WEBSTER FINANCIAL CORP Q2 FY2024 earnings call

• Announced private credit joint venture with Marathon Asset Management, which offers opportunities to serve clients better, enhance balance sheet flexibility, and generate fee income/deposit opportunities. • Hired Neal Holland as CFO, who brings extensive finance experience from large banking institutions. • Added Bill Haas to the Board of Directors, who has regulatory and risk management expertise. • Financial performance: Adjusted return on average assets 1.16%, return on tangible common equity 17.1%, adjusted EPS $1.26, efficiency ratio 46%. • Core deposits grew $700 million, loans grew $500 million. • HSA Bank benefited from technology investments with new product launches and client wins; Ametros showed robust deposit growth and will offer Webster products to its member base. • Commercial real estate portfolio: Rent-regulated multifamily portfolio performing well; office portfolio had some loans move to non-accrual but with credit enhancements. • Securities portfolio repositioning: Sold securities with book value $962 million, reinvested with improved yield, and expect capital ratios to remain unaffected.

On an adjusted basis for the quarter, Webster generated a return on average assets of 1.16% and a return on tangible common equity of 17.1%. Adjusted EPS was $1.26, and the efficiency ratio was 46%. Core deposits grew by $700 million, loans grew by $500 million (just under 1%). At HSA Bank, technology investments from the Bend acquisition are driving deposit growth and new product launches. Ametros continues to show robust deposit growth, and Webster banking products will be offered to Ametros' member base in the third quarter. The commercial real estate portfolio has a conservatively underwritten rent-regulated multifamily portfolio with low classified and non-accrual loans, while the office portfolio has some loans moved to non-accrual but 75% of remaining balances have credit enhancements. NPL ratio, classified loan ratio, and annualized charge-off rate remain proximate to or better than pre-pandemic levels.

• Anticipate loans to grow 4% to 5% for the full year, with growth in C&I categories in the remainder of the year. • Expect deposit growth in the 5% range with diverse products. • Net interest income expected in the range of $2.32 billion to $2.34 billion on a non-FTE basis, flat year-over-year. • Adjusted non-interest income expected to be roughly $375 million. • Adjusted expenses in the range of $1.3 billion to $1.325 billion, efficiency ratio in mid-40% range. • Effective tax rate expected to be 21%. • Near-term common equity Tier 1 ratio target is 11%, anticipated to achieve by year-end 2024, with long-term target 10.5%.

• Slower private equity activity and competition from private credit markets have muted the sponsor business growth. • Lower absolute level of loan repricings and refinancings in a higher for longer environment has muted loan yields. • Credit migration in the office portfolio, though granular and with credit enhancements, poses potential risks. • Private credit has become more competitive, impacting spreads and underwriting/syndication opportunities.

Q: Give idea on margin migration into year-end with rate cuts in 2025.

A: Glenn MacInnes said they'll get benefit from fixed asset repricing, loan growth, and securities repositioning, with modest deposit repricing, expecting to exit year around mid-3.30s on NIM basis.

Q: Touch on commercial real estate NPL pickup.

A: John Ciulla said NPLs in commercial were up almost entirely due to four office loans, with 3/4 of office loans having credit enhancements to mitigate losses, and reserves are adequate.

Q: Elaborate on updated NII guide.

A: John Ciulla said it's due to slower sponsor business growth, lower loan repricings/refinancings, but they've stressed downside risks in the revised outlook.

Q: Thinking around adding interLINK deposits.

A: Glenn MacInnes said interLINK deposits are tied to Fed funds, client-driven, and would reprice down if Fed cuts rates.

Q: Credit and reserves, Moody's base case improvement.

A: Glenn MacInnes said $61 million provision included $10 million for office portfolio, remainder due to credit risk migration in the quarter with Moody's macro outlook neutral quarter-over-quarter.

Q: HSA structure and sweep account discussion.

A: John Ciulla said Webster is a nationally regulated financial institution not in fiduciary services, not subject to new sweep account rules.

Q: Expense side offsetting NII pressure.

A: John Ciulla said they're investing in the business, examining opportunities for organizational efficiencies but sticking with expense guidance for now.

Q: Securities repositioning decisioning.

A: John Ciulla said driven by desire to accrete capital back to 11% on CET1, looking at capital neutrality, earn-back period, and short payback periods of moves.

Q: Office portfolio migration and reserve update.

A: John Ciulla said migration due to stress on rents, NOI, lower appraisals, with 40% of office book having updated appraisals; $10 million reserve increase for office portfolio.

Q: Sponsor business and private credit competition.

A: John Ciulla said private credit has impacted spreads and underwriting/syndication, but banks remain competitive with banks having different relationship styles and capabilities; it's been activity-based muted growth in the first two quarters this year.

Q: Loan growth categories for second half.

A: John Ciulla said diversified categories including mortgage, lender finance, fund banking, traditional middle market C&I, public sector finance, ABL, and Business Banking will contribute to loan growth.

Q: Deposit guide and loan growth relation.

A: Glenn MacInnes said deposit guide is driven by funding nature of loan book, with cost moderation expected; John Ciulla added focus on growing core operating deposits regardless of loan growth.