Webster Financial (WBS) - 2021 Q1 - Quarterly Report

PART I Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Webster Financial Corporation's Q1 2021 net income surged to $108.1 million, driven by reduced credit loss provisions, with total assets at $33.3 billion and a pending merger with Sterling Bancorp Executive Summary Webster Financial Corporation announced a $5.1 billion merger with Sterling Bancorp and incurred $9.4 million in Q1 2021 costs for strategic initiatives - On April 19, 2021, Webster announced a definitive agreement to merge with Sterling Bancorp in an all-stock transaction valued at approximately $5.1 billion, expected to close in the fourth quarter of 2021[15] - Costs related to strategic initiatives in Q1 2021 totaled $9.4 million, comprising $2.0 million in severance, $2.6 million in facilities optimization, and $4.8 million in other project costs[16][17] Results of Operations Q1 2021 net income surged to $108.1 million, primarily driven by a $101.8 million decrease in credit loss provision, despite a slight decline in net interest income Q1 2021 vs Q1 2020 Financial Highlights | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income | $108.1 million | $38.2 million | | Diluted EPS | $1.17 | $0.39 | | Net Interest Income | $223.8 million | $230.8 million | | Provision for Credit Losses | ($25.8 million) | $76.0 million | | Net Interest Margin | 2.92% | 3.23% | | Return on Average Assets | 1.31% | 0.50% | | Return on Average Common Equity | 13.65% | 4.75% | - The significant increase in net income was primarily due to a $101.8 million decrease in the provision for credit losses, reflecting improvements in the forecasted economic outlook and favorable credit trends[25][40] - Net interest margin decreased by 31 basis points year-over-year to 2.92%, attributed to lower loan and securities yields, partially offset by reduced deposit and borrowing costs and income from PPP loans[33] Segment Reporting Webster realigned segments in Q1 2021, with Commercial Banking's PPNR increasing by $27.6 million, HSA Bank's by $0.9 million, and Retail Banking's by $9.4 million - Effective January 1, 2021, the company realigned its segments, moving $1.9 billion in loans, $2.2 billion in deposits, and $131.0 million of goodwill from Retail Banking to Commercial Banking, with prior periods restated[53] Segment Pre-tax, Pre-provision Net Revenue (PPNR) - Q1 2021 vs Q1 2020 | Segment | Q1 2021 PPNR | Q1 2020 PPNR | Change | | :--- | :--- | :--- | :--- | | Commercial Banking | $102.4 million | $74.8 million | +$27.6 million | | HSA Bank | $32.9 million | $32.0 million | +$0.9 million | | Retail Banking | $28.8 million | $19.4 million | +$9.4 million | Financial Condition As of March 31, 2021, total assets increased to $33.3 billion, driven by deposit growth, with the company remaining well-capitalized and a CET1 ratio of 11.89% - Total assets grew by $0.7 billion to $33.3 billion at March 31, 2021, primarily due to a $1.1 billion increase in deposits[73][74] - The company and Webster Bank were considered well-capitalized at March 31, 2021, with a CET1 risk-based capital ratio of 11.89%, and the company elected to delay the full impact of CECL on its regulatory capital until December 31, 2024[77] - The Board of Directors declared a quarterly cash dividend of $0.40 per common share, with restrictions on increasing this level due to the pending merger with Sterling[76] Credit Quality Q1 2021 credit quality improved, with non-performing assets decreasing to $152.8 million and the Allowance for Credit Losses declining to $328.4 million due to an improved economic forecast Key Asset Quality Ratios | Ratio | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Non-performing assets as a % of total assets | 0.46% | 0.52% | | ACL on loans as a % of total loans | 1.54% | 1.66% | | ACL on loans as a % of non-performing loans | 218.29% | 213.94% | | Net charge-offs as a % of average loans (annualized) | 0.10% | 0.21% | - The Allowance for Credit Losses (ACL) on loans and leases decreased by $31.0 million during the quarter to $328.4 million, attributed to improvements in the forecasted economic outlook and favorable credit trends[120] - As of March 31, 2021, loan balances associated with COVID-19 payment modifications still in their deferral period totaled approximately $253.5 million[94] Sources of Funds and Liquidity Deposits grew to $28.5 billion at March 31, 2021, reducing borrowed funds to $1.2 billion and improving the loan-to-deposit ratio to 74.8%, indicating strong liquidity - Total deposits increased to $28.5 billion at March 31, 2021, from $27.3 billion at December 31, 2020, primarily due to customer PPP loan funding, stimulus effects, and lower customer spending[128] - Total borrowed funds decreased to $1.2 billion (3.6% of total assets) from $1.7 billion (5.2% of total assets) at year-end, as deposit growth outpaced loan and securities growth[132] - The loan to total deposit ratio improved to 74.8% at March 31, 2021, compared to 79.2% at December 31, 2020[136] Financial Statements The Q1 2021 unaudited financial statements report total assets of $33.3 billion, net interest income of $223.8 million, and net income of $108.1 million, with diluted EPS of $1.17 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $33,259,037 | $32,590,690 | | Loans and leases, net | $20,973,032 | $21,281,784 | | Total Deposits | $28,481,834 | $27,335,436 | | Total Liabilities | $29,986,109 | $29,356,065 | | Total Shareholders' Equity | $3,272,928 | $3,234,625 | Condensed Consolidated Statement of Income Highlights (in thousands) | Account | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $223,764 | $230,801 | | Provision for credit losses | ($25,750) | $76,000 | | Non-interest Income | $76,757 | $73,378 | | Non-interest Expense | $187,982 | $178,836 | | Net Income | $108,078 | $38,199 | | Diluted EPS | $1.17 | $0.39 | Notes to Condensed Consolidated Financial Statements The notes detail the pending Sterling merger, strategic initiative costs, segment reporting, investment and loan portfolios, credit quality, and regulatory capital ratios, confirming the company is well-capitalized Note 3: Business Developments This note details the pending all-stock merger with Sterling Bancorp and the $9.4 million in Q1 2021 costs incurred for strategic initiatives - On April 19, 2021, Webster and Sterling announced a definitive agreement to combine in an all-stock transaction valued at approximately $5.1 billion, expected to close in Q4 2021[187] Strategic Initiatives Reserve Activity (Q1 2021, in thousands) | Category | Beginning Balance | Charged to Earnings | Cash Payments | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Severance | $17,675 | $2,060 | ($1,365) | $18,370 | | Other | $2,120 | $7,202 | ($3,143) | $4,545 | | Total | $19,795 | $9,441 | ($4,508) | $22,915 | Note 5: Loans and Leases Total loans and leases were $21.3 billion at March 31, 2021, with an ACL of $328.4 million and non-accrual loans of $150.4 million, detailed by portfolio composition and credit quality Loan and Lease Portfolio Composition (in thousands) | Portfolio | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial | $14,775,543 | $14,900,535 | | Consumer | $6,525,840 | $6,740,680 | | Total | $21,301,383 | $21,641,215 | Allowance for Credit Losses (ACL) Activity (Q1 2021, in thousands) | Description | Commercial | Consumer | Total | | :--- | :--- | :--- | :--- | | Beginning Balance | $312,244 | $47,187 | $359,431 | | (Benefit) Provision | ($23,653) | ($2,106) | ($25,759) | | Net Charge-offs | ($4,685) | ($636) | ($5,321) | | Ending Balance | $283,906 | $44,445 | $328,351 | Note 12: Regulatory Matters Webster Financial Corporation and Webster Bank remained well-capitalized as of March 31, 2021, exceeding all minimum regulatory capital requirements, with a CET1 ratio of 11.89% Webster Financial Corporation Capital Ratios (March 31, 2021) | Ratio | Actual | Minimum Requirement | Well Capitalized Requirement | | :--- | :--- | :--- | :--- | | CET1 risk-based capital | 11.89% | 4.5% | 6.5% | | Tier 1 risk-based capital | 12.55% | 6.0% | 8.0% | | Total risk-based capital | 14.08% | 8.0% | 10.0% | | Tier 1 leverage capital | 8.45% | 4.0% | 5.0% | PART II – OTHER INFORMATION Risk Factors This section outlines new risks related to the pending Sterling merger, including completion uncertainty, integration challenges, and the potential failure to realize anticipated benefits - The completion of the merger with Sterling is contingent on satisfying numerous conditions, including regulatory and shareholder approvals, which are not guaranteed[313] - While the merger is pending, Webster faces business uncertainties and contractual restrictions that could adversely affect operations, customer relationships, and employee retention[315] - There is a risk that Webster may fail to realize the anticipated benefits and cost savings from the merger, or that integration of the significantly larger, combined business could present substantial challenges[316][317] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2021, Webster purchased 70,048 shares for stock compensation, while its formal $123.4 million repurchase program remains suspended due to the pending Sterling merger - In Q1 2021, the company purchased 70,048 shares at an average price of $55.79 per share, all related to stock compensation plan activity and not part of the formal repurchase program[321] - The company's common stock repurchase program, with $123.4 million available, is currently suspended due to the pending merger with Sterling and no shares may be purchased under it until the transaction is closed[322]