Webster Financial Q1 2025 Earnings Report

Webster Financial EPS Results

• Actual EPS: $1.30
• Consensus EPS: $1.38
• Beat/Miss: Missed by -$0.08
• One Year Ago EPS: $1.35

Webster Financial Revenue Results

• Actual Revenue: $704.80 million
• Expected Revenue: $708.46 million
• Beat/Miss: Missed by -$3.66 million
• YoY Revenue Growth: +5.70%

Webster Financial Announcement Details

• Quarter: Q1 2025
• Date: 4/24/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, April 24, 2025
• Conference Call Time: 9:00AM ET

Webster Financial (NYSE:WBS) operates as the bank holding company for Webster Bank, National Association that provides a range of financial products and services to individuals, families, and businesses in the United States. It operates through three segments: Commercial Banking, HSA Bank, and Consumer Banking. The Commercial Banking segment offers commercial real estate and equipment financing, business banking, asset-based lending, and commercial services; public sector finance; mortgage warehouse financing; sponsor and specialty financing services; credit, deposit, and cash flow management services; and wealth management solutions to business owners and operators, including trust, asset management, financial planning, insurance, retirement, and investment products, as well as treasury management services comprising derivative, treasury, accounts payable, accounts receivable, and trade products and services. This segment also provides commercial services, such as accounts receivable factoring and trade financing, payroll funding, and business process outsourcing. The HSA Bank segment offers health savings accounts, health reimbursement arrangements, flexible spending accounts, and commuter benefit services that are distributed directly to employers and individual consumers, as well as through national and regional insurance carriers, benefit consultants, and financial advisors. The Consumer Banking segment provides consumer deposit and fee-based services, residential mortgages, home equity lines, secured and unsecured loans, and credit cards to consumers; and small business banking products, such as credit, deposit, and cash flow management products to businesses and professional service firms. The company offers online and mobile banking services. Webster Financial Corporation was founded in 1935 and is headquartered in Stamford, Connecticut.

Webster Financial Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to Webster Financial Corporation First Quarter twenty twenty five Earnings Conference Call. Please note, this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harman, to introduce the call. Mr. Harman, please go ahead.

[Emlen Harmon, Director of Investor Relations at Webster Financial]

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 and A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue.

[Emlen Harmon, Director of Investor Relations at Webster Financial]

I will now turn it over to Webster Financial's CEO and Chairman, John Ciulla.

[John Ciulla, Chairman & CEO at Webster Financial]

Thanks, Emilin. Good morning, and welcome to Webster Financial Corporation's first quarter twenty twenty five 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 Massiani, is also joining us for the Q and A portion of the call today.

[John Ciulla, Chairman & CEO at Webster Financial]

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 provision 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.

[John Ciulla, Chairman & CEO at Webster Financial]

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, risk, technology and back office infrastructure. We reported EPS of $1.3 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 3,600,000.0 shares during the quarter. During our CECL process this quarter, we increased our recession case probability to 30% resulting in us adding approximately $20,000,000 to this quarter's provision.

[John Ciulla, Chairman & CEO at Webster Financial]

We believe that this was a prudent move given the significant uncertainty surrounding the path of our economy following recent policy announcements. Had 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.

[John Ciulla, Chairman & CEO at Webster Financial]

Two, we saw a material slowdown in negative migration. And importantly, overall criticized loans actually declined in 1Q. And finally, the drivers of our charge offs and sticky NPAs continue to be centered in pre office and health care 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.

[John Ciulla, Chairman & CEO at Webster Financial]

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

[John Ciulla, Chairman & CEO at Webster Financial]

this slide grew deposits this quarter, with corporate deposits the only category to exhibit a decline. The quality of

[John Ciulla, Chairman & CEO at Webster Financial]

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.

[Neal Holland, EVP & CFO at Webster Financial]

Thanks, John, and good morning, everyone. I'll start on Slide four with a review of our balance sheet. Total assets were $80,000,000,000 at period end, up over $1,000,000,000 from last quarter with growth in cash, securities and loans. Deposits were up over $800,000,000 The loan to deposit ratio held flat at 81% as we maintain a favorable liquidity position. Our capital ratios remain well positioned and we grew our tangible book value per common share to $33.97 up over 3% from last quarter.

[Neal Holland, EVP & CFO at Webster Financial]

Loan trends are highlighted on slide five. In total, loans were up $551,000,000 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 $800,000,000 with growth in core deposit categories of $1,500,000,000 in part related to seasonal trends.

[Neal Holland, EVP & CFO at Webster Financial]

We did see a slight decline in DDA in the first quarter, though 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 $3,000,000 At an efficiency ratio of 45.8%, we maintained solid profitability while investing in the growth of our franchise. Overall net income was down $24,000,000 relative to the prior quarter and earnings per share was $1.3 versus the adjusted figure of $1.43 in the fourth quarter.

[Neal Holland, EVP & CFO at Webster Financial]

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 eight, we highlight net interest income, which increased $4,000,000 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.

[Neal Holland, EVP & CFO at Webster Financial]

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 $650,000,000 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 cost by 16 basis points in the quarter. And to date, the cycle to date beta is 32.

[Neal Holland, EVP & CFO at Webster Financial]

We expect to end the year around 33%. Slide nine illustrates our interest income sensitivity to rates. We saw a slight tick up 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 $93,000,000 down $17,000,000 over the prior quarter.

[Neal Holland, EVP & CFO at Webster Financial]

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 $343,000,000 up from $340,000,000 in 4Q. The largest driver of the change was a seasonal increase in benefits expense.

[Neal Holland, EVP & CFO at Webster Financial]

In addition to regular way operating expense, we are also incurring expenses that enhance our operational foundation as we prepare to cross $100,000,000,000 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 $23,000,000 relative to the prior quarter. After booking $55,000,000 in net charge offs, we recorded a $78,000,000 provision.

[Neal Holland, EVP & CFO at Webster Financial]

This increased our allowance for loan losses to $713,000,000 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 US 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, nonperforming assets were up 22% and commercial classified loans up 6%.

[Neal Holland, EVP & CFO at Webster Financial]

The nonperforming asset increase was largely related to a small group of credits in the health care 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.

[Neal Holland, EVP & CFO at Webster Financial]

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.

[John Ciulla, Chairman & CEO at Webster Financial]

Thanks, Neil. In summary, despite market volatility,

[John Ciulla, Chairman & CEO at Webster Financial]

it has so far been a good start to the year with our financial performance to date 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 an acceleration in the investment cycle. Webster is fortunate to be positioned to prosper whatever the operating environment may be.

[John Ciulla, Chairman & CEO at Webster Financial]

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.

[John Ciulla, Chairman & CEO at Webster Financial]

Thank you for joining us on the call today. Operator, we'll open up the line for questions.

[Operator]

Thank you. We will now begin the question and answer you. Your first question comes from the line of Chris McGratty with KBW. Please go ahead.

[Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)]

Hey, how's going? This is Andrew Leisher on for Chris McGratty.

[John Ciulla, Chairman & CEO at Webster Financial]

Good morning.

[Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)]

Hi. So I know you've talked previously about, you know, seeing credit stabilization by midyear. Is that timing still on track? And then on the NPL increase this year this quarter, can just provide more details on those credits? I know it was mainly CRE office and healthcare, but if you can provide any comments on those, that'd be great.

[Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)]

Thank you.

[John Ciulla, Chairman & CEO at Webster Financial]

Yes, 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 midyear. I don't know whether it's midyear 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.

[John Ciulla, Chairman & CEO at Webster Financial]

With respect to looking at the in more detail on the non accruals, We are 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 the grand scheme of things. I think we have about $680,000,000 in the healthcare portfolio at quarter end and about $800,000,000 in office, contribute nearly half of the non performers. So if you think about taking those two out, our NPA ratio would be about 70 basis points rather than just over 1%.

[John Ciulla, Chairman & CEO at Webster Financial]

So 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 of quarters.

[Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)]

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

[Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)]

Thank you.

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. 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.

[John Ciulla, Chairman & CEO at Webster Financial]

But we obviously have our eye on what happens in the economic environment. 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.

[Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)]

Okay.

[Operator]

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

[Jared Shaw, Managing Director at Barclays Capital]

Hey, guys. Good morning.

[Jared Shaw, Managing Director at Barclays Capital]

Hey,

[Jared Shaw, Managing Director at Barclays Capital]

maybe just sticking with the credit side, looking at the growth in non performers and actually when I look at like Slide 17, the growth in commercial classified, 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?

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. I mean, Jared, you know, the CECL process is pretty complex. Most of the loans that are determined to be problem loans and problem assets have individual assessments of loss in them. And then there are obviously a lot of qualitative factors that go into the CECL reserve. So there were a bunch of offsets.

[John Ciulla, Chairman & CEO at Webster Financial]

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 were 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 $20,000,000 in additional provisioning.

[Neal Holland, EVP & CFO at Webster Financial]

Yeah. And I'll just add on that, you know, many of the loans that migrated were previously reserved for, you know, at adequate levels, so that didn't move the model. If if we ran our models without the change in waiting we did to our downside scenario, we would have seen approximately 20,000,000 less than reserve build. So we're comfortable, with kind of stating that the $20,000,000 of the increase was really driven by that change in waiting in the

[Neal Holland, EVP & CFO at Webster Financial]

model.

[Jared Shaw, Managing Director at Barclays Capital]

Okay.

[Jared Shaw, Managing Director at Barclays Capital]

All

[Jared Shaw, Managing Director at Barclays Capital]

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

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. 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 hurt us from an outside perspective. But also when we know that we've got an identified loss given default, we're not going to do a fire sale and give up capital too early.

[John Ciulla, Chairman & CEO at Webster Financial]

So I think it's a there will be some that naturally resolve themselves. Some will take charges in our expectations and where we have opportunities to accelerate remediation through sale, we'll do that as well. Our anticipation and just jumping the next question, our anticipation in charge offs 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 around 40 basis 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.

[Jared Shaw, Managing Director at Barclays Capital]

Okay. Thank you.

[John Ciulla, Chairman & CEO at Webster Financial]

Thank you.

[Operator]

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

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

Hey guys, good morning. Mark, good Good morning, John. First, I wondered if you could provide a little bit

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

of color on how HSA renewal season is coming along. I'm curious if you're feeling any pressure on the deposit costs or fees in that business.

[Luis Massiani, President & COO at Webster Financial]

Hey, Mark, it's Luis. On the second question first on the deposit side, no in deposit costs. The answer is You know, so 15 basis points, as you see in the slide that we put out there, has stayed pretty consistent, and we continue to think that that's the, you know, the path forward for, you know, for the book of business. So short answer is that there's no no real pressure from that perspective. Enrollment season for '25 was good.

[Luis Massiani, President & COO at Webster Financial]

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 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 than what we 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 of our you know, off our balance sheet and and 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, you know, 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 2025, but the first full season that we're going to have the entirety of the power of product suite is going to be for the 2026 pipeline cycle and we feel very good about the 2026 pipeline cycle.

[Luis Massiani, President & COO at Webster Financial]

So early to tell because it's still this is the first year that we're doing it, but we feel very good about the competitive positioning that we have going in the balance of this year and into next year. And as you think about the progression of deposits between fourth quarter of twenty four to first quarter twenty five and then what's going to happen for the balance of the year, we should see similar type of growth that's slightly ahead of what you saw between fourth quarter and first quarter over the remainder of year. So all things considered, growth rates are good, deposit costs are staying in line with 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.

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

Okay. And then just a second question for Neil. Neil, wonder if you could share with us how much you spent roughly in the first quarter to prepare for becoming a category four bank and also update us on what the timeline looks like for becoming compliant?

[Neal Holland, EVP & CFO at Webster Financial]

Yeah. So we talked about last quarter that we would be spending about $20,000,000 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 $5,000,000 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.

[Neal Holland, EVP & CFO at Webster Financial]

I mentioned that our implementation of a new GL this quarter is is a big move forward for us. We're we're on the timeline in category four, we're really as John 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, pacing those investments too to make sure that we kinda build over time. But 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.

[John Ciulla, Chairman & CEO at Webster Financial]

Yeah. I would just add. 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 things appear like they could change.

[John Ciulla, Chairman & CEO at Webster Financial]

There's a lot of things. Our baseline is that we need to be compliant with the current rules as we approach $100,000,000,000 The regulators are regulating most of the banks in our space 80,000,000,000 to 100,000,000,000 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, 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.

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

Thank you.

[Operator]

Your next question comes from the line of Matthew Breese with Stephens. Please go ahead.

[Matthew Breese, Managing Director at Stephens Inc]

Hey. Good morning.

[John Ciulla, Chairman & CEO at Webster Financial]

Hey, Matt.

[Matthew Breese, Managing Director at Stephens Inc]

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 whether or not the environment still remains attractive. Two, the marathon partnership, expectations for C and 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. Yes.

[John Ciulla, Chairman & CEO at Webster Financial]

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 and A activity, that's kind of been put on hold.

[John Ciulla, Chairman & CEO at Webster Financial]

We're not seeing a lot of private equity activity right now given all the tariffs and the noise in 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. So 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 4% to 5% loan growth over the course of the year.

[John Ciulla, Chairman & CEO at Webster Financial]

And obviously the first quarter we're kind of on track. Specifically to the other questions on we were down in CRE 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.

[John Ciulla, Chairman & CEO at Webster Financial]

We drove our concentrations down to the 2.55% area. We're there again this quarter. It 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 we expect there to be let's say 300 to $500,000,000 in commercial real estate growth, which will keep our concentrations in line with capital growth and everything else we're doing in the portfolio.

[John Ciulla, Chairman & CEO at Webster Financial]

So I will tell you and I was reviewing some of the other transcripts, we would agree with the comment that in first quarter the CRE landscape got significantly more competitive. We saw more of the big banks back in the CRE space. So we didn't drive down CRE exposure on purpose. We just had run off amortization payoffs and then a level of originations that had us slightly down in the quarter. But we're not afraid to grow that category and we're actively participating in the market.

[John Ciulla, Chairman & CEO at Webster Financial]

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 we're all the Is are dotted and the Ts are crossed.

[John Ciulla, Chairman & CEO at Webster Financial]

And then on resi, in the market, there's been some demand there. I think we look at our balance sheet, which is kind of 80% commercial. And so we think it's a good idea as we start to look forward to Category four to have a more balance between consumer and commercial asset classes. We

[John Ciulla, Chairman & CEO at Webster Financial]

want to

[John Ciulla, Chairman & CEO at Webster Financial]

make sure we're getting paid fairly for our mortgage business as well. So we're kind of really monitoring pricing. 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.

[Matthew Breese, Managing Director at Stephens Inc]

I appreciate all the color there. I guess my next one, it's 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.

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. 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 rating migration, which is our base case, I think you're right. I think we'll have opportunity on the cost of credit and the provisioning side moving forward.

[John Ciulla, Chairman & CEO at Webster Financial]

But again, I think there's enough uncertainty out there that we think we made a prudent decision to change the weighting. And as we get to next quarter, we'll evaluate. But obviously, our hope and our base case is that some stabilization will give us some tailwinds on the provisioning side as we move forward.

[Operator]

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

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Great. Thanks. Good morning, guys.

[John Ciulla, Chairman & CEO at Webster Financial]

Good morning, Casey. Great to have you back.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Thanks, John. Appreciate it. So just one more on credit, and then I'll ask the an income statement question. But so I guess what is preventing you from being more proactive in the in the risk rating process and with identifying NPAs? Like, this this inflection point that you speak of, John, I I know, know, you guys have

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

been candid about this, that it's it's coming at some point this year. But this 23% uptick in NPAs is probably a little bit more than than what it's probably gonna

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

keep people away, but they're a little

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

bit more than what people were hoping for. So why not in the middle of the next two quarters, everyone's going to be kind of holding their breath on the level of magnitude in NPAs. Just what's keeping you from just ripping off the band aid and identifying the problem assets today?

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. 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.

[John Ciulla, Chairman & CEO at Webster Financial]

So one of the office credits that went into non performer, we had a fully tentative and it's it's a current loan. It's a we're we're being paid on it right now. But with one of the major tenants completely unexpectedly and a strong credit tenant has acknowledged that they're not going to roll the lease going forward down the road. And so 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.

[John Ciulla, Chairman & CEO at Webster Financial]

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're 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, people keep talking about sort of things going back to normalization. 25 to 35 basis points, we're perfectly comfortable with that in the perpetuity given the fact that we can still have high teens RO ATCs throughout the process.

[John Ciulla, Chairman & CEO at Webster Financial]

These credit costs on a 55,000,000,000 commercial portfolio, we don't think are unmanageable, and we'll be as proactive as we can. So what you should know is that I can't 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.

[John Ciulla, Chairman & CEO at Webster Financial]

And that's why we've been talking over the last couple of quarters about seeing an inflection point.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Got it. Thank you. And then just some updated thoughts on the NIM

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

outlook. Neil, you said that deposit beta is gonna go to 33 from 32 this year. Loan yields sound a little bit tougher and, obviously, got some some bad cuts, know, some near term and expectations.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

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

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

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

[Neal Holland, EVP & CFO at Webster Financial]

Okay. And outlook.

[Neal Holland, EVP & CFO at Webster Financial]

That's perfect. I think last quarter we talked about expectations of NIM between three thirty five and three forty for the year. 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 we're looking more at a $3.40 ish NIM versus three thirty five to three forty going forward here for our full year expectations. So we're feeling pretty good there.

[Neal Holland, EVP & CFO at Webster Financial]

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 three four thirty five ten yield percent sorry, ten year yield range, but we we have a little bit more sensitivity to the longer end of the curve than the short end of the curve.

[Neal Holland, EVP & CFO at Webster Financial]

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.

[Operator]

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

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Hi, good morning. Morning. Sticking 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 BREO, I guess why maybe the hesitation to lower some of those higher costing deposit products and maybe work that the cost of deposits down a little bit more throughout the course of the year?

[Luis Massiani, President & COO at Webster Financial]

Yes. Listen, that's a great question. And that's something that we debate 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 as this rate environment continues to play out and there is a, you know, kind of the the the rate scenarios that we're forecasting happen, there is gonna be the ability for us to be able to reduce, you know, meaningfully, particularly in those areas of Brio and then some and potentially just backfill with some of the other higher rate products that we have on the interlinked side and some of the other, you know, channels.

[Luis Massiani, President & COO at Webster Financial]

So the good thing about the business the the business mix and model that 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 on 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 can, you know, we can be much, much more aggressive on. And to the extent that we want to to do that, we certainly can, and we can move very quickly to do it.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

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 math become given the higher levels of charge offs here more recent? And maybe what does that portend for future levels of provision expenses?

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Provision structurally go higher just given some of the more recent trends on the charge off side? Or is it more complex than that?

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. 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 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.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Yep. I agree with that.

[Operator]

Your next question comes from the line of Manon Ghosalia with Morgan Stanley. Please go ahead.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Hi. Good morning.

[John Ciulla, Chairman & CEO at Webster Financial]

Hey. Good morning.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Can you talk good morning. Can you talk about NII? It looks like you're tracking ahead of expectations and even run rating the current quarter's NII would get you to the high end of your guide. And you're clearly expecting some earning 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?

[Neal Holland, EVP & CFO at Webster Financial]

Yes. 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. We posted a 3.48% for the quarter and we're guiding full year to around 3.4 So we do expect a little bit of net interest margin compression throughout the year.

[Neal Holland, EVP & CFO at Webster Financial]

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.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Got it. I was I was adjusting a little bit for the day count in in one q there as well. Okay. Yep. But in in in terms of I guess, John, you noted that your clients have strategies in place to mitigate shocks in the supply chain.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Can you give us some more color on what you're hearing from them over the past couple of weeks?

[John Ciulla, Chairman & CEO at Webster Financial]

Yeah. It's interesting. We did a survey prior to Liberation Day and then we've gone back out to our clients. And 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 everyone could be impacted given their sourcing and supply chain and where we are.

[John Ciulla, Chairman & CEO at Webster Financial]

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 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.

[John Ciulla, Chairman & CEO at Webster Financial]

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 what we're hearing from our clients in terms of their preparedness and their ability to react to a different environment.

[Operator]

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

[Bernard von-Gizycki, Analyst at Deutsche Bank]

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. Sounds like, you know, you could buy back shares, if the revenue environment is weaker than you're expecting.

[Bernard von-Gizycki, Analyst at Deutsche Bank]

Just with that, do you have any flex in the expense base 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 base in both comp and non comp?

[Neal Holland, EVP & CFO at Webster Financial]

Yeah. I'll 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 a you know, this economic slowdown wherein 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 for readiness.

[Neal Holland, EVP & CFO at Webster Financial]

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.

[Neal Holland, EVP & CFO at Webster Financial]

So there are other levers that we could pull, in a scenario that is a more negative macro environment than we we are today. So I would say, overall, we have a a fair amount of flexibility there on the expense side if we needed to pull those levers.

[Bernard von-Gizycki, Analyst at Deutsche Bank]

Okay. Great. And then just a little follow-up. Just on the loan growth for the year, obviously, sponsored did contribute in the quarter. Just want to get

[Bernard von-Gizycki, Analyst at Deutsche Bank]

your sense of just, you

[Bernard von-Gizycki, Analyst at Deutsche Bank]

know, any any commentary just on activity levels and just how much of that could be a contribution for the rest of the year?

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. I mean, 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. So we haven't really seen the pickup in our bilateral higher yielding full relationship sponsor stuff given the cessation in M and A activity. So we do see that hopefully building over the second half of the year.

[John Ciulla, Chairman & CEO at Webster Financial]

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.

[Operator]

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

[Daniel Tamayo, Vice President at Raymond James Financial]

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, 74,000,000, assuming a 30% chance of recession, think is the number you said.

[Daniel Tamayo, Vice President at Raymond James Financial]

So that $74,000,000 is 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? 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 that 30% chance of recession. I'm really parsing your words here.

[Daniel Tamayo, Vice President at Raymond James Financial]

I apologize, but we're late in the call.

[John Ciulla, Chairman & CEO at Webster Financial]

Yes. No, no, that's all right. And I don't think we triangulate it that way. It really is a 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, we're really well reserved now.

[John Ciulla, Chairman & CEO at Webster Financial]

One of the nice things that we didn't mention on the call is if you look at our Category four peers, most of them have slightly higher provisions than most of the midsized banks do. As we continue to grow, 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 would could be a short term pop in charge offs, if that makes sense.

[Daniel Tamayo, Vice President at Raymond James Financial]

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

[John Ciulla, Chairman & CEO at Webster Financial]

Okay. And then And presumably if CECL works, it's supposed to capture life of loan losses during different times. And you don't necessarily it's trying to be not procyclical, 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.

[Daniel Tamayo, Vice President at Raymond James Financial]

Understood. Yes. Thanks for the clarification. And then maybe just another, small one here on on the sponsor side. If you had the, the amount of of migration, you know, kind of interested in the early stage migration of sponsor.

[Daniel Tamayo, Vice President at Raymond James Financial]

And, you know, if you if you think think or expect that those flows could be differently paced than the rest of the portfolio.

[John Ciulla, Chairman & CEO at Webster Financial]

You mean from a credit perspective?

[Daniel Tamayo, Vice President at Raymond James Financial]

Yes.

[John Ciulla, Chairman & CEO at Webster Financial]

Yeah. I think our sponsor book outside of health care has sort of basically performed the way it has during all of their credit cycles, which is those loans are generally rated in the lower pass categories. So if they migrate, they migrate into criticized. 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.

[Operator]

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

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

Yes. Hi, thanks. Good morning.

[John Ciulla, Chairman & CEO at Webster Financial]

Hey, Laurie. Good morning.

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

Just staying with credit here, do you have a number in terms of what is nonperforming in that 7,300,000,000.0 sponsor and specialty book?

[John Ciulla, Chairman & CEO at Webster Financial]

I don't know if I have it offhand.

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

Okay. And then maybe just, if you're looking for that, I'm just, slide 17. I always appreciate the color here. Just extrapolating and and just trying to understand. It looks like your traditional office went from a hundred and 8,000,000 down to 16,000,000.

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

I just wanna make sure that that's right. And then if you know, any comment on that any comment on that that $92,000,000 drop? Was that charge off? Was that cure? Was that combination?

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

And then it looks like your ADC construction book, that $1,600,000,000 book, had a pretty sharp jump in nonperformers. Any color on that? Those two things. Thanks.

[John Ciulla, Chairman & CEO at Webster Financial]

Okay.

[John Ciulla, Chairman & CEO at Webster Financial]

I think, actually, someone just pointed out that the NPL is a misprint. Yes? Yes.

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

Yep.

[John Ciulla, Chairman & CEO at Webster Financial]

That's and when given me that, it's point it's 0.5 Yes.

[John Ciulla, Chairman & CEO at Webster Financial]

Percent. So that was a good catch on your thought point, and we're I apologize for the inaccuracy on the slide. So there's nothing not

[John Ciulla, Chairman & CEO at Webster Financial]

a big jump in the ADC construction. Construction. What was the first question on that, Laurie, on that page?

[Operator]

Oh, great. Okay.

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

So then the the same thing. The traditional office last quarter was showing up at 13% non performers, which is a 8,000,000. It looks like it dropped to, in this chart, 2%, which extrapolates to 16,000,000. So your traditional office non performers dropped 92,000,000 in the quarter and just wondered well, I guess, you know, is is that correct? Or or what are what are the office traditional office non performers?

[Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners]

And then just office charge off, you know, of your 55,000,000 in total charge off this quarter, how much rough?

[Emlen Harmon, Director of Investor Relations at Webster Financial]

Yeah. Lauren, so Lauren

[Emlen Harmon, Director of Investor Relations at Webster Financial]

yep. It's it's Evelyn. So on the on the on the traditional office non accrual loans, that's just a decimal place is over one there. So that's a 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.

[Operator]

Your next question comes from the line of Amir Varga with UBS. Please go ahead.

[Analyst]

Hey, good morning. Neil, I wanted to just turn back to your 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? 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?

[Neal Holland, EVP & CFO at Webster Financial]

Yeah. You know, it it's always hard to predict where the allowance will go next quarter. We feel like we have, are well reserved, as John mentioned. We have 5.5 unemployment kind of peaking. I feel, you know, if you look at it, the peer population, I feel we're in a pretty good spot there.

[Neal Holland, EVP & CFO at Webster Financial]

And we've got real GDP growth of 1.31% next year. So, you know, it obviously, we've had a lot of volatility day to day here over the last few weeks. Could could things get worse? They could. Could things get better?

[Neal Holland, EVP & CFO at Webster Financial]

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 I don't wanna give a projection on which way it should could go, but I would say that I feel like we're very well reserved and we we have a a very reasonable assumption in for our CECL provision at this point in time.

[Analyst]

Okay. That makes sense. Thank you. And then just a quick one on the securities front. Nice pick up again this quarter in the yield there.

[Analyst]

Given what you see on the 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?

[Neal Holland, EVP & CFO at Webster Financial]

Yes. So in Q1, we had about $05,000,000,000 of purchases at 5.6% and we had about half a billion dollars in reductions at 4.52%. So as we turn that portfolio, we picked up a hundred 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.

[Neal Holland, EVP & CFO at Webster Financial]

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, no, we don't expect any major departures, from kind of our percentage mix of cash or securities for the rest of the year.

[Operator]

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

[John Ciulla, Chairman & CEO at Webster Financial]

Thanks. Good morning. Good morning, Jon.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Question for you, Jon. 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, guess, is the question. And then what's a more comfortable or normalized level of NPAs for Webster in your view?

[John Ciulla, Chairman & CEO at Webster Financial]

So the answer to your first question is yes, particularly after this hour. I'm a little bit tired of credit. No. But look, I take a pretty balanced approach here because promises about credit performance are sort of hollow. And as I said before, I think we need to continue to execute on these portfolios.

[John Ciulla, Chairman & CEO at Webster Financial]

I think we're well reserved. I think we're in a good spot. Certainly non performers for us from a normalized operating environment should be materially below 1%. And so I think that that's kind of the way we measure it 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.

[John Ciulla, Chairman & CEO at Webster Financial]

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. Am absent a recession and a significant downturn. I feel really good about our ability to work through these credits in 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.

[John Ciulla, Chairman & CEO at Webster Financial]

So we're seeing that slower migration into classified, lower and no migration, net migration into criticized. And so 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.

[John Ciulla, Chairman & CEO at Webster Financial]

We've got a boatload of capital and liquidity. And and I feel like the the overall credit book, which is a, you know, big commercial portfolio, our our problems are kinda situated in 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.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Yes. Okay. On the capital question, you have two targets. You have the CET1 at 11%, longer term 10.5%. If growth is slower in the near term, are you do you still want to be active in the repurchase program now?

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

And do you have any willingness to go below the 11%? Thank you.

[John Ciulla, Chairman & CEO at Webster Financial]

Yes, 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.

[John Ciulla, Chairman & CEO at Webster Financial]

So in and around 11% 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 good question and the answer is yes.

[Operator]

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

[Anthony Elian, Equity Research Analyst at JP Morgan]

Hi, It's on loan.

[John Ciulla, Chairman & CEO at Webster Financial]

Hey. Good morning.

[Anthony Elian, Equity Research Analyst at JP Morgan]

Good morning.

[Anthony Elian, Equity Research Analyst at JP Morgan]

First on loan, could you give me

[Anthony Elian, Equity Research Analyst at JP Morgan]

a little more to back to late March? I think that if

[Anthony Elian, Equity Research Analyst at JP Morgan]

I look at period end balances, they're about half a billion higher than the average number for one q.

[John Ciulla, Chairman & CEO at Webster Financial]

Yeah. I think I missed the very first part of the question. But if your question 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.

[Anthony Elian, Equity Research Analyst at JP Morgan]

Thank you. And then my follow-up, maybe for Neil, when I look at your NII guide of 2,500,000,000.0 to $2,500,000,000 where do you see the biggest weight factor? Is it more fewer rate cuts, deposit pricing, nonprospering growth? Thank you.

[Neal Holland, EVP & CFO at Webster Financial]

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

[Anthony Elian, Equity Research Analyst at JP Morgan]

It is. And it is. And more so, the the biggest swing factor, is it more fewer cuts, nonprospering coming in better than expected or pricing on deposit?

[Neal Holland, EVP & CFO at Webster Financial]

Yes. 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, if we don't get any cuts versus the three in our guide, the modeled NII difference is not overly material.

[Neal Holland, EVP & CFO at Webster Financial]

We're a little more sensitive to the long end of the curve. You can see in our K every 1% excuse me, every 20 every 50 basis point move has a 1% impact or $25,000,000 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 gonna look for ways to continue to outperform our our betas there.

[Neal Holland, EVP & CFO at Webster Financial]

I think as I take a big step back, you know, 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, would help us. We'd see more opportunity, move towards the high end of the guide. And if curve got flatter, we move to the low end.

[Neal Holland, EVP & CFO at Webster Financial]

So I 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.

[Operator]

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

[John Ciulla, Chairman & CEO at Webster Financial]

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

[Operator]

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

Participants

Executives

• Emlen Harmon, Director of Investor Relations
• John Ciulla, Chairman & CEO
• Neal Holland, EVP & CFO
• Luis Massiani, President & COO

Analysts

• Andrew Leischner, Assistant Vice President - Equity Research at Keefe, Bruyette & Woods (KBW)
• Jared Shaw, Managing Director at Barclays Capital
• Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies
• Matthew Breese, Managing Director at Stephens Inc
• Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research
• Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo
• Manan Gosalia, Equity Analyst at Morgan Stanley
• Bernard von-Gizycki, Analyst at Deutsche Bank
• Daniel Tamayo, Vice President at Raymond James Financial
• Laurie Hunsicker, Senior Equity Research Analyst at Seaport Research Partners
• Analyst
• Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets
• Anthony Elian, Equity Research Analyst at JP Morgan