building out our forecast, we're not relying on any one category or any one business line. It's sort of blocking and tackling and hopefully contributions across the board. And if we're lucky and we get a little bit of more economic activity in a macro environment going into the second half of the year, we should see the sponsor business rebound as well.

Your next question comes from the line of Daniel Tomeo with Raymond James. Please go ahead.

Thank you. Good morning, everybody. Maybe first just a clarification. So the 25 to 35 basis point net charge off assumption you guys are talking about, I think that's kind of a longer term assumption. And then you built in the reserves, 74 million, assuming a 30% chance of recession, I think is the number you said. So that's 74 million. It's about 14 basis points of loans. I mean, is that kind of how you're thinking about what that 30% chance of recession number is. I mean, is that more of a cumulative number? I'm just trying to size where that 25 to 35 basis points could go. If we do get, you know, that 30% chance of recession, I'm really parsing your words here. I apologize, but we're late in the call.

Yeah, no, no, that that's all right. And I, I don't think we triangulate it that way. It really is a cumulative. It's, It's the CECL modeling looking at the cumulative life of loan losses across the portfolio. So I don't think in the short term, you know, we're really well reserved now. One of the nice things that we didn't mention on the call is if you look at our category four peers, you know, most of them have slightly higher provisions than most of the midsize banks do. As we continue to grow, you know, we feel like that 134 basis points is stronger than peer. We're not really looking at it in the short term in terms of capturing current period charge-offs. That's embedded in the overall provision. So I think you think about it from a more macro high-level perspective, not trying to triangulate the extra reserves against what we might believe could be a short-term pop in charge-offs, if that makes sense.

Right. So the 25 to 35 basis points is your base case, which assumes a recession is not happening, that if we did have a recession, obviously, even at 30%, it would be a higher level, I guess, is a safe way. Okay.

Right. And presumably, if CECL works, you know, it's supposed to capture life of loan losses during different times. And so, you know, you don't necessarily, it's trying to be not pro-cyclical, so you don't necessarily have to see incredible increases if your charge off rates for a period of time end up in 40 to 45 basis points that shouldn't, if we're doing CECL right, automatically result in significant increases in provision going forward. It's all based on the modeling as we move forward.

Understood, yeah, thanks for the clarification. And then maybe just another small one here on the sponsor side. If you had the amount of migration, um you know kind of interested in the early stage migration of sponsor and you know if you if you think think or expect that those uh flows could be differently paced than the regular the rest of the portfolio you mean from a credit perspective yes yeah i'm you know i think our our sponsor book outside of healthcare has you know sort of basically

performed the way it has during all other credit cycles, which is those loans are generally rated in the lower path categories. So if they migrate, they migrate into credit side. We've seen very little loss outside of the healthcare portfolio. So I don't think there's anything there that concerns us any differently than any other sector in the portfolio.

Your next question comes from the line of Laurie Hunsaker with Seaport. Please go ahead.

Yeah, hi, thanks. Good morning. Good morning. Just staying with credit here, do you have a number in terms of what is non-performing in that $7.3 billion sponsor and specialty book?

I don't know if I have it offhand.

Okay. And then maybe just, if you're looking for that, just... Slide 17, always appreciate the color here, just extrapolating and just trying to understand. It looks like your traditional office went from $108 million down to $16 million. I just want to make sure that that's right. And then if, you know, any comment on that, any comment on that $92 million drop, was that charge-offs, was that cure, was that combination? And then it looks like your ADC construction book, that $1.6 billion book, Had a pretty sharp jump in non-performers. Any color on that? Those two things.

Thanks.

Okay.

I think actually someone just pointed out that the NPL is a misprint. Yes? Yes. Yep. Emlyn's giving me that. It's 0.5? Yes. Percent. That was a good catch on your point, and I apologize for the inaccuracy on the slide. So there's nothing, not a big jump in the ADC construction. What was the first question on that, Laurie, on that page?

Oh, great. Okay, so then the same thing. The traditional office last quarter was showing up at 13% non-performers, which is 108 million, and it looks like it dropped to, in this chart, 2%, which extrapolates to 16 million. your traditional office non-performers dropped $92 million in the quarter and just wondered, well, I guess, you know, is that correct? Or what are the office, traditional office non-performers? And then just office charge-offs, you know, of your $55 million in total charge-offs this quarter, how much, Ross?

Yeah, so on the traditional office non-accrual loans, That's just a decimal place is over one there. So that's a 20% non-accrual rate, and that was about 15% last quarter. So there's a little just a misplacement of the decimal place there.

Your next question comes from the line of Emir Varga with UPS. Please go ahead.

Hey, good morning. Neil, I wanted to just turn back to allowance for a quick one. I understand that the probability of recession has gone up to 30%, and I also see that the assumptions have pretty meaningfully changed. Is there any potential creep up in those assumptions to turn more negative in the second quarter, or do you think that the 1.34% allowance and your ability to change the probabilities a little bit makes it be sort of the the high end of where we can see the allowance even between this quarter and next quarter?

Yeah, it's always hard to predict where the allowance will go next quarter. We feel like we are well-reserved, as John mentioned. We have 5.5% unemployment kind of peaking. I feel if you look at the peer population, I feel we're in a pretty good spot there. And we've got real GDP growth of 1.3% and 1% next year. You know, obviously we've had a lot of volatility day to day here over the last few weeks. Could things get worse? They could. Could things get better? They could. As of today, I feel that, you know, we're probably a little bit better than where we were when we put 30% in. So I don't want to give a projection on which way it could go, but I would say that I feel like we're very well reserved and we have a very reasonable assumption in for our CECL provision at this point in time.

Okay, that makes sense. Thank you. And then just a quick one on the securities front. Nice take up again this quarter in the yield there. Given what you see on the purchase side, how much more room do you think there is to drift that yield higher and potentially offset some more cash builds on the margin?

Yeah, so in Q1, we had about a half a billion dollars of purchases at 5.6%. And we had about a half a billion dollars in reductions at 4.52%. So as we turn that portfolio, we picked up 100 basis points, we are seeing a little tighter spreads on securities we're purchasing at this point in time. So we do expect to continue to see some opportunity there with the repricing. So we'll continue to move forward in that direction. And we don't plan to shrink or increase our securities mix as a percentage of our assets for the rest of the year. And as I talked about earlier, we built our cash levels up to around 2% of assets. And so we will see a little bit more cash just as average balances catch up throughout the year. But Overall, we don't expect any major departures from kind of our percentage mix of cash or securities for the rest of the year.

Your next question comes from the line of John Arfstrom with RBC Capital Markets. Please go ahead.

Thanks. Good morning.

Morning, John.

Question for you, John. Do you feel like we're too focused on credit? You told us NPAs were going to go up, and maybe we didn't listen, but internal perception versus external focus, I guess, is the question. And then what's a more comfortable or normalized level of NPAs for Webster, in your view?

So the answer to your first question is yes, particularly after this hour. I'm a little bit tired of the question. No, but look, I'm... I take a pretty balanced approach here because, you know, promises about credit performance are sort of hollow. And as I said before, I think, you know, we need to continue to execute on these portfolios. I think we're well-reserved. I think we're in a good spot. You know, certainly non-performers for us from a normalized operating environment should be materially below 1%. And so I think that, you know, that's kind of the way we measured and we look at it. Some of these are a bit stickier than we thought, and we're not willing at this time, and we might be willing to have a completely uneconomic resolution of these non-performers because there's significant value in many of these credits. And as I said, some of them are actually paying in their current. And so we feel like we can work through them with a good outcome for our holders of capital. So, you know, I am, absent a recession and a significant downturn, I feel really good about our ability to work through these credits in an orderly fashion. And as I said, the most encouraging thing for us is that our criticized asset levels actually have come down quarter over quarter. So we're seeing that, you know, slower migration into classified, lower and no migration, net migration into criticized. I think we need to kind of continue to work through it. But as we do, I think to your earlier point, I don't feel like we are under credit stress at all, right? We've got really good operating income. We've got really good fundamental operating capacity and capabilities. We've got a boatload of capital and liquidity. And I feel like the overall credit book, which is a big commercial portfolio, and our problems are kind of... situated in two of these small buckets or small discrete portfolios. So I get it. We have higher headline numbers and we need to continue to bring those numbers down. But that's why we have sort of a calm confidence that as we move forward, we can just continue to operate and deliver high returns despite what these credit costs are right now, which we don't think are particularly outsized.

Okay. On the capital question, You have two targets. You have the CET 1 and 11, longer term 10 and a half. If growth is slower in the near term, do you still want to be active in the repurchase program now? And do you have any willingness to go below the 11? Thank you.

Yeah, it's a good question. I think absolutely if we see a stable economy with no further credit deterioration, and no other uses of capital and loan growth isn't too robust, we will be buying back more shares because our stock is significantly undervalued. I think that 11% during the current operating environment is probably the right target. Would we be willing to go quarter to quarter below that 11% in the right circumstances? Sure. So in and around 11% would be would be good. We generate a lot of capital, and so we could buy back a lot of shares and stay above that 11% level as well. So I think a good question and the answer is yes.

Your final question comes from Anthony Iliando. Please go ahead.

Hi, everyone. Hey, good morning. Good morning. First of all, did you say a little more about If I look at period end balances, they're about half a billion higher than the average number for 1Q.

Yeah, I think I missed the very first part of the question. But if your question was, was a lot of the origination done at the end of the quarter, the answer was yes. And that wasn't obviously done on purpose. We just ended up closing a bunch of really good transactions and larger transactions towards the end of the quarter.

Thank you. And then my follow-up. Maybe for Neil, when I look at your NII guide of 245 to 2.5 billion, where do you see the biggest swing factor? Is it more or fewer rate cuts, deposit pricing, non-disparing growth?

Thank you. I think you asked kind of what would move us to the low end or the high end of that guide. Is that the general question there? You were breaking up a little bit.

And it is. And more so, the biggest swing factor, is it more or fewer costs, non-prosparing coming in better than expected, or pricing on deposits?

Yeah. I talked about this a little bit before. The team has done a nice job of reducing our asset sensitivity. So, we don't have a lot of exposure to swings in the short end of the curve in the near term. So, as I mentioned earlier, we don't get any cuts versus the three in our guide. The modeled NII difference is not overly material. We're a little more sensitive to the long end of the curve. You know, you can see in our K, every 1 percent, excuse me, every 50 basis point move has a 1 percent impact or $25 million. So, if the long end of the curve moves up or down, we have a little bit of opportunity or risk in the long end. Deposit pricing is under our control. We're pretty confident in our betas there. And as we talked about earlier, we're going to look for ways to continue to outperform our betas there. I think if I take a big step back, if we see more robust economic activity and better industry loan growth, we could clearly move higher in the guide. If we move into a recessionary scenario, you would see the opposite impact. If yield curve steepens on the long end, obviously that would help us. We'd see more opportunity move towards the high end of the guide. And if curve got flatter, we'd move to the low end. So I would kind of highlight those factors as some key things that we look at as we think about what may push us up or down off the middle of our current guide.

And that concludes our question and answer session. And I will now turn the call back over to John Fila for closing comments.

Thank you very much. Thank you, everybody, for joining. Have a great day.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.