Webster Financial Corporation (WBS) Earnings Call Transcript & Summary

All right. Up next, we are pleased to have Webster Bank joining us for the first time. I'm sure many of you are familiar, Webster is an $83 billion balance sheet bank headquartered in Connecticut and a footprint that spans the Northeastern New York to Rhode Island and Massachusetts and had certain national businesses. They focus on 3 lines of business: commercial banking, health care, financial services and consumer banking. Joining us from the company is Chairman and CEO, John Ciulla. Welcome, John.

Thanks, Ryan. Great to be here.

Thank you. Thank you for coming. Today's discussion is going to be a fireside chat. So maybe, John, kicking it off, this is obviously your first time being at the conference. Again, thank you for joining us. And well, I think most people know you guys, to the extent maybe some attendees could be less familiar with the company. Do you want to just provide a quick overview of the bank?

Sure. I think you hit the fun fact. We're an $83 billion bank headquartered in Connecticut. Our branch footprint runs really from Boston to New York City. Our middle market and commercial kind of in footprint is extended down to Philadelphia. And then we've got a number of national businesses on both the lending and the deposit gathering side. I think our real competitive advantage, and we talk about this a lot in our investor communications is our diversified funding base. We have traditional bank deposits throughout and then we've got a really neat health care financial services vertical that includes HSA Bank and Ametros. In aggregate, we've got about $10 billion in low-cost granular long-duration deposits. We also have a company that we acquired a couple of years ago right before the financial crisis, called interSYNC, which provides low cost of acquisition deposits, although the deposits are sort of priced at Fed funds plus or minus. So we've got, I think, in a competitive advantage, we've been able to, with respect to other mid-tier banks, keep a lower loan-to-deposit ratio, more flexibility and fund market or slightly better loan growth. The result, I think, of all that is we have, over the last 3 years, delivered top quartile returns. We have a very efficient operating model and we've shown good growth. So we generate a lot of capital. We've been able to return capital to shareholders. And I think we feel like we're in a pretty good position from a competitive perspective.

So you talked about the health care businesses. I think a unique attribute of our franchise is the Healthcare Services segment. Maybe just talk a little bit about the strategic value of those businesses, how it fits into the broader company?

Yes, sure. So HSA Bank, as I mentioned, is the largest bank custodian of health savings accounts. It's a relatively consolidated industry. The top 5 players own about 70% of the market. And for us, where we have about 3.5 million account holders, it's given us the opportunity, as I said, to have a very low cost, around 15 basis points on average, $9 billion in deposits, along with some other investment assets that our account holders hold and it also generates a decent amount of fees for us each quarter. Ametros is similar. It's a workers' compensation settlement business. It's about $1 billion in single basis point cost deposits growing at about 25% per annum. And so we think that, that might be the next HSA Bank if we can continue to take advantage of that market. We're the market leader in a relatively unconsolidated industry with a lot of mom and pops. So we put a lot of focus on that industry in terms of growing deposits, growing fees. And as we may talk about later, also providing us an opportunity to cross-sell traditional banking products into those 3.5 million account holders.

So as we're here wrapping up 2025, maybe just spend a minute talking about some of the notable accomplishments for the year? What are areas that could have gone better and what were some of the key accomplishments for the bank over the course of the year?

Well, I think we delivered on the promised financial performance, which I'm proud of. Obviously, the operating environment has been a little bit volatile over time. So I think our consistency of financial performance has been great. We've also spent a lot of work and we can talk about this later, obviously, building resiliency into an $83 billion company, in part in anticipation of enhanced prudential standards, Category 4 at $100 billion, that seems to be changing a bit, but we're also, as we've told all the people in this room and other interested parties. A lot of what we're doing there, we would do anyway in terms of making our liquidity and capital management resilient and strong. So I think it's been a good year. We've grown loans better than the market. We've grown deposits better than the market. We've delivered good financial performance, and we've invested in the organization and technology. On the side, I'm always pretty honest on the side of what we could have done better. We had a couple of discrete portfolios at the end of last year and the beginning of this year, namely office and health care services that gave us a little bit of credit challenge. And I think the market reacted to that as a former Chief Credit Risk Officer, I still think our credit metrics and stats are completely in line with our peer group, but we spent some time resolving that and credit has stabilized, which is good. And I think the other opportunity we have is to be a little bit more aggressive on deposit pricing. And hopefully, that will help our NIM over time as well.

So we're going to round out 2025 in the next couple of weeks. We're obviously 2-plus months into the quarter. Maybe just talk a little bit about how 4Q is shaping up relative to the expectations that you had discussed on the fourth quarter earnings call? Third quarter earnings -- we haven't hit the fourth quarter yet.

Not much of a material change, I will say on loan growth. We had the year anticipating 4% to 5% growth at the end of the third quarter, we increased that to an estimated 6% growth. We have continued to see robust loan growth. And so our expectation is we may come in closer to that 7% level. I would say on credit, on fees and expenses were pretty much in line. We still are dealing with some headwinds on margin. And so my guess is we had guided towards a 3.35 exit NIM at the end of the year. We may be 1 or 2 basis points of that. But otherwise, our guidance remains intact.

So maybe just to follow up on one of the points that you made. You had spoken about the NIM coming down in the back half of the year, including some softness. Maybe just talk a little bit about what some of the -- what are the key drivers that are driving the softness? And how is that impacting your thoughts as we look towards 2026?

Yes. I think there are 2 categories. One, I'll use Fed speak and say that it's transitory. And I would say that we've got seasonal outflows of government deposits in the fourth quarter, which put some pressure on our funding costs. We also issued some new debt and we have in the process of redeeming to existing debt issuances. So we're carrying extra sub debt now, and that's worth a couple of basis points. On a less transitory and more structural basis, and we've been talking about this with investors, we've been growing loans a little bit faster than market. We've been funding that growth with a little bit more of interSYNC and some high-cost deposits, which has an impact. I will also tell you that our loan yields have not expanded because we've done less with respect to origination in our higher-yielding sponsor and specialty business, and more in higher credit quality but lower yielding loans. And all of you know, too, that credit spreads have -- are as tight as they've been in a while. So I'd say that, and then that's why I talked about our focus on deposit pricing and trying to accelerate our beta on the way down because we think that can help us as we move in. In the first quarter, we generally see a tick up in NIM or at least a stabilization because of the inflow of government deposits, and that's our big HSA quarter. But we're working diligently with our Board next week to make sure that we can stabilize our NIM as it moves forward through '26.

So, if you think about the balance sheet positioning as it's evolved over time, I think Webster historically had an asset-sensitive balance sheet. Maybe just talk a little bit about how the balance sheet is positioned today? What's changed and how it's positioned for the environment that we're in and going to continue to be in a Fed easing but steepening yield curve?

Yes, it's a great question. And I think it's an understatement that we were asset sensitive, 2019 was difficult for us to manage because we were funding variable in an increasing interest rate environment, we were funding very -- a lot of variable rate sponsor and specialty loans with 15 basis points HSA loans and when everything kind of shifted it was very hard to inorganically stop that. The great news is when we did the big MOE in 2022, that really organically shifted the makeup of our balance sheet. We had significantly more fixed rate loans. And then subsequently, we have now interSYNC, which is 100% beta. So on the way down, we get that benefit. We extended duration in the securities portfolio. And we have about $5 billion in notional swaps. So if you look in our Q now, with respect to shocks on the short end, we are relatively neutral from an interest rate perspective, which believe me, makes me a lot happier than 2019.

So maybe let's shift gears and talk about expectations as you look into 2026 and I guess maybe to start, what type of operating environment are you planning for? And how does that -- that type of environment inform your strategic planning? And what are your -- what are those implications for how you're thinking about balance sheet growth?

Yes. I think it's a great question, and there's a lot of inputs there. I was pinned down at a conference earlier in the quarter about industry growth because I'm not going to give '26 guidance for Webster. We're meeting with our Board next week. And I thought kind of mid-single digits from a loan growth perspective. I would say I would stick with that thought process just as kind of a natural impact. I think we could, as an industry, outperform that. There's going to be a little bit more M&A activity as far as I see. I still think on the -- and I think that people are constructive. I know our clients are that -- the base case is no recession and tariff impact being relatively modest. So could you -- could the industry outperform that? Yes. I think on the other side of that, you have continued proliferation of private credit, which continues to take some share from the bank. So I think as we go into our planning session, we think about always at Webster kind of meeting or slightly exceeding industry growth targets. But one of the inputs this year, and we talked about NIM earlier is making sure that we're really focused on delivering mid- to high-teens [ ROATCE ]. So what we want to think about is we want to grow and we want to grow with the market so that people know that we've got good growth potential. We also want to grow very profitably. So I think we'll talk about on the January call, what that means for the categories we're focused on, what we think growth is going to be.

Got you. So you talked about earlier about becoming Category 4 compliant. What is your 2026 outlook anticipate in terms of regulatory developments, particularly the Category 4 threshold? And how about any changes play into your strategic planning?

Yes. I mean, I'm sure all of you are reading the same thing I have, and I've spent a lot of time with the new regulatory agency heads. It is clear. First of all, I'll just start by saying regulation is changing, and it has changed the supervisory attitude at the ground level with the troops has improved dramatically and is much more constructive. This idea of a focus on material financial risk and not focus on necessarily process or political platforms obviously helps bank managers have more flexibility in how they run their bank and how we can compete. So that's great. And I could go down a laundry list of rule making that's been rescinded on brokered deposits, 1071, everything else. So I think that's important to note that, that's really happening on the ground and will continue to happen. I think with respect to some of these bright line tests, I think heightened standards at $50 billion, Category 4 to $100 billion, they're going to move. And everybody is talking about it. This is -- again, this is more listening to John editorialize, but I think the FDIC and the OCC are already there. I think Micky Bowman at the Fed feels that that's the right direction to go. But the Fed takes a little bit longer given their approval process. But we anticipate that Category 4 level to move up, I can't promise it, but I think that most of the industry think that's going to happen. And then the question is, is it just indexed up -- or is it going to move to $250 billion. In any event, that entire package of kind of regulatory constructiveness does help us. And you've heard our CFO, Neal, who's here, talented CFO, talk about $60 million in aggregate expenses over 3 years. We spent $20 million this year. We expected to spend $20 million in '26 and $20 million in '27 specifically to be Category 4 compliant. We have mentioned that not every single one of those dollars was simply to get regulatory compliance that a lot of it was making us a better bank, I think liquidity management, capital management, data and we'll still make some of those investments. But there's no question that the $40 million in front of us will be less than that for regulatory compliance. Some of it will be able to avoid, some of it will spend as originally scheduled, and some of it will spend in a longer time frame. So it will be less. We'll extend out projects because we don't have to get them done with a gun to our head. And then what we'll talk about in January is how much of the avoidance and deferral and expense goes to the bottom line to try and achieve operating leverage? And how much do we deploy into things that are -- shareholders want us to invest in, which is more teams and technology and HSA growth. So it does give us more flexibility going forward and more to come.

You talked a little bit earlier about credit, problem asset migration at the tail end of last year was a big focus. I guess what do you anticipate as the trajectory of asset quality, whether in the fourth quarter or into '26. And you mentioned a couple of portfolios that had generated disproportionate share of migration. What are some of the other pockets of credit degradation that you're seeing?

Yes. I mean, it's fascinating for us. And I know that I'm always fighting a battle, I think, into a perceived credit sensitivity at Webster, and I don't know whether it goes back to the great financial crisis or obviously, we've had dealt with some office. If you look at our actual statistics in terms of credit metrics and you compare them to our OCC peers, we're not out of line, but I understand that we had 2 pockets that created a significant jump up in classified and nonaccrual assets towards the end of '25. And those 2 portfolios are significantly ring-fenced and very small as it relates to the overall portfolio. We've identified the problem loans we think are there. And now it's just a question of working through resolution. We have not really seen pockets of poor credit performance -- correlated poor credit performance in any other category, geography or business line to date. So I feel good about that, and we portended that in the second half of the year, we would see stable to improving credit. We posted that in the third quarter. Our -- we anticipate that to continue -- and so it may take a while to resolve some of those and there may be lumpy charge-offs, but we still think that 25 to 35 basis point annualized charge-off rate is within striking distance, and we'll continue to work through those. Interestingly, I think people -- it's funny depending on how long you've been around and following, there are some people that are still saying, "Hey, when is credit going to be more benign?" Credit has been really benign since the great financial crisis. And I liked one of your competitors put out a note that said we think credit will normalize, but normalization means back to historic charge-off rates and higher levels of classified. So I think we're in that interesting position now. I feel really good about our portfolio. I don't see any pockets of deterioration that are correlated, but we're obviously very diligent around managing our credit book.

I may have made a joke about the competitor, but you don't know my sense of humor well limited...

Not a real competitor. Someone who claims to be a competitor...

No, that was a helpful answer. You referenced earlier competition from private credit across the industry. And obviously, you've probably seen in certain of your businesses. At the same time, you entered into a partnership with a private credit provider. I think you talked about a lot on the earnings call. Maybe just talk a little bit about the rationale of that partnership and how and when does that partnership start to impact Webster's financial performance? And maybe just talk through some of the moving pieces behind it?

Sure. It's interesting. It's always a loaded question because there are those that are really glad we're in the sponsor and specialty business and those that are a little bit more concerned. I always start by saying that was really a defensive move to go on offense, right? It's a risk management move. We are not sort of jumping into private credit structures. We're not putting on our balance sheet loans that don't meet our strict bank balance sheet hurdles. So the reason we did it, and people have heard me say it before, I'll give you kind of just an easy example. We have great private equity relationships going back 25 years, great performance throughout cycles, the GFC, the pandemic. And we used to do the first platform financing at $35 million back before the proliferation of private credit and the pandemic. That company would do another platform acquisition. It would be a $75 million loan. We would underwrite it, make syndication fees and sell that down to $35 million. Right now, that's not really feasible because most of the private credit folks will come in and take it all down. So what this allows us to do is to be able to structure loans have a higher implied balance sheet but take a portion of that exposure and put it into the fund. At the same time, we have management fees from the fund and we're an LP in the fund. We have no credit clawback or any risk to us. But over time, it should allow us to be more competitive in sponsor and specialty, continue to maintain our deposits and our cash management fees, ultimately be more profitable and have this nice source of noninterest income coming back to us. We've validated the model. It works. We're originating loans. There are loans in there. I'm happy to report that we actually have won the cash management business for a loan originated by the Marathon folks, which gives us another opportunity. They're not a bank for us to do treasury management services and generate other fees. As it relates to financial impact, we're hopeful that it will have an impact on our ability to grow balance sheet loans, certainly towards the second half of '26 could be meaningful. But we don't think it's going to have a meaningful impact on expenses or noninterest income in '26. I think I'd look out beyond that. We'll provide more detail on the January earnings call.

So John, obviously, you have a geographic focus in the Northeast, including a presence in and around New York City. Maybe talk a little bit about how you think the recent mayoral election impact the operating environment for banks that do business around here, both in terms of the business climate and also overall asset quality?

Yes, it's a great question. I'm really happy we have New York exposure because I think it's the greatest city in the world. I think it's incredibly resilient. I understand unique dynamics. So we've spent a lot of time pressure testing our portfolio. And we don't think that there are any short- or medium-term impacts on things like rent freezes and other things on our portfolio. So if you look at our rent-regulated multifamily, which is just above $1 billion, it's incredibly granular, average loan size, $3.5 million like some of our other competitors, we don't have $200 million single point exposures. They're much easier to rightsize and work with borrowers. And 70% of that book was underwritten post rent regulation meaning we didn't underwrite into an assumed increase in rents. We underwrote in rents in place. Input costs have gone up, yes, insurance and other things, but our debt service coverage ratios have maintained, and we haven't seen material deterioration in that portfolio. And I use that as an example and you can think about anything else we have there. So I think our best estimate is nothing to see here from an immediate short- or medium-term credit performance. I think I do have to acknowledge that I worry about public safety, and I worry about just the overall business climate that's not going to change in the next year. But over time, right, that could be an issue. I think that's more an impact on new business origination and economic activity than it is on -- in place credit portfolio performance. So I'm not panicked. And I think if you talk to our clients on the ground and you talk to our commercial real estate lenders, our small business lenders, our C&I folks, they're not seeing changes in client behavior related to the mayoral change.

And maybe hitting on another area of policy, this one, National -- current Congress and presidential administration have been proponents of consumer-directed health and HSA accounts specifically, which I think, as we talked about early comprise a decent fund amount of your funding, how do you foresee these legislative actions impacting HSA Bank?

Yes. We spent a lot of time in our first 4 meetings this morning talking about this. And it's tough because there are some things that have reasonable probability. There are some long shot unicorn big wins that we could have if some of what's being talked about could happen. And I don't want to go down that path because I don't want to set expectations. Let me just say, it's for the first time in my life, I turn on CNBC in the morning, I don't know if you guys watch that or something else. But I'm amazed that every morning, there are senators and congressmen using the term HSA accounts on TV, which I think is great. And so we did see the one big beautiful bill have a provision that allowed Bronze participants in the ACA Act become HSA eligible. We have talked about that and size the TAM, it's about 7 million to 10 million potential additional account holders. We anticipate if we can keep our market share and execute and we need to execute. It could mean another $1 billion to $2.5 billion in deposits for HSA incrementally over the next 5 years, $50 million to $100 million in '26. Among 100 bills literally -- among 100 bills that are floating out there, there are things like working Medicare seniors that could be eligible, decoupling HSA accounts from high deductible health plans. We've even heard talk about the Obamacare subsidies going directly into consumers' HSA accounts, which, again, we're not counting on. We don't think there's a high probability of that, but that would be terrific for our industry. So the one thing I would say is we are putting a lot of our effort on marketing, user experience and the whole process around HSA because the addressable market is increasing, we don't know the extent of it, but never, in my life, having owned this business for a long time, have we seen sort of 100% of what people are talking about from a policy perspective being constructive in HSA. So we think it certainly will give us some tailwinds as we move forward.

And John, we talked a little bit about that health care segment. And maybe outside of that, as you look ahead to '26, where are you expecting to see the most appealing growth opportunities across the bank?

Yes. I would say our initiatives center in some of the things we do really well in market, in business banking and middle market and commercial that we do in footprint. We've got some opportunities to move outside of footprint, not take additional risk. Most of this is on the deposit gathering side because that's really our focus. We've got enough levers to pull on the asset origination side that I don't think we need to expand the risk box or be particularly aggressive going outside of geography. We're adding middle market teams to continue to grow in market and take share from a C&I perspective. We're investing a lot in our treasury management capabilities because we think that matters, and we want to grow fees and have a higher proportion of fees to total revenues than we do right now. And then I'd say, while not in the financial services area because that's the question you asked outside, we do have 3.5 million HSA account holders. And we've got about 50,000 Ametros' clients. And we are right now trying to operationalize the use cases for checking accounts, debit cards, mortgages, savings accounts and other products to cross-sell into an embedded big customer base, client base that we really haven't -- we really haven't penetrated in any material way to date.

So let's maybe switch and talk about capital priorities. So your near-term target is 11%. I think you're operating around 11.4%. How do you think about the role of organic plays versus strategic opportunities to return capital to shareholders? How do you think about the balance of those in the near term?

Yes. I think we've been pretty disciplined and said the same thing. So I'll bore everybody again. If we have outsized profitable loan growth to support, that's our first priority. If we have an opportunity in a very economically effective way without tangible book value dilution or significant tangible book value dilution to enhance our health care vertical through a tuck-in acquisition, a small acquisition where we can generate low-cost deposits or fees, that would be a use. If not, we look at our payout ratio. And as you've seen this year, we've been our most aggressive with respect to share buybacks. We talked about in our Q, our share repurchases to quarter and we continue to think that, that's part of the game plan. We still think we're undervalued even though the stock has had a nice run recently. And I still think that we'll continue if we run high capital levels and don't have other organic uses of capital, we'll continue to return capital to shareholders.

And maybe just to follow up on that, like what factors would lead you to getting to your long-term target of 10.5%. Obviously, you talked about better growth. I'm assuming that's a big part of it. But maybe you could just talk about the bridge from where we are today to the longer term?

Yes. And it's a great question and a lot of good questions this morning, and I'm not sure my answer is always satisfy everybody on the question because I think it is a bit of a triangulation of factors. I want to make sure the market feels confident that our credit trajectory is in a good fashion. I think we're all feeling really good about this particular point in time, but I think there's also the sense that there is still uncertainty out there from the economic environment from an employment perspective. So I'm not hesitant and we're clearly looking to move our capital CET1 capital level down to 11%. We do think we're much closer to 10.5% target level. And I think that's going to be important. We think that's the right place as a disciplined management team to operate there definitely are competitive factors. I think everyone at your conference has now talked about 10.5% and then 10%, and I think we need -- yes, I think we need to make sure that we continue to be competitive there. So I think we're looking at it. I got a couple of questions today from -- I don't know if anybody here in the audience about whether Moody's is driving midsized banks to keep higher capital levels? I think it's not secret that they would like higher capital levels than lower capital levels, but I don't think they're a gating factor. I think if you've got a good, well-managed company with a strong balance sheet, I think we'll be able to operate back to our long-term 10.5% target shortly.

So across the conference, there's been a lot of talk of strategic activity mergers and the like. Obviously, this has been very topical amongst regional banks, given the flood of deals that we've seen recently. I guess, obviously, you went through a big merger of [indiscernible], but -- where do acquisitions fit into your strategic priorities? I know you talked about some health care tuck-ins, but what about more traditional bank deals?

This is the trap question, isn't it, Ryan? It's pretty easy, right? And we continue to answer the same way in the short and medium term and given where we're trading and our opportunity in front of us and the strategic opportunities we think are contiguous to our market. Whole bank acquisition M&A is not a priority and not something that we're focused on and something that I don't think we would do in the short and medium term. As I mentioned a minute ago, I do think that we would still look at franchise enhancing fee and deposit gathering opportunities inorganically as long as they're small and they make sense economically and don't restrict otherwise our capital priorities. We would do something like that. Otherwise, I would say, and I think I answered the question on the earnings call with respect to upstream partnerships, that's not on our top 20 items when we're talking to our Board next week about strategic opportunities. But if there was something really compelling to shareholders, as a fiduciary, we would have to evaluate that.

Absolutely. If you look across the banks, we've had a lot of banks come out with return targets over the last quarter or so. You guys have obviously continued to post really strong returns. Maybe just talk about what you consider to be a longer-term profile -- return profile for the bank? And what is allowing you to sustain such high levels of return relative to the peer group?

Yes. So I'm going to be careful. I'm not going to set targets, but I think I've said many times publicly that we think that we have the right efficient operating model and business mix and efficiency ratio to continue to generate mid- to high teens [ ROATCE ]. And so when we go into our planning session, our goal, we saw -- we don't solve for efficiency ratio. We don't solve for NIM. We try and solve for continuing to deliver top quartile peer returns. And so I would say that's the ratio that we plug in to try and continue to grow the bank smartly, but profitably over time.

So when you were talking about the stock before you mentioned that it had gone up a bit, but remains undervalued. And I think when I looked, it trades at a discount to some other banks, at least on earnings and -- as you go out and talk to investors, you mentioned you had 4 meetings this morning. What would continue to be the themes that you hear as to why that is trading at a discount?

I think if I had to answer the question just flat out, it would be credit sensitivity, followed maybe a little bit down the road by Category 4 and what that means with respect to expense trajectory and operating leverage. And I've had lots of theories. I've been asking this question for longer than I've wanted to because I think we run a really high-quality, very profitable, consistent delivery franchise. But I think credit is on people's minds and the idea that we're in some businesses like sponsor and specialty, I think we have a higher bar to continue to show that our credit profile is not any riskier than anybody else's, and that's what I truly believe, and I think only time and continued performance alleviates that.

We're in the last minute here of the presentation. And I wanted to close with -- we obviously covered a lot of ground here. But as you look ahead, you mentioned that you're meeting with the Board, and you'll have a more formalized guidance as we get into the earnings call on '26 -- in early '26. But what do you expect to distinguish Webster's performance for investors as we look into next year?

Yes. I think it -- for us, I think we've learned -- we're going to keep our heads down and continue to deliver consistent performance. I think that's the most important thing. With respect to how we do that, I do think our differentiated deposit franchise is really critical. And if we can continue to execute and take advantage of some of these tailwinds in HSA and continue to accelerate growth in Ametros and have a lower cost of deposits. And as I mentioned earlier, in self-evaluation, I think we can be more aggressive on our deposit pricing, which I think is important to us as we move forward. So I think being a great -- having a great funding profile ultimately distinguishes what makes a great bank, and I think we have it.

Well, that was great. I appreciate your comment. Hopefully, we'll have you back here next year, and please join me in thanking John.

Ryan, I appreciate it.

Thank you so much.