Webster Financial Corporation

Reformation 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 and accompanying management remarks can be found on the company's investor relations website at investors.websterbank.com. I'll now turn it over to Webster Financial CEO, John Ciullo.

Thanks, Emlyn. Good morning and welcome to Webster Financial Corporation's third quarter 2023 earnings call. We appreciate you joining us. 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. The results we announced today further illustrate the power of Webster in terms of earnings potential, as well as our sound operating and risk profile. We continued to enhance our liquidity position, and in contrast to broader industry trends, we grew deposits by $1.6 billion. We also grew our net interest income and materially expanded net interest margin in the quarter. In the quarter, we also completed our core systems conversion, marking a significant milestone in our integration, and we are pleased with the outcome and did so with limited client disruption. Our streamlined technology architecture will allow us to further enhance client experience and more efficiently deliver for our clients in the future. Achieving this outcome took an exceptional effort on the part of our colleagues, particularly our client-facing colleagues and those dedicated to the conversion. I want to express the gratitude of our executive team, directors, and shareholders for their efforts. With the core conversion complete, we expect our company's financial potential will become even more evident over the near to medium term. and we will have significantly more opportunity to build upon our operating capabilities going forward, including services that allow us to enhance non-interest income in our commercial, consumer, and HSA businesses. Furthermore, our colleagues will direct their full attention to continuing to grow the organization as they deepen existing and develop new client relationships, enhance our product capabilities and client service, raise Webster's market profile, and keep operations running smoothly. With that as an introduction, I'll get into our financial highlights for the quarter. I'll start on slide two. On an adjusted basis, we generated EPS of $1.55, with solid results across nearly all of our income statement lines, and PPNR grew 2% from the prior quarter. This generated an adjusted return on assets of nearly 1.5%, and an adjusted return on tangible common equity of 21%. our efficiency ratio remained at 42% among the best in the industry. We grew our deposits by almost 3% over prior quarter, and we were able to grow net interest income despite a decline in loans. As we have discussed in our prior calls and at our investor day in March, we've continued to evaluate our capital allocation and the risk-return dynamics across lending businesses since our merger closed nearly two years ago. We've discussed with many of you that the time would come to de-emphasize some businesses where our resources and capital could be better allocated, and we are starting to see some of that today, particularly in an environment where liquidity is at a premium and the credit environment remains uncertain. In the quarter, we focused our loan origination efforts on franchise building, full relationships, C&I, and non-office commercial real estate. We purposefully de-emphasized our mortgage warehouse activities where balances materially declined. As a result of our deposit growth and more targeted loan origination activities, Our loan-to-deposit ratio improved to 83%, providing us a ton of flexibility as we move forward. We have a solid loan pipeline and feel good about our ability to continue to safely grow earning assets, even with a backdrop of sluggish loan demand. Our common equity Tier 1 ratio and TCE ratio are strong at 11.2% and 7.2%, respectively. Our robust capital position and returns provide us a great deal of flexibility and optionality, in terms of capital deployment, whether it be organic growth, share repurchases, payment on a common dividend, or in selective instances, executing on complementary acquisitions such as the Interlink and Venn transactions that we've executed on over the last two years. On slide three, we again provide a profile of our diverse and unique deposit funding. Many of you have seen this slide a few times now, but we'd like to highlight what we believe to be one of our key competitive advantages. particularly as deposits exit the banking system. The deposit growth we generated this quarter was a team effort with most of these channels contributing, and Glenn will provide more details on our deposit growth shortly. This business profile also enables our robust liquidity position, which we review on the following slide, slide four. We again increased our immediately available liquidity to $19.8 billion from $18 billion last quarter. In the most recent quarter, our uninsured deposits fell to 22% of total from 25% last quarter, and our liquidity coverage of those uninsured deposits grew to 148% versus 124% last quarter. I'll touch on our office CREE portfolio and credit in general as we turn to slide five. Office loan exposure continues to be a focus of our conversations with investors and we continue to actively manage our risk in that asset class. Notably, we've proactively reduced our office exposure, which is now under 1.2 billion, or 2.3% of loans. Including actions taken this quarter, we've reduced the portfolio by $500 million since the second quarter of 2022, or 30% of the original balance. The portfolio is generally well secured, with an at origination weighted average LTV of 54% and a current debt service coverage ratio of 1.9 times. No delinquencies in the portfolio and a low level of non-accruing assets. Note that of the remaining portfolio, almost two-thirds of our exposure has some level of tertiary support in the form of a guarantee or reserve. Overall, while it's clear that the credit environment remains uncertain and that the industry trends indicate some level of bumpiness as we move forward, We remain generally pleased with the resilience and credit metrics in our existing loan portfolio. While our commercial classifieds increased in the quarter, they remain well below pre-pandemic levels. Our non-performing loans and charge-offs remain stable and at historically favorable levels. We continue to add to our overall allowance for credit losses, and our 1.27% coverage of loans and leases compares favorably to peers. We continue to proactively manage credit exposure in our portfolio to ensure early identification of problem credits. I'll now turn it over to Glenn to provide more details on the quarter.

Thanks, John, and good morning, everyone. I'll start on slide six with our GAAP and adjusted earnings. We reported GAAP net income to common shareholders of $222 million with earnings per share of $1.28. On an adjusted basis, we reported net income to common shareholders of $267 million an EPS of $1.55, excluding $62 million in pre-tax merger-related expense. Merger-related charges were associated with our core conversion, which was completed in the third quarter and will decline significantly in the fourth quarter. Next, I will review our balance sheet trends, beginning on slide seven. Total assets were $73 billion at period end, down $900 million from the second quarter. Interest-bearing deposits, primarily cash held at the Fed, was $1.8 billion at period end. We averaged $1.2 billion in cash for the quarter, in line with what we anticipate going forward. Our security balances were relatively flat in the quarter as we reinvested proceeds for maturities and sales. Loans were down $1.5 billion, reflective of both lower loan demand and a decline in non-strategic loan categories. Deposits grew $1.6 billion in the quarter, and we reduced borrowings by $2.6 billion. Deposit growth was across several product types and business lines, including over $250 million in non-interest-bearing deposit growth. Our loan-to-deposit ratio was 83% in the quarter, down from 88% last quarter, and we anticipate operating in the mid-80s going forward. Our capital levels are consistently strong. The common equity Tier 1 ratio was 11.2%, and our tangible common equity ratio was 7.2%. Tangible book value decreased to $29.48 per share, reflecting the impact of AOCI, the dividend, a small share repurchase. This was partially offset by retained earnings. Unrealized security losses included in tangible book value increased to $819 million after tax from $645 million last quarter, driven by higher rates. In a steady interest rate environment, we anticipate roughly $125 million of this or to creep back into capital annually. Loan trends are highlighted on slide 8. In total, loans were down by $1.5 billion, or 3% on a linked quarter basis. The commercial bank continues to drive loan trends, where declines were reflective of both lower demand and declines in non-strategic categories. Mortgage warehouse was down $600 million. Commercial real estate was down $100 million as we continued to reduce our office exposure, and C&I was lower by $900 million. The yield on the loan portfolio increased 14 basis points, and floating and periodic loans were 59% of total loans at quarter end. We provide additional detail on deposits on slide 9, with total deposits up $1.6 billion from prior quarter, or 2.7%. We saw growth in all major deposit categories, with the exception of savings. Growth was aided by the seasonal inflow in public funds, along with growth in interlink, commercial, and HSA. In our commercial business, we continue to recapture balances that have left in search of diversity earlier this year, as well as new clients. Our total deposit costs were up 24 basis points to 196 basis points for cumulative cycle-to-date total deposit data of 37%. On slide 10, we have updated the forward progression of our deposit data assumptions. We anticipate our cycle-to-date data will reach 40% in the fourth quarter of this year. While the macro data has pushed out the interest rate cycle, we would still anticipate a beta in the low to mid-40s by the middle of 2024. Our expectations here align with our outlook, for which we assume no further Fed increases at this point, with cuts beginning at the back half of 2024. Moving to slide 11, we highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period. Overall, adjusted net income was up $7 million over prior quarter. Net interest income was up $3.3 million as we continued to benefit from our asset-sensitive balance sheet. Adjusted non-interest income was flat, while expenses were down $2.3 million. We also benefited from a lower tax rate, 20.1% this quarter, down from 21.7% in the second quarter. Partially offsetting these trends, the provision was up $5 million. The net interest margin was 3.49%. up 14 basis points from the prior quarter. The NIM benefited from more normalized on-balance sheet liquidity, as well as our asset sensitive position. And our efficiency ratio was 42%. On slide 12, we highlight net interest income, which grew 3.3 million linked quarter. Net interest margin increased 14 basis points from the prior quarter. Our yield on earning assets increased 17 basis points from the prior quarter. and the pace of deposit pricing moderated to 24 basis points. It's important to note that our total cost of funds were up just four basis points, as growth in core deposit categories was used to replace wholesale funding and brokered CDs. On slide 13, we highlight our non-interest income, which was flat the prior quarter. An increase in derivative valuation and direct investment gains was offset by declines in deposit service fees. Transaction activity tied to commercial clients remained slow in the third quarter, though the outlook is improving into next year. The year-over-year decrease was primarily driven by $10 million in lower client deposit fees, $7 million lower loan-related fees, $4 million from the outsourcing of the consumer investment service platform, and lower client hedging activity. Non-interest expenses on slide 14. We reported adjusted expenses of $301 million down 2 million from the prior quarter. Reductions in professional fees, occupancy, and marketing were partially offset by higher employee benefits and technology expense. Slide 15 details components of our allowance for credit losses, which were up 6 million over prior quarter. After recording 29 million in net charge-offs, we incurred a 36 million provision expense for macro and credit factors, partially offset by the impact of lower loan balances. As a result, our allowance coverage to loans increased to 127 basis points from 122 basis points last quarter. Slide 16 highlights our key asset quality metrics. On the upper left, non-performing assets are flat to prior quarter and prior year, with non-performing loans representing just 43 basis points of loans. Commercial classified loans is a percent of commercial loans increased to 174 basis points from 139 basis points as classified loans increased by 118 million on an absolute basis. The balance was up as we saw migration of a few larger credits that we expect to cure over time. Net charge-offs in the upper right totaled 29 million or 23 basis points of average loans on an annualized basis. We divested another 78 million in office loans in the quarter. These divestitures generated 13 million of the 29 million in net charge-offs. Worth repeating, our total office exposure declined $110 million, inclusive of other actions, this quarter. On slide 17, we maintained strong capital levels. All capital levels remain in excess of regulatory and internal targets. Our common equity Tier 1 ratio was 11.2%, and our tangible common equity ratio was 7.2%. Our tangible book value was $29.48 a share. Including the AFS mark on our securities portfolio, our common equity Tier 1 ratio would be approximately 9.5% as of September 30th. I'll wrap up my comments on slide 18 with our fourth quarter outlook. We expect loans to grow in the range of 1% to 2% with growth-focused and strategic segments. We expect core deposits to be in the range of third quarter with a year-end loan-to-deposit ratio in the mid-80s. We expect net interest income of $580 million to $590 million on a non-FTE basis and excluding accretion. Approximately $4 million in accretion would be added to the interest income outlook. And for those modeling net interest income on an FTE basis, I would add roughly $17 million to the outlook. Our net interest income outlook assumes no further Fed increases. We currently expect NIM to be flat to the third quarter. Non-interest income should be approximately $90 million. Core expenses are expected to be around $305 million with an efficiency ratio in the range of 42%. Our expense outlook excludes the FDIC special assessment. We expect an effective tax rate of 21%. We'll continue to be prudent managers of capital and target a common equity tier one ratio of 10.5%. With that, I'll turn it back to John for closing remarks.