Webster Financial - Earnings Call - Q1 2025

Executive Summary

• EPS of $1.30 missed the Street’s $1.38 consensus; SPGI “Revenue” (post‑provision) of $627.3M missed the $701.5M consensus, with the shortfall driven by a higher provision ($77.5M) after management raised recession scenario weighting to 30%. Company-reported revenue (NII + noninterest income) was $704.8M.
• Net interest margin expanded 4 bps q/q to 3.48% and efficiency ratio remained strong at 45.8% as deposits grew 1.3% and loans grew 1.0% q/q.
• Credit costs stayed elevated but improved sequentially: net charge-offs fell to $55.0M (0.42% of average loans) with nonperforming assets rising to 1.06% of loans, concentrated in office CRE and health care; allowance increased to 1.34% of loans, largely from macro weighting changes rather than deterioration.
• Full-year 2025 outlook is largely unchanged vs January: loans/deposits +4–5%, NII $2.45–$2.50B, efficiency 45–47%, tax ~21%, NIM ~3.40% (raised from 3.35–3.40% in January); deposit beta now expected ~33% vs ~30% previously, a modest tightening.
• Potential catalysts: continued buybacks (3.6M shares repurchased in Q1), deposit cost reductions, credit inflection mid-2025, and Marathon JV timing (target late Q2/early Q3).

What Went Well and What Went Wrong

What Went Well

• Diverse deposit growth and NIM expansion: total deposits +$0.8B q/q; NIM +4 bps to 3.48%, reflecting lower deposit costs and stable funding mix. “We grew total deposits by over $800 million… NII was up slightly… NIM… up 4 basis points” (CFO).
• Segments: Healthcare Financial Services delivered 7% y/y operating revenue growth and 7.6% pre‑tax net revenue growth; HSA deposits +8% y/y with stable costs (~15–16 bps). “Enrollment season for ’25 was good… deposit costs are staying in line” (COO).
• Capital return and resilience: ROA 1.15%, ROATCE ~15.9%, CET1 11.26%; repurchased ~3.6M shares on “significant excess capital and stable fundamentals” (CEO).

What Went Wrong

• Consensus misses: EPS of $1.30 vs $1.38*, and SPGI Revenue (post‑provision) of $627.3M vs $701.5M*, driven primarily by a provision increase tied to macro scenario weighting (added ~$20M to provision).
• Asset quality optics: NPAs rose to 1.06% of loans (from 0.88% in Q4), with concentration in office and health care; ACL/NP loans coverage decreased to 126% from 149% in Q4 as NP loans grew.
• Noninterest income down y/y (-$6.8M), with higher operating investments and risk infrastructure spend pushing noninterest expense up y/y (+$7.7M).

Transcript

Operator (participant)

Good morning and welcome to Webster Financial Corporation First Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon, to introduce the call. Mr. Harmon, please go ahead.

Emlen Harmon (Director of Investor Relations)

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

John Ciulla (CEO and Chairman)

Thanks, Emlen. Good morning and welcome to Webster Financial Corporation's First Quarter 2025 Earnings Call. We appreciate you joining us this morning. I will provide some high-level remarks on our performance, after which our CFO, Neal Holland, will cover the financials in more detail. Our President and Chief Operating Officer, Luis Massiani, is also joining us for the Q&A portion of the call today. Webster's first quarter financial performance was fundamentally solid, with consistent execution across each of our business segments. As illustrated on Slide 2, 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. 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 $1.30, a return on assets of 1.15%, and a return on tangible common equity just below 16%. Our sound operating position allows us to be opportunistic. Given significant excess capital and stable fundamentals, we elected to repurchase 3.6 million shares during the quarter. During our CECL process this quarter, we increased our recession case probability to 30%, resulting in us adding approximately $20 million to this quarter's provision.

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

Two, we saw a material slowdown in negative migration, and importantly, overall criticized loans actually declined in 1Q. Finally, the drivers of our charge-offs and sticky NPAs continue to be centered in CRE office and healthcare asset classes. We've yet to see any real impact on credit related to the tariff announcements, but as you can imagine, we're spending a ton of time consulting with our clients on potential impacts and looking for potential vulnerabilities in our portfolio. We do not have disproportionate exposure to industries we believe will be most directly impacted, and many of our borrowers have strategies in place to manage costs and supply chain and pass along price increases. While our borrowers remain in generally good financial health, we have selectively seen clients delay strategic actions as they assess the potential impacts of the proposed tariffs.

We entered 2025 with a cautious view on accelerating economic activity, and the current environment falls within the realm of our initial expectations. Turning to Slide 3, Webster continues to generate diverse and granular deposit growth. Every one of the five major business areas we highlight on this slide grew deposits this quarter, with corporate deposits the only category to exhibit a decline. The quality of our deposit franchise allows Webster to pursue persistent and profitable balance sheet growth through a variety of operating environments. Executing on initiatives that enhance our funding profile will continue to be a primary focus of our management team. With that, I'll turn it over to Neal to provide some additional detail on our financial performance in the quarter.

Neal Holland (CFO)

Thanks, John, and good morning, everyone. I'll start on Slide 4 with a review of our balance sheet. Total assets were $80 billion at period end, up over $1 billion from last quarter with growth in cash, securities, and loans. Deposits were up over $800 million. The loan-to-deposit ratio held flat at 81% as we 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. Loan trends are highlighted on Slide 5. In total, loans were up $551 million, or 1% linked quarter. The yield on the loan portfolio was down 13 basis points as the effects of the fourth quarter Fed funds cuts were partially offset by fixed-rate asset repricing and new loan originations. We provide additional detail on deposits on Slide 6.

We grew total deposits by over $800 million, with growth in core deposit categories of $1.5 billion, in part related to seasonal trends. We did see a slight decline in DDA in the first quarter, though we continue to expect DDAs have structurally stabilized and should be effectively flat on a full-year basis. Turning to Slide 7, our income statement trends. NII was up slightly from Q4, while we did see a moderate decline in non-interest income as we had a unique transaction in Q4 that we did not expect to repeat. Expenses were up $3 million. At an efficiency ratio of 45.8%, we maintained solid profitability while investing in the growth of our franchise. Overall net income was down $24 million relative to the prior quarter, and earnings per share was $1.30 versus the adjusted figure of $1.43 in the fourth quarter.

A higher provision was a significant contributor to the decline. The increase in provision was due to increased weighting of recessionary scenarios in our modeling as opposed to asset quality trends. Our tax rate was 20%. On Slide 8, we highlight net interest income, which increased $4 million despite two fewer days in the quarter, driven by balance sheet growth and an increase in the net interest margin. We changed the annualization factors for the NIM calculation to better represent the full-year NIM, with prior periods recast as well. Incorporating this change for both periods, the NIM was up four basis points over the prior quarter to 3.48%. Our average cash position increased by roughly $650 million this quarter, and we anticipate we will hold higher cash levels going forward. This was roughly a three-basis-point drag on the NIM this quarter.

We reduced our total deposit cost by 16 basis points in the quarter, and to date, the cycle-to-date beta is 32%. We expect to end the year around 33%. Slide 9 illustrates our interest income sensitivity to rates. We saw a slight 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 million, down $17 million over the prior quarter. Excluding a direct investment gain in the fourth quarter and changes in our credit valuation adjustment, non-interest income would have been roughly flat to the prior quarter. Underlying business activity remained consistent. Slide 11 has non-interest expense. We reported expenses of $343 million, up from $340 million in fourth quarter.

The largest driver of the change was a seasonal increase in benefits expense. In addition to regular way operating expense, we are also incurring expenses that enhance our operational foundation as we prepare to cross $100 billion in assets. This quarter, we complete a strategic initiative to modernize our general ledger. Streamlining onto a cloud-native solution allows us to scale with improved analytic capabilities and financial controls. Slide 12 details components of our allowance for credit losses, which was up $23 million relative to the prior quarter. After booking $55 million in net charge-offs, we recorded a $78 million provision. This increased our allowance for loan losses to $713 million, or 1.34% of loans. The increase in the provision is not driven by underlying asset quality trends, but instead, we elected to place a greater consideration for downside economic scenarios in our allowance calculation.

Under these new scenario weightings, our allowance calculation now assumes the U.S. unemployment rate increases to 5.5%, with a considerable slowdown in real GDP growth. Slide 13 highlights our key asset quality metrics. As you can see on the left-hand side of the page, non-performing assets were up 22% and commercial classified loans up 6%. The non-performing asset increase was largely related to a small group of credits in the healthcare and office portfolios, and we anticipate the growth here to slow going forward. On Slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital to our publicly stated targets. Our regulatory capital ratios were down modestly as share repurchases and RWA growth outweighed retained earnings growth in the quarter. Our TCE ratio was effectively flat as it also benefited from AOCI improvements.

Our tangible book value per share increased to $33.97 from $32.95, with net income and AOCI improvements offset by shareholder capital returns. Our full-year 2025 outlook, which appears on Slide 15, is unchanged relative to the outlook we provided in January, with the exception of a small change in Fed funds expectations. Our outlook assumes an operating environment similar to that which we have experienced so far in 2025. With that, I will turn it back to John for closing remarks.

John Ciulla (CEO and Chairman)

Thanks, Neal. In summary, despite market volatility, 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. We retain and generate significant excess capital, proactively manage credit and other business risks, have a unique and advantageous funding base, and a strong liquidity profile. We are poised to quickly adjust to changing market conditions. Finally, I'd like to thank our colleagues for their continued effort.

Their hard work is reflected in our performance this quarter, including our strong deposit growth in favorable categories and diverse loan growth. It is also their effort that continually enhances Webster's operating capabilities, preparing us for the future. Thank you for joining us on the call today. Operator will open up the line for questions.

Operator (participant)

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

Andrew Leischner (Assistant VP of Equity Research)

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

John Ciulla (CEO and Chairman)

Good morning.

Andrew Leischner (Assistant VP of Equity Research)

Hey, I know you've talked previously about seeing credit stabilization by mid-year. Is that timing still on track? On the NPL increase this quarter, could you 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. Thank you.

John Ciulla (CEO and Chairman)

Yeah, sure. I think the key factor for us is looking at the migration and the reason that we remain confident of seeing kind of an inflection as we move through the year is our level of criticized assets actually declined quarter-over-quarter. That is kind of representative of the new flows in. I would say, yes, we talked about mid-year. I do not know whether it is mid-year or third quarter, but I think we are seeing positive trends in risk-rating migration that is consistent with what we have talked about over the course of the last several months. With respect to looking at the in more detail on the non-accruals, we are, some of them obviously are sticky. We are working through them.

I think important to note is if you took our healthcare portfolio and our office portfolio, which are relatively small portfolios in the grand scheme of things, I think we have about $680 million in the healthcare portfolio at quarter-end and about $800 million in office. Contribute nearly half of the non-performers. If you think about taking those two out, our NPA ratio would be about 70 basis points rather than just over 1%. We obviously proactively manage those portfolios. We do think that we've got everything sort of ring-fenced and covered. That gives us confidence that we'll be able to work those classified and non-accrual numbers down. We're not seeing stuff flow into the initial criticized bucket.

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 VP of Equity Research)

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

John Ciulla (CEO and Chairman)

Yeah, I mean, we obviously think that our stock is undervalued. We bought back a substantial amount of shares in the first quarter. We anticipate kind of sticking to our guns about deploying capital into organic growth, looking at potential tuck-in acquisitions in our healthcare vertical and other areas. If that's not available, we will buy back shares, certainly over the next three quarters. 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 VP of Equity Research)

Okay.

Operator (participant)

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

Jared Shaw (Managing Director)

Hey, guys. Good morning.

John Ciulla (CEO and Chairman)

Jared.

Jared Shaw (Managing Director)

Hey. Maybe just sticking with the credit side, looking at the growth in non-performers. Actually, when I look at slide 17, the growth in commercial classified, how did that not drive itself a provision? When we look at the growth and 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 (CEO and Chairman)

Yeah, I mean, Jared, as you know, the CECL process is pretty complex. Most of the loans that are determined to be problem loans and problem assets have individual assessments of loss in them. There are obviously a lot of qualitative factors that go into the CECL reserve. There were a bunch of offsets. I made the comment that when we ran the models going through our specific reserves, going through overall weighted average risk rating in the portfolio and migration, that had we not changed the economic scenario, our provision would have been roughly in line with charge-offs. It is a bunch of inputs, and I think you clearly higher levels of non-performers and classified in and of themselves drive higher reserves. Overall portfolio migration and weighted average risk ratings in the portfolio, along with qualitative factors, offset a bunch of that.

We're obviously not being cute in saying that when we change the weighting of the recession scenario from closer to zero to 30%, that really drove the $20 million in additional provisioning.

Neal Holland (CFO)

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

Jared Shaw (Managing Director)

Okay. All right. Thanks. 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? 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 (CEO and Chairman)

Yeah, I think it's a combination, right? And so we're always looking at the economic benefit. Obviously, we know that the optics of those higher categories hurt us from an outside perspective. 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. I think there will be some that naturally resolve themselves. Some will take charges in our expectations. 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 we're around 40 to 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)

Okay. Thank you.

John Ciulla (CEO and Chairman)

Thank you.

Operator (participant)

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

Mark Fitzgibbon (Head of FSG Research)

Hey, guys. Good morning.

John Ciulla (CEO and Chairman)

Mark, good morning.

Mark Fitzgibbon (Head of FSG Research)

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

John Ciulla (CEO and Chairman)

Hey, Mark Fitzgibbon. On the second question first, on the deposit side and deposit costs, the answer is no. 15 basis points, as you see in the slides that we put out there, has stayed pretty consistent. We continue to think that that's the path forward for the book of business. Short answer is that there is no real pressure from that perspective. Enrollment season for 2025 was good. As you think and look at the numbers that we have there, this is the first quarter where you're going to have a little bit of a different view, given that we did bring over the investment balances, the cash investment balances from Schwab last year.

You have a little bit more movements that are slightly different than what we've had historically because we did not have that part of the deposit base as part of our numbers. Remember that those deposits used to sit outside of our, off our balance sheet, and we've never factored into those numbers before. Enrollment season was good. This was the first year that we've had what I'll call the full product suite that we have been developing for the past three years, which includes new employer portal experiences, new client-facing technology, our new HSA investment platform. We've started to see the benefits of that in 2025. The first full season that we're going to have the entirety of the power of that product suite is going to be for the 2026 pipeline cycle. We feel very good about the 2026 pipeline cycle.

is early to tell because this is still the first year that we are doing it, but we feel very good about the competitive positioning that we have going into the balance of this year and into next year. As you think about the progression of deposits between fourth quarter of 2024 to first quarter of 2025, and then what is going to happen for the balance of the year, we should see similar type of growth that is slightly ahead of what you saw between fourth quarter and first quarter over the remainder of the year. All things considered, growth rates are good. Deposit costs are staying in line with where we thought they were going to be. We continue to feel very good that we have improved our competitive positioning in the market, and we feel pretty good about that going into next year.

Mark Fitzgibbon (Head of FSG Research)

Okay. Just a second question for Neal. Neal, I wanted you to share with us how much you spent roughly in the first quarter to prepare for becoming a Category IV bank and also update us on what the timeline looks like for becoming compliant.

Neal Holland (CFO)

Yeah. We talked about last quarter that we would be spending about $20 million this year. You could think about that as pretty proportional. I do not have the exact number on what we spent broken out, but it is probably right in that $5 million range. We are investing. We are making great hires right now and making good steps forward on all the required areas around data, around reg reporting. I mentioned that our implementation of a new GL this quarter is a big move forward for us. On the timeline to Category IV, we are 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.

We are making investments as quickly as we can in those areas, while obviously pacing those investments too to make sure that we kind of build over time. We are moving quickly to have the flexibility for us to be ready. We do not have an exact timeline on when we will plan to cross into Category IV.

John Ciulla (CEO and Chairman)

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. I think an important point that Neal made is we also have one eye on what's going on in the regulatory landscape, Mark, because things appear like they could change. There's a lot of things. Our baseline is that we need to be compliant with the current rules. As we approach $100 billion, the regulators are regulating most of the banks in our space, $80 billion-$100 billion, as if we're kind of almost there anyway. 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 Miki Bowman talking a little bit about that, we will be prepared to change the pace of our investment. I think we are being very thoughtful. Right now, we figure that we need to be compliant with the rules as they have been in place, and we think we can get there in the next two years or so.

Mark Fitzgibbon (Head of FSG Research)

Thank you.

Operator (participant)

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

Matthew Breese (Analyst)

Hey, good morning.

John Ciulla (CEO and Chairman)

Hey, Matt.

Matthew Breese (Analyst)

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

John Ciulla (CEO and Chairman)

Yeah. This is kind of the $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. 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, they certainly remain healthy, and they remain relatively optimistic, but everybody's kind of waiting for the dust to settle. Certainly for things like in our sponsor group, which is driven largely by M&A activity, that's kind of been put on hold. We're not seeing a lot of private equity activity right now, given all the tariffs and the noise and the market volatility.

We know that there's a lot of discussions. We've been mandated on some deals that have been kind of put on hold. For the passage of time, we should be able to provide financing for those transactions. 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%-5% loan growth over the course of the year. Obviously, the first quarter, we're kind of on track. Specifically to the other questions on CRE, 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. 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%. We expect there to be, let's say, $300 million-$500 million in commercial real estate growth, which will keep our concentrations in line with capital growth and everything else we're doing in the portfolio. 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. We did not drive down CRE exposure on purpose. We just had runoffs, amortization, payoffs, and then a level of originations that had us slightly down in the quarter.

We are not afraid to grow that category, and we are actively participating in the market. With respect to the Marathon joint venture, our expectation is that we still go live toward the end of the second quarter, potentially the beginning of the third quarter. I think what we have been careful to do is we have not 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. On the next earnings call, or if we issue a press release publicly after we go live, we will put a little bit more meat around the bone as to the short-term and more medium and long-term economic benefit for us. It is still on track.

We're just making sure that we set up the right structure and that all the i's are dotted and the t's are crossed. 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. We think it's a good idea as we start to look forward to Category IV to have a more balance between consumer and commercial asset classes. We want to make sure we're getting paid fairly for our mortgage business as well. We're kind of really monitoring pricing. 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. We're participating appropriately in the market.

Matthew Breese (Analyst)

I appreciate all the color there. I guess my next one, it's a shorter one. 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? It also sounds like charge-offs could be down to the right, given your commentary there.

John Ciulla (CEO and Chairman)

Yeah. I mean, that's always a tough question, right? I think that would be our hope. If our base case comes true and we do not 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. I think there's enough uncertainty out there that we think we made a prudent decision to change the weighting. As we get to next quarter, we'll evaluate. 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 (participant)

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

Casey Haire (Senior Research Analyst)

Great. Thanks. Good morning, guys.

John Ciulla (CEO and Chairman)

Good morning, Casey. Great to have you back.

Casey Haire (Senior Research Analyst)

Hey. Thanks, John. Appreciate it. Just one more on credit, and then I'll ask an income statement question. I guess what is preventing you from being more proactive in the risk-rating process and with identifying NPAs? This inflection point that you speak of, John, I know you guys have been candid about this, that it's coming at some point this year. This 23% uptick in NPAs is probably a little bit more than what was probably going to keep people away. It's a little bit more than what people were hoping for. Why not, over 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 (CEO and Chairman)

Yeah. I think it's a fair question. I think we are very proactive in our risk-rating and conservative. 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. One of the office credits that went into non-performer, we had a fully tentative, and it's a current loan. We're being paid on it right now. One of the major tenants, completely unexpectedly and a strong credit tenant, acknowledged that they're not going to roll the lease going forward down the road. That came as, I don't want to say a surprise to us because we're not on top of things, but a surprise to us because I think it surprised everybody.

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. Those are the things where we're not going in there and saying, "Hey, can we delay putting this thing into non-accrual?" In fact, we believe that we're putting things that have material risk to repayment and current payment into non-performers right away. Those are fewer and farther between, and that's why we have a lot more confidence that we'll be able to reverse the trend. 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 into perpetuity, given the fact that we can still have high teens ROATCs throughout the process. These credit costs on a $55 billion commercial portfolio, we don't think are unmanageable, and we'll be as proactive as we can. 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. We are absolutely not sort of waiting for the last minute to move things into classified and non-accrual. We're proactively managing that. 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. That's why we've been talking over the last couple of quarters about seeing an inflection point.

Casey Haire (Senior Research Analyst)

Got it. Thank you. Just some updated thoughts on the NIM outlook. Neal, I think you said that deposit beta is going to go to 33 from 32 this year. Loan yields sound a little bit tougher. Obviously, you've got some Fed cuts, just some near-term NIM expectations.

Neal Holland (CFO)

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

Casey Haire (Senior Research Analyst)

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

Neal Holland (CFO)

That's perfect. I think last quarter, we talked about expectations of NIM between 3.35 and 3.40 for the year. We've 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. We are looking more at a 3.40-ish NIM versus 3.35-3.40 going forward here for our full-year expectations. We are feeling pretty good there. As mentioned, we now have three cuts built into our forward forecast. We've run projections. If we do not get any cuts, and based on our asset sensitivity position, we do not think that would have a material impact to our guidance. As I've talked about before, we are a little bit more sensitive to the long end of the curve.

Our assumption is we kind of maintain in this 4.35%, 10-year yield range. We have a little bit more sensitivity to the longer end of the curve than the short end of the curve. Overall, good performance on the deposit side, a little bit challenging on the flatter curve than we originally expected. Overall, we do expect our NIM to be better than what we had talked about last quarter for the year.

Operator (participant)

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

Timur Braziler (Director of Mid-Cap Bank Equity Research)

Hi. Good morning.

John Ciulla (CEO and Chairman)

Good morning.

Timur Braziler (Director of Mid-Cap Bank Equity Research)

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

John Ciulla (CEO and Chairman)

Yeah. Listen, that's a great question. That's something that we debate consistently. To the extent that there's a combination of competitive landscape dynamics and just requirements for funding across the balance sheet that inform those decisions when we make them, we are very confident that over the course of the year, if this rate environment continues to play out and the rate scenarios that we're forecasting happen, there is going to be the ability for us to be able to reduce meaningfully, particularly in those areas of Brio and then potentially just backfill with some of the other higher-rate products that we have on the interLINK side and some of the other channels.

The good thing about the business mix and model that we've created is that there is a ton of flexibility regarding what we can do across consumer, commercial, and then some of these alternative deposit channels. As we continue to view the progression of balance sheet and loan growth over the course of the year, we have a tremendous amount of flexibility in what we can do on deposit pricing. We've been conservative right now in moving down, but those are products that from one day to the next, we can be much, much more aggressive on. To the extent that we want to do that, we certainly can, and we can move very quickly to do it.

Timur Braziler (Director of Mid-Cap Bank Equity Research)

Okay. Thanks. 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? What does that portend for future levels of provision expenses? Provision structurally go higher just given some of the more recent trends on the charge-off side, or is it more complex than that?

John Ciulla (CEO and Chairman)

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

Neal Holland (CFO)

Yep. I agree with that.

Operator (participant)

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

Manan Gosalia (Head of U.S. Midcaps Banks Research)

Hi. Good morning.

John Ciulla (CEO and Chairman)

Hey. Good morning.

Manan Gosalia (Head of U.S. Midcaps Banks Research)

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. You're clearly expecting some earning asset growth from here too. Can you talk a little bit about what could the current trends drive the NII higher than the high end of your guide?

Neal Holland (CFO)

Yeah. 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 3.40%. We do expect a little bit of net interest margin compression throughout the year. 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 (Head of U.S. Midcaps Banks Research)

Got it. I was adjusting a little bit for the day count in 1Q there as well. In terms of, I guess, John, you noted that your clients have strategies in place to mitigate shocks in the supply chain. Can you give us some more color on what you're hearing from them over the past couple of weeks?

John Ciulla (CEO and Chairman)

Yeah. It's interesting. We did a survey prior to Liberation Day, and then we've gone back out to our clients. 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. Obviously, my concern, if there is a concern, would be really on the demand side if we start to get into a recessionary environment. 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. I would say everybody is concerned and going through the analysis.

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. I would say pleasantly surprised on kind of the resilience and the planning. Obviously, if things stabilize and we start to get a pullback on a little bit of the high-level tariff noise, hopefully, this will kind of blow over. 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 (participant)

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

Bernard von Gizycki (Equity Research Analyst)

Hey, guys. Good morning. You manage your franchise well across various cycles, and you just increased the reserves to encompass various economic scenarios. You're able to keep the net interest income outlook unchanged despite another rate cut. It sounds like you could buy back shares if the revenue environment is weaker than you're expecting. 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 component of your expense base in both comp and non-comp?

Neal Holland (CFO)

Yeah. I'll jump in there. As you mentioned, we feel very confident in our NII guidance. If we did hit a scenario where we move from this economic slowdown we're in into a recession or other scenario, we do have a lot of flexibility on the expense side. As you really look at what we talked about earlier on the call, we're making investments in the franchise to build to Category IV readiness. We clearly have an easy opportunity to slow those investments. As we talked about, we're not planning to do that right now. We want to be ready. We want to continue to grow and scale. It is a lever that we have that we can pull if we entered into an environment like that. As a leadership team, we're always looking for ways.

At a 46% efficiency ratio organization, we focus on always finding ways to continue to drive efficiencies into the organization. There are other levers that we could pull in a scenario that is a more negative macro environment than we are today. I would say overall, we have a fair amount of flexibility there on the expense side if we needed to pull those levers.

Bernard von Gizycki (Equity Research Analyst)

Okay. Great. Just as a follow-up, just on the loan growth for the year, obviously, sponsor did contribute in the quarter. Just wanted to get your sense. Just any commentary just on activity levels and just how much of that could be a contribution for the rest of the year.

John Ciulla (CEO and Chairman)

Yeah. I mean, I think we look at it now as still kind of broad-based blocking and tackling across asset classes. I would note that what you see in the sponsor category was largely lender finance and fund banking. We haven't really seen the pickup in our bilateral higher-yielding full-relationship sponsor stuff given the cessation in M&A activity. We do see that hopefully building over the second half of the year. Obviously, we'll have an opportunity with the Marathon partnership joint venture, hopefully, to increase that volume. 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.

If we're lucky and we get a little bit 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 (participant)

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

Daniel Tamayo (Director)

Thank you. Good morning, everybody. Maybe first, just a clarification. 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. You built in the reserves, $74 million, assuming a 30% chance of recession, I think is the number you said. That $74 million 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? I mean, is that more of a cumulative number? I'm just trying to size where that 25 to 35 basis points could go if we do get that 30% chance of recession. I'm really parsing your words here. I apologize, but we're late in the call.

John Ciulla (CEO and Chairman)

Yeah. No, no. That's all right. I don't think we triangulate it that way. It really is a cumulative. It's the CECL modeling looking at the cumulative life of loan losses across the portfolio. I don't think in the short term, we're really well reserved now. One of the nice things that we didn't mention on the call is if you look at our Category IV peers, most of them have slightly higher provisions than most of the mid-size banks do. As we continue to grow, we feel like that 134 basis points is stronger than. Here, 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.

I think you think about it from a more macro high-level perspective, not trying to triangulate the extra reserves against what we might believe could be a short-term pop in charge-offs, if that makes sense.

Daniel Tamayo (Director)

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

John Ciulla (CEO and Chairman)

Right. Presumably, if CECL works, it is supposed to capture life of loan losses during different times. You do not necessarily—it is trying to be not procyclical, so you do not 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 should not, if we are doing CECL right, automatically result in significant increases in provision going forward. It is all based on the modeling as we move forward.

Daniel Tamayo (Director)

Understood. Yeah. Thanks for the clarification. Maybe just another small one here on the sponsor side. If you had the amount of migration, kind of interested in the early-stage migration of sponsor, and if you think or expect that those flows could be differently paced than the rest of the portfolio.

John Ciulla (CEO and Chairman)

You mean from a credit perspective?

Daniel Tamayo (Director)

Yes.

John Ciulla (CEO and Chairman)

Yeah. I think our sponsor book outside of healthcare has sort of basically performed the way it has during all other credit cycles, which is those loans are generally rated in the lower-pass categories. If they migrate, they migrate into criticized. We've seen very little loss outside of the healthcare portfolio. I don't think there's anything there that concerns us any differently than any other sector in the portfolio.

Operator (participant)

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

Laurie Hunsicker (Senior Analyst)

Yeah. Hi, thanks. Good morning.

John Ciulla (CEO and Chairman)

Hey, Laurie. Good morning.

Laurie Hunsicker (Senior Analyst)

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

John Ciulla (CEO and Chairman)

I don't know if I have it offhand.

Laurie Hunsicker (Senior Analyst)

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

John Ciulla (CEO and Chairman)

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

Neal Holland (CFO)

Yes.

John Ciulla (CEO and Chairman)

That's Emlen giving me that. It's 0.5%?

Neal Holland (CFO)

Yes.

John Ciulla (CEO and Chairman)

A percent. That was a good catch on your point. I apologize for the inaccuracy on the slide. There is nothing, not a big jump in the ADC construction. What was the first question on that, Lori, on that page?

Laurie Hunsicker (Senior Analyst)

Oh, sorry. Okay. The same thing, the traditional office last quarter was showing up at 13% non-performers, which is $108 million. It looks like it dropped to, in this chart, 2%, which extrapolates to $16 million. Your traditional office non-performers dropped $92 million in the quarter. I just wondered, I guess, is that correct? Or what are the traditional office non-performers? Then just office charge-off. Of your $55 million in total charge-offs this quarter, how much were office? Thanks. I'll leave it there.

Emlen Harmon (Director of Investor Relations)

Yeah. It's Emlen. On the traditional office non-accrual loans, that's just a decimal places over one there. That's a 20% non-accrual rate. That was about 15% last quarter. There's a little just a misplacement of the decimal place there.

Operator (participant)

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

Samuel Varga (Associate Analyst)

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

Neal Holland (CFO)

Yeah. It's always hard to predict where the allowance will go next quarter. We feel like we are well-reserved, as John mentioned. We have 5.5% unemployment kind of peaking. I feel if you look at it, the peer population, I feel we are in a pretty good spot there. We have real GDP growth of 1.3% and 1% next year. Obviously, we have had a lot of volatility day to day here over the last few weeks. Could things get worse? They could. Could things get better? They could. As of today, I feel that we are probably a little bit better than where we were when we put 30% in. I do not want to give a projection on which way it could go. I would say that I feel like we are very well reserved.

We have a very reasonable assumption in for our CECL provision at this point in time.

Samuel Varga (Associate Analyst)

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

Neal Holland (CFO)

Yeah. In Q1, we had about $500 million of purchases at 5.6%. We had about $500 million in reductions at 4.52%. As we turn that portfolio, we picked up 100 basis points. We are seeing a little tighter spreads on securities we're purchasing at this point in time. We do expect to continue to see some opportunity there with the repricing. We'll continue to move forward in that direction. We don't plan to shrink or increase our securities mix as a percentage of our assets for the rest of the year. As I talked about earlier, we built our cash levels up to around 2% of assets. We'll see a little bit more cash just as average balances catch up throughout the year.

Overall, we don't expect any major departures from kind of our percentage mix of cash or securities for the rest of the year.

Operator (participant)

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

Jon Arfstrom (Managing Director)

Thanks. Good morning.

Neal Holland (CFO)

Good morning, Jon.

Jon Arfstrom (Managing Director)

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

John Ciulla (CEO and Chairman)

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. As I said before, I think we need to continue to execute on these portfolios. 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%. 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. 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.

As I said, some of them are actually paying in their current. We feel like we can work through them with a good outcome for our holders of capital. I am, absent a recession and a significant downturn, I feel really good about our ability to work through these credits in orderly fashion. As I said, the most encouraging thing for us is that our criticized asset levels actually have come down quarter-over-quarter. We're seeing that slower migration into classified, lower and no net migration into criticized. I think we need to kind of continue to work through it. As we do, I think to your earlier point, I don't feel like we are under credit stress at all, right? We've got really good operating income. We've got really good fundamental operating capacity and capabilities.

We've got a boatload of capital and liquidity. I feel like the overall credit book, which is a big commercial portfolio, and our problems are kind of situated in two of these small buckets or small discrete portfolios. I get it. We have higher headline numbers, and we need to continue to bring those numbers down. That is 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 do not think are particularly outsized.

Jon Arfstrom (Managing Director)

Yeah. Okay. On the capital question, you have two targets. You have the CET1 of 11, longer-term 10.5. If growth is slower in the near term, do you still want to be active in the repurchase program now? And do you have any willingness to go below the 11? Thank you.

John Ciulla (CEO and Chairman)

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

Operator (participant)

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

Anthony Elian (Equity Research Analyst)

Hi. First on loans.

John Ciulla (CEO and Chairman)

Hey, good morning.

Anthony Elian (Equity Research Analyst)

Morning. First on loans, did you see any little more of that since late March? If I look at period end balances, they're about $500 million higher than the average number for 1Q.

John Ciulla (CEO and Chairman)

Yeah. I missed the very first part of the question. If your question was, was a lot of the origination done at the end of the quarter, the answer was yes. That was not 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)

Thank you. My follow-up, maybe for Neal, when I look at your NII guide of $2.45 billion-$2.5 billion, where do you see the biggest weight factor? Is it more fewer rate cuts, deposit pricing, non-interest-bearing growth? Thank you.

Neal Holland (CFO)

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

Anthony Elian (Equity Research Analyst)

It is. More so, the biggest swing factor is it more fewer cuts, non-interest-bearing coming in better than expected, or pricing on deposits?

Neal Holland (CFO)

Yeah. I talked about this a little bit before. The team has done a nice job of reducing our asset sensitivity. We do not have a lot of exposure to swings in the short end of the curve in the near term. As I mentioned earlier, if we do not get any cuts versus the three in our guide, the modeled NII difference is not overly material. We are a little more sensitive to the long end of the curve. You can see in our K, every 1%—excuse me, every 50 basis point move has a 1% impact or $25 million. 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 are pretty confident in our betas there.

As we talked about earlier, we're going to look for ways to continue to outperform our betas there. I think as I take a big step back, if we see more robust economic activity and better industry loan growth, we could clearly move higher in the guide. If we move into a recessionary scenario, you would see the opposite impact. If yield curve steepens on the long end, obviously that would help us. We'd see more opportunity move towards the high end of the guide. If curve got flatter, we'd move to the low end. 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 (participant)

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

John Ciulla (CEO and Chairman)

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

Operator (participant)

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