Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Webster Financial Corp (WBS, Financial) announced a private credit joint venture with Marathon Asset Management, enhancing balance sheet flexibility and adding new sources of fee income and deposit opportunities.
- The company hired Neil Holland as the new Chief Financial Officer, bringing extensive experience from First Republic and MUFG.
- Bill Haas joined the Board of Directors, adding significant regulatory and risk management expertise from his 38-year career at the OCC.
- Core deposits grew by $700 million, and loans increased by $500 million, with growth expected to continue in the second half of the year.
- Investments in technology at HSA Bank are yielding positive results, with significant client wins and a new investment offering expected to add $400 million in deposits.
Negative Points
- Net interest income (NII) performance has not met earlier expectations due to slower private equity activity and competition from private credit markets.
- The office portfolio saw several loans move to non-accrual status, increasing overall non-performing loans (NPLs) for the quarter.
- The company experienced a $49 million pretax charge due to the repositioning of its securities portfolio.
- Commercial classified loans increased, particularly in the healthcare and office sectors, reflecting ongoing challenges in these areas.
- The efficiency ratio increased slightly, and adjusted non-interest income was down $5 million, driven by lower BOLI income and reduced deposit and customer hedging activity.
Q & A Highlights
Q: Can you give us some idea for the margin as we head into year-end with some rate cuts in 2025?
A: We expect to benefit from fixed asset repricing, loan growth, and securities repositioning, offset by modest deposit repricing. We anticipate exiting the year with a net interest margin (NIM) around the mid-3.30s.
Q: Could you touch on the commercial real estate NPL pickup and expected loss content?
A: The increase in non-performing loans (NPLs) was primarily due to four office loans. We believe our 1.30% reserve coverage is adequate for expected losses. Approximately 75% of our office loans have credit enhancements, which help mitigate potential losses.
Q: Can you elaborate on the updated NII guide and what would make it conservative or aggressive?
A: The dynamic has been around loan yields and modestly increased deposit costs. We missed our original expectations due to slower loan growth and lower repricing activity. Our revised guidance is based on updated assumptions and trends, and we believe it is neither conservative nor aggressive.
Q: What is driving the decisioning for securities repositioning?
A: Our primary objectives are capital neutrality, earn-back period, and improving yields. Year-to-date, we've done about $1.3 billion in restructuring, picking up about 400 basis points on yield with a duration of 3.7 years.
Q: Can you provide an update on the HSA business and its exposure to sweep account discussions?
A: We do not see our HSA business being subject to new sweep account rules. We are a nationally regulated financial institution, not providing fiduciary services or investment advice.
Q: What is the outlook for loan growth in the second half of the year?
A: We expect diversified loan growth across categories such as mortgage, lender finance, fund banking, traditional middle market C&I, public sector finance, ABL, and business banking. We aim for 4% to 5% loan growth for the full year.
Q: How confident are you in the HSA structure in terms of not being caught up in the sweep account discussion?
A: We are confident that our HSA business will not be impacted by the new sweep account rules. We are not in the business of providing fiduciary services or investment advice.
Q: What drove the updated appraisals in the office portfolio this quarter?
A: The updated appraisals were driven by standard operating procedures such as risk rating migration, debt service levels, and approaching maturities. Approximately 40% of the office portfolio now has updated appraisals.
Q: Can you discuss the impact of private credit on your sponsor business?
A: The proliferation of private credit has impacted spreads and the number of deals we can participate in. However, many private equity firms prefer to deal with banks for various reasons, and we remain competitive in this space.
Q: What is the outlook for expenses given the revised NII guide?
A: We are sticking with our initial expense guidance. We have opportunities for organizational efficiencies and will continue to invest in the business. Our goal is to bring expenses in at the low end of the guidance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
