Good morning. Welcome to the Webster Financial Corporation 2Q 2024 Earnings. 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.

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 the call over to Webster Financial CEO, John Ciulla.

Thanks a lot, Emlen. Good morning, and welcome to Webster Financial Corporation's second quarter 2024 earnings call. We appreciate you joining us this morning. I'll provide remarks on our high level results and operations before turning it over to Glenn to cover our financial results in greater detail. There have been a number of important accomplishments since our last earnings call, including the announcement of our private credit joint venture with Marathon Asset Management, the hiring of Neal Holland as our next Chief Financial Officer, and the addition of Bill Haas to our Board of Directors. The Marathon joint venture is a great opportunity for Webster, as it will allow the sponsor team to better serve and meet the growing needs of our client base, while at the same time enhancing Webster's balance sheet flexibility and adding a new source of fee income and deposit opportunities. Our sponsor team will continue to operate in its existing form. By partnering with Marathon to fund a portion of our loan originations, we will gain the ability to offer larger facilities and additional financing solutions to our existing clients that we would not traditionally hold on our balance sheet. We're also very excited about the new leaders we have brought into the company. Neal is a great addition to our executive management team. He brings years of experience leading finance organizations at large banking institutions. He was CFO of First Republic prior to Webster, having joined their team in November of 2022. Prior to that, Neal was with MUFG and their Union Bank subsidiary for 14 years, serving as CFO, Chief Accounting Officer, and Head of FP&A. Bill Haas, who joined Webster's Board of Directors last week, is also a terrific addition to the company. Bill comes off a 38-year career at the OCC where he was Deputy Controller for mid-sized bank supervision. His extensive regulatory and risk management background will be a tremendous asset to our Board of Directors. In combination, these additions illustrate our commitment to investing in the people and processes that will advance the capabilities of our company as we grow and create long-term franchise value for stakeholders. I'll now turn to our financial performance for the quarter, beginning on Slide 2. On an adjusted basis for the quarter, we generated a return on average assets of 1.16% and a return on tangible common equity of 17.1%. Our adjusted EPS was $1.26. Our efficiency ratio was 46%. We were pleased to grow core deposits by $700 million and used a significant portion of the funds to redeem wholesale funding. Loans grew by $500 million or just under 1%, with growth anticipated to continue in the back half of the year. On Slide 3, we recap our unique deposit funding profile where I specifically want to highlight encouraging developments at HSA Bank and Ametros. At HSA Bank, investments we have made to enhance our technology via the Bend acquisition two years ago are bearing fruit. We advanced our digital experience, which led to some significant client wins during selling season this spring and bodes well for our deposit balances next year. These investments in technology also provide flexibility to improve our solutions. In the third quarter, we will launch a new investment offering, which provides a discrete opportunity to add roughly $400 million in deposits. In the quarter, we also extended our long-term relationship with Cigna, our largest HSA partner relationship. Ametros continues to produce the robust deposit growth we anticipated when we announced the acquisition at the end of last year. Additionally, we will begin offering Webster banking products to Ametros member base in the third quarter. This opportunity was not anticipated in our original projections for Ametros and strengthens the strategic rationale for the acquisition, in addition to the value proposition for Ametros' member base. On Slide 4, we provide an updated overview of our commercial real estate portfolio, focusing on the two portfolios that are capturing most of the headlines. There were no significant changes to the performance characteristics of our rent regulated multifamily portfolio, where our conservatively underwritten portfolio has performed well, as indicated by consistently low levels of classified and non-accrual loans. Our office portfolio, however, faced challenges, resulting in several loans being moved to non-accrual, which was the primary driver of the increase in our overall NPLs this quarter. Office balances were $950 million at the end of the second quarter, down from just over $1 billion last quarter. In our office portfolio, approximately 75% of the remaining loan balances have some form of credit enhancement. I want to stress that we do not see this rate of upgrade migration continuing in Q3. With a 1.3% reserve coverage, our CET is accreting back to 11% by year end, and our strong operating and capital generation capabilities, we remain confident in our ability to navigate through whatever challenges arise in this credit cycle. With that, I'll turn it over to Glenn to cover our financials in more detail.

Thanks, John, and good morning, everyone. I'll start on Slide 5 with our GAAP and adjusted earnings for the second quarter. We reported GAAP net income to common shareholders of $177 million with diluted earnings per share of $1.03. On an adjusted basis, we reported net income to common shareholders of $216 million and diluted EPS of $1.26. The adjustment was a pre-tax $49 million charge due to the repositioning of our securities portfolio. Next, I'll review balance sheet trends beginning on Slide 6. Total assets were $77 billion at period end, up nearly $700 million from the first quarter. Our security balances were up $165 million relative to the first quarter. The yield on the portfolio increased 22 basis points linked quarter to 3.86%. In the quarter, we sold securities with a book value of $962 million and reinvested with a nearly 400 basis point improvement in yield. We expect that we'll add another 13 basis points in the third quarter as yields will fully reflect the restructuring that occurred midway through the second quarter. It's notable that we manage our securities restructuring such that it did not materially impact our capital ratios. Loans increased $475 million or 0.9% over the linked quarter. Total deposits were up $1.5 billion with growth driven by interLINK, Ametros, and Consumer Banking, offset by a seasonal decline in public funds. Capital levels improved modestly. The Common Equity Tier 1 ratio was 10.6%, and our tangible common equity ratio was 7.18%. Tangible book value increased to $30.82 per common share with the increase from the prior quarter driven by retained earnings, offset by a small increase in AOCI. In a steady interest rate environment, we anticipate $100 million of unrealized security losses would accrete back into capital annually. Loan trends are highlighted on Slide 7. In total, loans were up $475 million or 0.9% linked quarter. Growth was driven by commercial real estate and C&I. Our expected loan growth for the balance of the year remains based on our distributions of categories that I touched on earlier. We provide additional detail on deposits on Slide 8. We grew total deposits by $1.5 billion, with growth driven by interLINK, Consumer Banking, and Ametros. Our total deposit cost was up 12 basis points over the prior quarter to 235 basis points, driven by clients opting for higher yielding products and renewals in our CD portfolio. Our total cost of funds was up a less significant 10 basis points. Moving to Slide 10, we highlight our reported to adjusted income statement, compared to our adjusted earnings for the prior period. Net interest income was up $5 million from the prior quarter driven by balance sheet growth and higher earning asset yields, partially offset by higher funding costs. Adjusted non-interest income was down $5 million, driven by lower BOLI income and lower deposit and customer hedging activity. Adjusted expenses were up $5 million, and the provision increased $13.5 million. Our tax rate was 21.2% this quarter, up from 20.7% in the first quarter. Overall, adjusted net income was down $17 million relative to the prior quarter, and our efficiency ratio was 46%. On Slide 11, we highlight net interest income, which increased $5 million or 0.8% linked quarter. The net interest margin was down 3 basis points to 332 basis points due to increased funding costs, which were partially offset by higher asset yields. The yield on earning assets increased 6 basis points over the prior quarter, with loan yields flat and the securities portfolio up 22 basis points. Total liability costs were up 10 basis points relative to a 12 basis point increase in the last quarter. On Slide 12, non-interest income was down $5 million versus the prior quarter on an adjusted basis, driven by seasonal trends and lower account fees. Slide 14 details components of our allowance for credit losses, which was up relative to the prior quarter. After recording $33 million in net charge-offs, we recorded a $61 million provision, mainly due to credit factors and loan growth. As a result, our allowance coverage to loans increased to 130 basis points from 126 basis points last quarter. On Slide 15, non-performing assets increased $85 million relative to the prior quarter, with non-performing loans now representing 72 basis points of total loans caused largely by the migration in office credits. Overall, we feel confident in our capital levels and with our CET1 ratio expected to be at 11% by year end 2024.

Thanks, Glenn. I want to make one final point on outlook. While on an absolute basis, our net interest income performance has been relatively solid concerning industry trends, with NII increasing over last quarter. It obviously has not been as robust as we anticipated earlier in the year. We've had to take steps to position ourselves well within the new range by the end of 2024. I want to take a moment to recognize Glenn's outstanding 13 years at Webster. He's been my partner in providing steadfast execution as we have grown the bank. On behalf of our Board and our leadership team, I want to wish Glenn all the best in his next chapter. We remain confident about Webster's prospects and long-term opportunities as we continue to build and invest in our organization's capabilities and people. Thank you to all of you for joining us today. Operator, Glenn and I will open the line for questions.

Thank you. We will now begin the question-and-answer session. We'll take our first question from Matthew Breese at Stephens Inc.

Hey. Good morning. I was hoping you could give us some idea for the margin as we head into year-end with some rate cuts in 2025. Obviously, the balance sheet is a bit more interest rate neutral. There was a securities restructuring, and then there's still fixed asset pricing. So I was just looking for some frame of reference of where we might see the NIM migrate to over the next couple of quarters and into 2025?

Sure. As I sort of indicated in our comments, and John touched on as well, we'll get the benefit of fixed asset repricing going forward, loan growth as well as the securities repositioning, and some of that will be offset by what we think is going to be more modest deposit repricing. Overall, I think you can expect us to exit the year somewhere around the mid-3.30s on an NIM basis.

Okay. Great. And then John, maybe you could touch on the commercial real estate NPL pickup. First of all, you mentioned it was a handful of loans. How many were in there size? And then just some idea on resolution and expected loss content would be great.

Sure. Happy to, Matt. The credit story, at the headline, looks negative because we had negative risk rating migration. But it was unique to a few discrete portfolios, mainly in the office portfolio. Our non-performing loans in commercial went up $84 million, primarily from four office loans, which demonstrates the granularity in our portfolio without huge single point exposures. With respect to loss content, we believe that we have adequate reserves for any expected losses. Additionally, we think that 75% of our office loans have some form of credit enhancement to mitigate potential losses.

Great. I’ll leave it there. Thank you for taking my questions.

We'll move next to Chris McGratty at KBW.

Good morning.

Good morning, Chris.

John or Glenn, we've received a few questions on the updated NII guide. In your prepared remarks, you said high confidence this is the last cut. Could you elaborate on what would make it either conservative or a little aggressive at this point?

That's a good question, Chris. The dynamic here has been around loan yields. Our kind of gem of sponsor and specialty was expected to yield higher returns, but has not grown significantly. We believe we can achieve our model estimates, but if we don't hit certain growth targets or if there's a continued mix towards lower-yielding assets, that could push us below our guidance. Conversely, if we have normalized origination and refinancing activities, we could potentially outperform our guidance.

Just to add on the funding side, we saw the deposit costs go up 12 basis points. As John mentioned, we had about $2.2 billion in CDs that matured and re-priced upwards. Conversely, we expect maturing CDs in the third quarter to contribute positively to our net interest margin.

That's great. And John, if I could on capital, you said 11% by year-end and 10% over time. How does that play out for 2025? Does that mean growth is expected to pick up and use capital that way or would you flip on the buyback again?

Given our profitability trajectory, we should reach 11% organically by year-end. Our approach will depend on the operating environment, and if opportunities arise for growth through better returning assets, we’ll capitalize on that. If suitable opportunities are not available, we might consider resuming buyback or increasing dividends.

Thank you.

Thank you.

We'll take our next question from Mark Fitzgibbon at Piper Sandler.

Hey, guys. Good morning.

Good morning, Mark.

I noticed the average rate on the interLINK deposits this quarter was about $557 million. Can you explain the decision to add roughly $1.1 billion in interLINK deposits this quarter? Do you expect those to reprice down?

Those are tied to Fed funds, and it depends on new originations. But as we look at the Fed making any kind of move, interLINK is one that will reprice down as it is indexed to Fed funds. So, we expect that as rates change, we will be positioned accordingly.

Okay. And then just a follow-up. Did you mention the $119 million uptick in commercial nonmortgage 30 to 89 day delinquencies? What was that?

It was a single credit mark, actually a strong rate of credit that just administratively didn’t get fixed and rolled over by quarter-end and it was cured the first week in July. So that went away with no credit issue associated with that spike.

Thank you.

Thank you.

Next, we'll go to Steven Alexopoulos at JPMorgan.

Hey, good morning, everyone.

Hey, Steven.

I want to start to go back to the NII outlook for a minute. If we get two cuts with the first cut in September, then another in December. Does that bring you to the low end of the new range or does that bring you below the range?

In a 25 basis point reduction, you would probably expect that to come down, but we believe that we've done the right work to neutralize the balance sheet. As we think about rates, it is certainly a challenge but manageable.

Got it. That's actually great color. If I could ask on the loan outlook because, John, I know you said that was one of the drivers of why NII has been reduced.

It's a good question, Steven. We've been consistent with lower credit growth expectations, but we still feel confident in hitting our 4% to 5% guidance and recognizing some growth from various segments as we move through the rest of the year.

If I could just wrap, Glenn, thanks for all the years providing really great color on the calls. You leave Webster at big shoes to fill.

Thank you, Steve. Appreciate it.

We'll go next to Jared Shaw at Barclays Capital.

Hi. Good morning. Thanks. I just wanted to reiterate my congratulations, Glenn. It's been great working with you.

Thanks, Jared.

Maybe just looking at credit and the reserves. The $55 million provisions due to macro and credit. During the quarter, did the macro conditions improve? What specifically drove that provision?

Our increase in reserves during the quarter was due to credit risk migration, primarily. Moody's base case was neutral; however, our portfolio saw specific pressures that led to our provision increase.

Okay. Thank you.

Thank you.

We'll go next to Manan Gosalia at Morgan Stanley.

Hey. Good morning. I wanted to ask on the expense side. You got the expense guide unchanged, while cutting the NII guide, so do you see any potential offsets on the expense side if revenues remain under pressure here?

We don't foresee near-term pressures on our expense guidance at this juncture. We remain committed to investing in the company and achieving market-leading returns while monitoring efficiencies.

I would add that our guidance assumes the investments we make, like in Ametros, are strategically necessary for growth. Therefore, we remain focused on that long-term outlook.

Got it. Thanks.

Thank you.

We'll take our next question from Casey Haire at Jefferies.

Great. Thanks. Good morning, guys.

Good morning, Casey.

On the fixed-rate asset repricing, I just wanted to understand that yield in terms of new money yields in the second quarter versus what's in the pipeline currently?

The dynamics in the market have revealed higher yields in some sectors, but our pipelines remain stable. Overall, we’re optimistic about where we stand on originations.

Furthermore, our strategy involves prudent risk management while working to capture higher yields, allowing us to maintain a competitive edge across our sectors.

Got it. Okay. And then just on the CRE concentration, what's the current thinking on that?

We're examining various options for managing our CRE concentration, including potential divestitures and maintaining a balanced growth strategy across the board. We aim to reach a more favorable ratio over time.

We'll go next to Daniel Tamayo at Raymond James.

Thank you. Good morning, everybody.

Good morning, Dan.

Maybe just a quick question on the office portfolio and the migration we had in the quarter. Was there anything specific that you attributed that to?

The uptick in delinquencies primarily stemmed from several unique properties facing challenges. However, we maintain a diversified portfolio that allows us to effectively manage and mitigate risks across our office segment.

Okay. Great. And then you mentioned you don't expect risk migration to continue at this pace. What gives you confidence in that, particularly in the office book?

Our confidence is derived from our deep portfolio analysis and proactive management strategies. We will continue to closely monitor the market situation to adaptively manage risks.

We'll go next to Bernard Von Gizycki at Deutsche Bank.

Hey, guys. Good morning.

Good morning.

So John, you noted the partnership with Marathon will provide more capabilities for clients. I'm just wondering if you are expanding the credit box, and how does underwriting standards of Marathon compare to the credit culture at Webster?

Our operational processes will remain unchanged. The partnership simply enhances our flexibility, allowing us to manage larger financial transactions while adhering to our existing risk profile.

Okay. Great. And then just following up on the competitive landscape regarding private credit. What are you seeing in terms of that increased competition and its impact on your business?

While private credit has grown significantly in the market, we believe our value as a banking institution will remain attractive to clients seeking comprehensive services and risk management capabilities. It has undoubtedly impacted spreads but didn't render us non-competitive.

We'll go next to Timur Braziler at Wells Fargo Securities.

Hi. Good morning.

Good morning, Timur.

I'm just wondering what drove the updated appraisals this quarter? Were loans coming up for maturity?

We consistently conduct appraisals as part of our risk management process. The uptick in appraisals this quarter was due to standard procedures in evaluating the performance of properties, particularly those flagged in our risk rating process.

Just what portion of the office book now has updated appraisals on it?

About 40% of our office loans have undergone updated appraisals, allowing us to monitor their performance more effectively.

Okay. And then just on the HSA business, can you just talk to us about the migration from deposits to investments?

In a higher rate environment, investment migration from deposits has accelerated. Our aim is to educate clients about the advantages of savings and the value of HSA accounts as a core asset.

We maintain a strong base of spender accounts within our HSA offerings, which contributes positively to our balance sheet and will continue to be a strategic focus.

Thanks.

We'll take our next question from Laurie Hunsicker at Seaport Research Partners.

Good morning, everyone.

Good morning, Laurie.

So the $61 million loan loss provision, how much of that specifically was office? What is your specific office reserve now?

Of the $61 million, about $10 million was attributed to office. Our coverage ratio for the office portfolio remains strong, and we are committed to managing it closely.

What is your sponsor and specialty non-performing number now?

The non-performing assets for our sponsor and specialty book remain flat compared to last quarter. We are vigilantly monitoring performance across all sectors.

Thanks so much.

Thank you.

And that concludes our Q&A session. I will now turn the conference back over to John for closing remarks.

Thank you for joining us today. Have a great day. Thank you.

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