Q1 2022 Webster Financial Corp Earnings Call

Yeah.

[music].

Good morning, welcome to the Webster financial corporations first quarter 'twenty 'twenty tail earnings call. Please.

Please note. This event is being recorded I would now like to introduce Webster's director of Investor Relations at Harman to introduce the call. Mr. Herman. 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 1990 fives in there.

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 W. D. S. G Dot com I'll now turn it over to Webster financials CEO John .

Sure.

Thanks, a lot and good morning, everyone and thank you for joining us for our first quarter earnings call.

It's an eventful quarter as we closed our merger of equals with Sterling executed on our integration plan and announced and completed the acquisition of vantage financial all while continuing to generate solid performance in our underlying businesses.

I'll begin with some high level remarks on the macro environment our performance for the first quarter of 'twenty, two and I'll provide a quick update on the merger.

I'll turn it over to Glenn after that to review our financials.

The effects of the merger and to provide our outlook for full year 2022.

Despite uncertainty in the macroeconomic environment driven by war in Ukraine in supply chain labor market challenges and the lingering impacts of Covid and some of you may have seen a one 4% surprising GDP contraction. This morning.

We feel that the underlying strength in economic activity remained strong demand for debt financing and continued confidence among our clients is prevalent.

Our base case continues to call for solid economic growth rising interest rates and positive trend in loan demand over the next six to eight quarters.

We're very pleased with our performance in Q1, our reported net income was a loss of $20 million and EPS was a loss of 14 <unk>. These results. However were impacted by various one time merger related charges, including the non PCB double count provision for Sterling.

Excluding these merger related expenses adjusted net income was $184 million and adjusted earnings per share was $1 24, those adjusted metrics equate to a 137 return on assets and our return on common tangible equity of 17%.

Loans and deposits grew smartly year over year driving material revenue growth, we effectively managed expenses and our efficiency ratio was approximately 49% for the quarter.

Credit performance continues to be favorable excluding the non PGD provision included in the merger accounting our provision for the quarter was $14 million all credit metrics remained strong, including our npls to total loans ratio at 57 basis points period and down from 71 basis points.

For Standalone Webster a year ago.

I'm now on slide three.

We closed our merger on January 31, we're excited to be operating as a combined organization and believe our combination is a strategically compelling today as it was when we announced it a year ago. We now have $65 billion in assets 54 billion in deposits and 44 billion in loans as a combined company.

As always our intent at the outset, we have created a commercially focused bank that we believe can outperform as we leverage our significant expertise industry verticals and broad asset generation capabilities are.

Our funding and liquidity profile is differentiated strength for Webster as our diversified sources of low beta deposits, including from our HSA Bank franchise should provide a competitive advantage as interest rates rise and liquidity returns to more normalized levels.

Our loan to deposit ratio of 80% provides ample flexibility for us going forward.

In combination with a predominantly floating rate loan portfolio, we expect significant income improvement in a rising interest rate environment.

Our tangible book value per share and capital levels at close were roughly in line with our expectations at merger announcement, we expect to achieve $60 million in realized cost saves in 'twenty, two and another 60 million of savings for the full year of 'twenty three.

We began the consolidation of our corporate real estate footprint and expect to reduce our combined corporate square footage by over 40% by the end of the year. We've eliminated redundant operating costs were identified and at quarter end. The combined organization was operating at 93% of its head count relative to merger announcement a year ago.

We expect to complete the core banking systems conversion in the third quarter of 2023.

All customer facing rebranding has been completed.

In combination with the financial merits of the deal and strong business execution, we are well on the path to sustainably generating that targeted financial metrics, we set forth a year ago at deal announcement, including a high teens return on tangible common equity.

With respect to outstanding people, we have seen effectively no attrition among client facing colleagues due to the merger or the competitive labor market and in fact, we've added additional commercial bankers and have a pipeline of teams and portfolios that we believe will help us sustain our growth momentum.

Slide five covers loans with great business momentum heading into the second quarter, excluding the effects of PPP and the material contraction in mortgage warehouse balances due to the rate environment linked quarter loan growth for the two legacy entities combined with one 5% or 6% annualized year over year growth.

On the same basis was eight 5%.

Both was driven primarily by commercial categories as anticipated as we have discussed with many of you our increased balance sheet capacity allows us to immediately expand relationships with our existing customer base.

The proof point at year end 2021, the combined bags had a total of 109 relationships with exposure greater than $40 million with a bigger balance sheet since legal day, one of the merger on January 34th 31st we've pre screened 61 deals and approved 27.

Deals with exposures over $40 million.

These higher old traffic trends contributes to our confidence in reaching our 8% to 10% in 2022 full year loan growth targets, we feel good about our ability to leverage our bigger balance sheet without sacrificing credit quality and without expanding our existing underwriting guidelines of note the weighted average risk rating of our top 100 exposures.

More than half a turn better than that of our overall loan portfolio asset quality improves as hold levels increase.

Deposits on a combined basis also exhibited solid growth this quarter up three 2% on a linked quarter basis and up almost 4% year over year, our deposit cost declined one basis point, despite the start of fed tightening and higher market rates broadly.

Growth this quarter was principally driven by HSA and our government banking business HSA added 288000, new accounts and core deposits increased almost half a billion dollars.

As mentioned earlier, we closed on our acquisition of that in this quarter, which we view as another proof point with respect to the merger providing additional opportunities to accelerate growth in low cost long duration HSA deposits with that I'll turn it over to Glenn.

Thanks, John and good morning, everyone. Let me start with our period end balance sheet on slide seven.

At period end total loans were $43 5 billion total assets were $65 1 billion and total deposits were $54 4 billion on a pro forma basis linked quarter loan growth was led by $442 million in sponsor and specialty and $255 million in C&I.

Was partially offset by declines in mortgage warehouse N P. P P.

Pro forma deposits increased $1 7 billion or 3% linked quarter with growth across all categories, except higher cost Cds.

Boeing's ended the period at $1 6 billion.

Capital ratios continued to be exceptionally strong post merger with a common equity tier one ratio of 11, 4% and a tangible common equity ratio of eight 3% at merger announcement, we had estimated pro forma common equity tier one ratio of 11, 3% at close.

Tangible book value per common share was $28.94 down from $30.22 last quarter, a number of factors contributed to the decline, including merger accounting merger related charges and the impact of a S. S securities valuation marks on a OCI.

Moving on to slide eight we detail the various merger and restructuring adjustments for the quarter, including a reversal of accrued strategic initiative expenses merger related expenses and the non P. C D double count provision.

In aggregate these three items subtracted $1 38 from EPS for the quarter.

On slide nine we provide our reported to adjusted and pro forma income statement, which includes the January adjusted results for Sterling.

January Sterling performance is excluded from our reported results as it occurred prior to the closing of the merger.

On an adjusted basis, we reported 184 million of net income available to common or $1 24 in diluted earnings per share in the quarter.

Our pre provision net revenue was $242 9 million a return on assets was 137% return on tangible common equity was 17% and we had an efficiency ratio of 48, 7%.

I will point out that our adjusted performance benefited from the deferred tax valuation adjustment of $10 million in the quarter, which is reflected in the effective tax rate of 18%.

As John highlighted earlier, we feel very good about the trajectory of our returns given where we are in the integration process on.

The next three slides, we have provided trends on a pro forma income statement categories to give you a better sense of the starting point as we head into the second quarter.

Slide 10 shows our net interest income for the quarter.

464 million and total net interest income includes 394 million reported for Webster and $70 million for Sterling in January .

This includes $36 million in purchase accounting accretion.

The pro forma net interest margin for the quarter was $3 two 4%, while the net interest margin excluding the effects of purchase accounting was $2 98 per cent.

Noninterest income as presented on slide 11, noninterest income is again presented on a pro forma combined basis, including Sterling January noninterest income.

When combining Webster's reported noninterest income of 104 million for Q1 with 11 million for Sterling in January the total is $115 million.

The linked quarter decline from Q4 reflects lower investment gains of 11 million realized at Webster and $5 million at Sterling. In addition, we recognized lower wealth management and mortgage banking fee income.

Noninterest expenses presented on slide 12.

Webster reported $255 million and adjusted expenses in Sterling January adjusted expenses were $46 million, which total to $301 5 million.

On a linked quarter basis, the general trend in noninterest expense was driven by a decrease in Q4 performance based expenses, which was partially offset by seasonal benefit expenses and intangible amortization.

Total intangible amortization on a pro forma basis was $4 9 million in each of the prior periods compared to $7 5 million in Q1 2022.

Moving onto our allowance on slide 13, the allowance totaled $569 million for the quarter largely driven by merger related accounting.

The net P. C D allowance for Sterling added 88 million and was mark through the balance sheet. The P. C. D allowance adjustment is the net of $136 million in gross T. C. D reserves was $48 million in charge offs recognized that acquisition, reflecting balances written off by Sterling in prior periods.

The non P. C D provision added $175 million in accordance with purchase accounting. This is recognized as a provision through the income statement is commonly referred to as double cat is the double count as the assets are both marked on our balance sheet and.

And income statement.

The balance of our increase was the net effect of 9 million in charge offs and 14 million provision expense.

Slide 14, we provide our key asset quality metrics as John indicated earlier, our asset quality remained strong, including an NPL ratio of 57 basis points and a commercial classified loans totaling 213 basis points of the commercial portfolio. This compares to 62 basis points and 226 basis points.

Actively on a combined basis at year end.

On slide 15, we are exceptionally well positioned from a capital perspective, our regulatory capital ratios exceed well capitalized levels by substantial amounts our common equity tier one ratio of 11, 4% exceeds well capitalized by $2 4 billion and our tier one risk based capital of 12% exceeds well capitalized.

<unk> by $1 9 billion of.

Tangible book value per share of $28.94 is up 53 cents from prior year.

Slide 16 provides our estimated purchase accounting marks a close relative to expectations at merger announcement.

Loan marks totaled 317 million compared to $381 million anticipated at announcement, including March related to credit interest and liquidity our security Mark of $60 million is lower than originally anticipated mark of $102 million driven by the higher rate environment. The core deposit intangible is estimated at one.

Hundred and $19 million versus 106 million of announcements again, driven by higher rates. We've also added $91 million of intangibles for customer relationships related to reoccurring revenue portfolios and our commercial bank segment the.

Property and equipment Mark was $23 million.

Goodwill and other intangibles totaled $2 1 billion in line with the announcement.

On slide 17, we have provided the expected expected income statement impact of the merger in accordance with acquisition accounting Sterling previously scheduled yield accretion and intangible amortization are eliminated in the first quarter, we realized $34 7 million of purchase accounting accretion and net interest income.

Scheduled accretion for the calendar year is $73 5 million.

In the first quarter purchase accounting accretion benefited the net interest margin by 29 basis points.

With respect to intangible asset amortization Webster reported $6 4 million in intangible amortization in Q1, which includes $5 2 million related to the merger.

Total intangible amortization will be $9 million for Q2, including the full effect of the merger and legacy amortization.

On slide 18, we provide our full year outlook. Each of these items assumes no material change in the macroeconomic or regulatory environment.

We expect net interest income of 1.85 billion on a GAAP basis, excluding accretion.

Our projection assumes the fed funds rate ended the year at 2.5%, implying an additional 200 basis points of rate increases.

Our net interest income projection also anticipates loans grow at 8% to 10% annually beginning from our legal day, one balances of $43 3 billion.

We expect fee income of $430 million to 450 million and expenses, excluding one time costs of $1 1 billion to $1. One 2 billion. So we continue to monitor inflationary headwinds.

We anticipate an effective tax rate in the range of 22% to 23% going forward.

With that I'll turn things back over to John for closing remarks.

Thanks Glenn.

When Jack cutting to ski and I decided to embark on the merger of our two companies. In addition to the financial merits of the transaction. There were several aspects to this merger that made it particularly compelling including the ability to elevate the best talent from both organizations the alignment and complementary nature of the lending verticals are uniquely valuable funding base and.

Scale that would allow us to accelerate investment in differentiated businesses.

Already in the first few months as a combined company we are executing on the strategic benefits. We felt this merger would provide we're elevating the best talent from both organizations. The Executive Management Committee is a balanced group coming from each legacy organization, we're committed to building a contemporary and values based culture in the new organization the leadership.

Team has coalesced around an agreed upon set of core values and expected behaviors. These a bit.

Formalized into our culture shaping program already rolled out across the bank our company and our colleagues are committed to outstanding corporate citizenship and I encourage you to read our recently published ESG report available on our website.

As previously highlighted we had solid loan originations and net loan growth in key commercial segments and we are immediately realizing on the ability to execute on larger transactions, particularly on our differentiated sponsor and specialty and institutional commercial real estate business.

We have an exceptional low cost sticky deposit base led by HSA bank in the consumer banking network of the combined organization, we were able to reduce our cost of deposits by a basis point this quarter and continue to explore new customer verticals and in digital delivery channels that should further enhance our funding position we're in.

And vesting and digital capabilities, we saw a couple of examples in the first quarter. As previously mentioned, we purchased <unk> financial our cloud based solutions provider in the HSA space. We're excited about the technology, then brings to our platform and the business benefits. It's client facing experience will provide in addition to our innovations group.

Western joined the U S. D F consortium as a founding member of the consortium will work to support Likeminded forward thinking bags as they work to integrate blockchain capabilities into their operations.

An active and engaged a participant in the consortium's activities, we will benefit from the pooled expertise and network effects of other members. We will continue to invest in our data environment and migrate our digital platforms to the cloud.

We expect to generate significant returns and excess capital as a combined organization as we set forth the merchant at the merger announcement a year ago.

This will provide us with significant capital flexibility going forward, we will continue to be disciplined in our capital management framework allocating capital to those businesses and activities that generate the highest return on equity.

We will deploy capital into differentiated and growing organic activities first and into commercial loan portfolios and select inorganic business or product acquisitions like we did with that we will also continue to return capital to our shareholders in the absence of organic opportunities through dividends and share repurchases in Q1, we repurchase.

Over 120 million in shares and have replenished our repurchase authorization announced yesterday.

Finally, I want to thank all of our western colleagues for their engagement efforts and execution. We've asked a lot of every colleague over the last year as we were preparing for the merger close and delivering outstanding performance in a challenging macro environment.

Colleague stepped up and delivered for our clients our communities and for our shareholders with that Glenn and I are prepared to take questions.

Thank you I see we'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question is from Chris Mcgratty with BW. Please proceed.

Oh, great. Thanks for the question Glenn.

Glenn the big on maybe start on the expense. The guide was pretty much in line with with what we were looking for I'm just interested in kind of the cadence.

As you realize the 60 of cost saves this year and 60 next next year.

Where do where do expenses effectively go to over the next four five quarters and then we left from there once the synergies are realized.

Yeah. Thanks, Thanks, Christian and good morning, Let me give you a little a little more texture on the $60 million because I can say, we have pretty clear sight on how we're going to achieve that and it sort of falls into three categories. The elimination of redundancies that the consolidation of corporate facilities as you probably heard John John noted in his remarks of 45%.

Reduction in square footage and then operational efficiencies from the consolidation of our vendor contracts operating systems and automation. So we gave you guidance it sort of gets us to a one for one but the 1.12 billion and as I always say that trajectory is probably going to get us to our range.

Oh in the range of like a 285.

By the fourth quarter I want to I want to sort of preface that with that are you know in the fourth quarter. We have basically we do traditionally have a spike in HSA type of expenses somewhat offset by lower employee comp related costs are on the on the health care and things like that so it's that's a range I would say that that would be a jump off rate.

In the fourth quarter.

Okay and then.

From there, there's still a little bit more I guess to go for 'twenty 'twenty three but there's always there's also inflationary pressures so.

So look I, we're sticking with our achieving the additional $6 million to $60 million in 2023 are the big driver of that will be the completion of our core banking conversion.

It will generate significant savings and then well as you know.

As you would expect we'll get a full year run rate of a lot of the initiatives that we executed this year.

Okay, and then if I could just one more on the margin. The expansion was was it was a little bit better than we thought can you given the challenges of two months in the quarter can you just provide like what the March core margin was for lift off for Q2.

298.

That's my that's the month of March Okay.

Ex accretion right.

Alright, thank you.

Hi, Chris.

Our next question is from Casey Haire with Jefferies. Please proceed.

Yeah. Thanks, good morning, everyone.

Casey.

Wanted to touch I guess slide five the the.

The loan growth.

Obviously, a little bit slower this quarter, but you know I guess can you just give us some color on the mix of lots of moving parts here C&I very good sponsor and specialty are also very good well what is this a similar mix. So we can expect in the remaining quarters to get to that 8% to 10% and then also.

You know what as you know sponsor and specialty I know John you. You are you really loved that vertical what what is what is the limit on that concentration wise.

Yeah, It's great Great question, Casey and you can probably hear that I'm I'm you know obviously the contraction in mortgage warehouse and run off of the P. P. P is what sort of muted. The the you know the GAAP reported.

Loan growth, but obviously for me the underlying characteristics out on page five our strong because the proof point on this transaction was in our institutional real estate and C&I in sponsor and specialty that we had a lot of momentum and with a bigger balance sheet, we were going to be able to accelerate loan growth and that's why I'm still pretty confident no mortgage warehouse.

There's about $500 million in balances right now, we don't see that contracting much more during this kind of purchasing season and kind of our general thought is that that $500 million would be a good average balance for that business for the rest of the year. So neither a big driver of growth nor a drag but as you noted our originations were really strong.

Across C&I sponsor and specialty and actually inquiry, we just had an inordinate amount of prepayments, it's sort of spilled over from the fourth quarter in Investor Crazy. So a lot of momentum there and I think as we talked about when we announced this deal our sponsor and specialty business on our $20 billion loan portfolio.

Standalone legacy Webster company, we were sort of saying to ourselves hey are we reaching maybe a threshold of concentration and now and on the other side from a legacy Sterling perspective, we had a relative concentration in commercial real estate. If you look at the $43 billion loan portfolio in the granular nature of all these categories.

We really have significant running room to expand in all these categories. So you know that 11% growth in a single quarter and sponsors terrific again, some of that was because of lower prepayments I wouldn't pencil that in but we expect general C&I across all of the middle market businesses, Investor Cree and sponsor and specialty.

We continue to grow smartly for all the good pipeline stronger loan demand and the bigger balance sheet. So.

That's why I think the underlying numbers here from a loan growth perspective or are not discouraging because of the geography of what sort of muted the growth.

Yeah, Okay, great and then on the buyback you guys announced the 600 million dollar renewal. My last night, you you know how does that $220 million a quarter ahead of that.

400 million or so our expectation.

[noise] announcement can you just give us some updated thoughts.

You know on your buyback appetite going forward.

Sure you know I think we're going to continue to be disciplined and opportunistic the environment's a bit choppy. Obviously, we have the increased authorization, which makes sense given the size of our company and in and moving forward and as I articulated I think in our first prize for US is outsized loan growth ports.

Folio purchases team lift outs opportunistic product enhancements for companies like ours.

Our activities in divisions like HSA back, but obviously you know we look to a say a 45% to 65% payout ratio.

You know, we prepay a pretty robust dividend and if we don't have you know line of sight to organic investment and we don't feel like.

There's a recessionary environment right in front of us and we feel pretty confident we'll certainly use some of that authorization to buy back shares.

Over the course of the next three to four quarters.

Okay very good and then just last one for me Glenn Slide 26, the asset sensitivity slide.

You guys pointed out a 20% base.

Beta over the first 12 months of the forecast is that does that hold for 100 bps of hikes and 200.

So we have we have increase that if you recall from our last call. We were sort of in the 11% range I think that's something that we have to look at and where we're using 'twenty 'twenty. One right now I think we do have a ramped up toward the end part of the year you know the wildcard here Casey is if the fed goes 50, and 50 I think you know it.

It may spike up but what we're what we're using in our model right now on a full year basis, 12 month ramp up basis like 21%.

Okay, and then does that that would've and that's that that holds for 200 bps as well.

We're just 100 bps, yeah, it does and that was for 200 as well.

Okay very good thank you.

Thanks, Stephanie.

Our next question is from Steven Alexopoulos with J P. Morgan. Please proceed.

Hi, Good morning. This is Alex Lau on for Steve. Thanks for taking my question.

Hey, Alex.

As you guys integrate the two companies together what are some of your more immediate revenue synergies that you're targeting and beyond that what are some of the larger opportunities that will take more time for revenue synergies.

Yeah. That's a great question I think the immediate ones that I've already referenced which is larger balance sheet to be able to have more profitable and larger relationships with our existing commercial clients potentially more capital market fees, depending on market conditions, so that scale of balance sheet and our existing penetration in key commercial categories.

It's kind of the immediate revenue synergy, there's obviously more cross sell opportunities for example, our private bank legacy Webster private bank selling into the the commercial portfolio at legacy Sterling is an immediate opportunity to get more penetration in wealth management as we have brought.

Our products and services to sell into and to deliver to our clients across a bigger footprint.

On the Walnut side, it's a lot of exciting things because we're working through our innovations group to think about ways. We can digitally served 3 billion our retail clients at HSA Bank.

And digitize other products. So we feel that we're spending a lot of time on our longer term strategies around are there opportunities to.

Digitize and sell cards or short term loan products into HSA is can we use or a bigger balance sheet and larger corporate relationships to leverage more sales of HSA or ARPA standard and basic HSA products into a larger corporate client base.

Webster, So I think immediately what youll see is in our core commercial relationships broader deeper more profitable relationships and over the long term our ability to create more cross selling products across the bank and HSA through innovation and digital products.

Thanks, John and one question on the HSA business, so coming out of the pandemic can you talk about the HSA business and if youre seeing some return to normal for that business such as for balance growth and fee income.

Yeah. Another great question, Josh and we have not back to pre pandemic levels, but there was muted activity you probably heard us over the last several calls talk about one of the dynamics was that most of the deposit growth.

And account growth came actually from existing clients. So further penetration into existing clients, that's sort of waned a little bit as general activity slowed during the pandemic as you heard me mentioned in my script, we had 288000, new accounts and obviously net account growth reported with a little bit muted by the Tpa accounts.

Still running off but that was an increase over last year's account growth and so that was that was healthy almost a half a billion in new core deposits, which was also a positive trend line and what we did see underlying that was more of our existing clients, we're signing up new employees to high deductible.

Health plans HSA accounts, so I'd say, that's a trending in the right direction towards pre pandemic levels and I think we saw the same thing as well in our card swipes and activity just from from a discretionary health care activities and and alike. So definitely encouraged.

I'm not yet back to where we'd like it yeah. Let me just add a little color on that on a debit transactions as an example, I think we did $6 9 million.

In the quarter that's versus $6 four so that's the transaction volume is up year over year.

<unk> eight point to a little over 8%. So we are seeing some of that on a like quarter basis prior year.

Thanks for taking my questions.

Thanks Al.

Our next question is from Brock Vandervliet with UBS. Please proceed.

Yeah.

Hey, good morning, guys.

Good morning Brock.

Good morning, just to follow up on the HSA questions I noticed the yeah on.

On balance sheet deposits.

Yeah. Your off balance sheet funds are growing significantly faster is that the kind of mix. We should see we should expect going forward and can you compare the economics of the.

Of the two.

Sure be happy to we talked about when we talk about this a good amount so.

The answer is the trend line, obviously, while overall penetration in the industrial category is still relatively low it's increasing but relatively low obviously the larger balance accounts are the ones the transition into investments and obviously when you look at that number there's also the benefit or detriment of market.

Performance that moves that around and so obviously over the course of the last year. There was significant expansion in the value of those investments as well as more people going into those investments.

No secret and were very transparent about the fact that for us.

And I would say, particularly in a raising a rising interest rate environment. The deposits are more valuable to us because we get the full benefit of the value of those deposits to deploy directly into loan and asset growth and with respect to the investments through our both our proprietary offering and and 70 year end.

And in our other vendor, we only got really <unk>, one fees from Nashville were talking somewhere between 10, and 30 basis points, depending on which avenue that runs and so it is it is less profitable on its face. However, what we've always said is the invest stores.

In our HSA client base tend to have high average deposit balances as well and tend to be among our stickiest depositors. So you know, we obviously want to provide our clients with as much flexibility as we can there and so I think at the end of the day, there's a nice virtuous cycle that allows us to keep you know depart.

Asset growth running, albeit it dollar for dollar it's not as profitable.

Got it okay and as a follow up can.

Can you give us sort of a level set range.

Sumit.

Relative stability not not a resection ahead in terms of net charge offs net charge off range for the combined.

Company going forward.

[laughter] Yeah. That's you know it's a tough one I've been surprised as you know is a former a credit guy about the way.

Credit has performed even leading up into the pandemic period.

I would say we were we were experiencing that kind of 20 basis points give or take.

Life net charge off before the pandemic I think that if you think about commercial categories. If there ever is kind of a return to normal you know maybe think about that 20 to 30 basis point annualized charge off rate as more of a normalized commercial charge off rate and obviously, we still haven't seen it theres been.

A lot of stimulus and other reasons why but.

That's probably in our minds, where we think it would normalize on a commercial basis.

Got it okay. Thanks for the questions.

Thank you Brian .

Our next question is from Jared Shaw with Wells Fargo Securities. Please proceed.

Hey, good morning, everybody.

Good morning.

Hmm.

Starting with the with the NII guide does that assume sort of a stable mix of loans and securities and cash are.

From where we are right now or is that loan growth accelerates should we assume that you know a lot of that's funded or some of that is funded out of cash and securities.

So it assumes somewhere between 8% to 10% loan growth. So you can say, 9%, but you know right in the middle of it does assume that a part of our some of our securities portfolio.

How fun that.

But I think all in that's that's where we are so there's some borrowings as well that you would expect to see we are not we are you know we have drawn down our cash levels. As you know for last couple of quarters. So our securities portfolio about $15 billion. So as we now reached the phase where we'll start to.

Realize that loan growth, you'll probably see the securities portfolio starts to temper that a little bit.

Okay. Okay. That's good color and then what was the Louis Aoc I on a combined basis at quarter end.

So.

Yeah. The total total a M C I.

Yeah some securities.

So yes I believe.

So the impact of the securities if that's what you're if that's what you're looking for the impact of the valuation of securities after tax $240 million.

And so that impacted you know, we we started out I mentioned that the tangible common equity ratio of $8. Two 6% really strong that includes that 40 basis point reduction from the unrealized loss on the portfolio.

Okay. Okay.

That's great. Thank you and then.

And when we look at the when you look at the accretion this.

This quarter what were the you'd mentioned the accelerated pay downs I guess, Gary what was the.

The actual balance of Paydowns and was that more than you were expecting.

So it was about $15 million and and accretion impact is as I think I mentioned in my comments.

Sure we have the balances associated with Chad I'll circle back with you on the actual loan balances that prepaid on.

Okay.

That's good thanks, and then just just finally for me sort of following up on <unk> question about the charge offs, what's the expectation for the for the ratio of the allowance for credit loss as we as we move forward is there still a larger qualitative reserve tied into that or are we sort of good with it.

With that yeah. The currently.

So, whereas 131, you know coverage and I think we're expecting like stable ACL ratio and we'll continue to monitor credit quality and macro loan mix loan growth as well I you know I think John hit on it and some of his comments that there is a qualitative portion.

And we're being somewhat conservative on that until we see how things play out over the next couple of quarters. Yeah. I think that's I think that's spot on I think we feel really good about the reserve as Glenn said another way to say, we think it's relatively conservative.

There isn't enough choppiness going forward that it's the right reserve level now, but if we do see some of our some of the uncertainty going forward the war or some of the other choppiness kind of settle down and we do thank you.

There may be an opportunity to lower that reserve a bit.

Great. Thanks, a lot.

Our next question is from David However, many with Wedbush Securities. Please proceed.

Hi, Thanks for taking the question you.

You mentioned at the outset about the economy contracting and a question I always seem to get them whenever recession enters the narrative related to Webster is your leverage loan exposure could you talk about.

What the exposure is there and any details you can provide to give investors comfort.

Related to you know historical loss rates leverage multiples you know equity contribution by private equity sponsors to provide cushion for you guys can you can you rattle off some stats there.

Everybody loves to ask me that question I could I can stay here for the next hour and talk about it but I promise.

And I and I know, we've done that contraction in the AR in the Genie paid from one of my colleagues here last minute because it wasn't in my script, but I don't want to seem like we were blocked we're blind to what was going on he one of the other reasons, we talked about another benefit of doing this transaction and having a bigger balance sheet is that again from a concentration perspective.

To give sponsor and specialty more running room under our under a prudent portfolio approach to management to the way we manage it so.

I will tell you that as of.

Quarter end or kind of regulatory defined definition of leverage loans was roughly 6% of the entire loan portfolio of the organization with like credit performance to the rest of the portfolio as we've said before that's that's kind of held our historically through both the great financial crisis.

Through the pandemic and that while there may be volatility and risk rating at times. It really it it performed at or better than the rest of the portfolio and it goes to some of the things you're talking about you know we feel like we're not involved in kind of March not that much involved and market level large syndicated deals.

We have a lot of really good long term relationships with private equity sponsors we tend to play in areas that have repeatable protective with predictable cash flows like our technology group like our data center and infrastructure group like our health care and health care services group. So they tend to be companies that done.

During normal cycles actually have predictable cash flow and obviously during the pandemic those did well we don't do a lot of covenant Lite transactions.

And you are right to say that one of the benefits are in these deals is there is a lot of cash equity underneath your senior debt. So it takes a real paradigm shift in any company's performance to have the private equity firms say hey, we're out of here or we wanted to give you the keys and so we've tend to work with these private equity firms for.

Literally more than 20 years in some cases and have a really good.

Relationship, where the senior debt and the equity work gets a great outcomes and so you know it is enterprise reliant it doesn't have hard collateral underneath it and I think that's why sometimes the market always asked the question, but I think we've had a long and durable.

The time to kind of validate our strategies and underwriting in that area and again, it's you know 6% of our $44 billion loan portfolio. So it's also a right sized I believe are where we are.

Very helpful. Thank you and then shifting over to you guys spoke about you know the U S. D. F consortium I was curious can you talk to the opportunity there, particularly on the deposit front.

Sure.

Let me take a step back so we're excited about the innovations group, we have a great leader there and we are doing here is the former CFO of of Sterling and the group you know we're looking at a number of things there in terms of banking as a service, including the direct bank activities and as consortium around.

Distributed ledger and blockchain. The reality is from an analyst perspective, it's not a significant drag on expenses and we don't really have any built in revenue in the short term, but what our goal is ultimately is I guess two fold which is to help.

Augment our existing businesses through digital strategies and and the like obviously to look to continue to digitize consumer and retail banking trying to discover and effective and efficient way to get to new profit pools and then for example on the consortium in distributed ledger.

Apply it to a lot of use cases, so you could think of.

And process and in correspondent mortgage where you could think of trading and storing loans on chain you could think of 24 hour cheap effective and efficient payments strategies.

As it relates specifically to the consortium theres going to be a little bit of a slow walk as we work with the other banks as we work with the technology providers and we work with the regulators quite frankly, I'm kind of moving forward. So it's all of those use cases, I just mentioned, but the expectations are that we won't see immediate and direct benefit just because.

Kind of a nature of the development of the technology.

The figuring out all the risk aspects and also working through the regulatory landscape. So a lot of exciting things that we think will benefit us 2023, and beyond but from a 2022 perspective, it's not factored into our financial statements.

Got it thanks very much.

Our next question is from Matthew Breese with Stephens incorporated please proceed.

Morning, Hey, Matt I want to go to the NII Guide the 1.85 billion for the year given expectations for higher rates and the asset sensitive balance sheet could you help me with the exit rate of core NII in the fourth quarter. It feels like it should be north of 500 million, but curious your thoughts and maybe you can help me home that down.

Youre looking for the exit rate of net interest income in the fourth quarter exactly yes.

Yes.

So you know I'm not going to be real prescriptive, but it is in the range slightly above the range of $500 million.

So I would say in the range of $5 45 to $5 50, I'll use that.

Great. Okay, and then you know what is the blended new loan yields youre, putting on the books today commercial real estate traditional C&I and then oppositely have you started to feel any pressure even exception based pricing on the deposit front at all.

Yeah.

So on the deposits.

Not really maybe a few select circumstances on the on the government side, but but otherwise no. That's that's easy I'll take that second question first and then the first question is on our rates and spreads you know and it's always been for I think both legacy organizations, we try and remain pretty disciplined but there is some various.

<unk> as you go through the different asset classes. So I would say you know I'm looking at our commercial real estate high quality institutional commercial real estate being done you know L plus 175, L plus three and.

And in the range, obviously on sponsored special things, we've talked about you know you're getting a much higher yields you know on on some of those leverage loans. So when we when we talk about originations in any one given quarter. Its usually based upon kind of what the mix is in that quarter. We have not you know.

Obviously, it's very competitive out there, but we've not seen dramatic rate compression. We saw some you know before the pandemic and kind of.

Evened out and while it is very competitive you know, we're still we're still able to meet our return on capital hurdles on these loans and it really is just a question of in which loan category in which business, we're booking them and obviously the ones that have lower a lower yields are the ones that have better risk ratings and so you know with the <unk>.

Allocations lower.

Got it okay.

And then the last one for me just more out of curiosity. You said you were going to reduce corporate of course.

Square footage by 40% to 45%.

That's predominantly the double headquarter or you know Sterling's legacy headquarters or you know could you just frame for us what the corporate square Footages and you know how much in the way of cost savings just from that.

Yeah, I think it's around $5 million on an annualized basis and you know it really is not related to either exiting a market or change.

Changing headquarters, where actually we have more people in our Waterbury headquarters than we did before we moved our official headquarters are and where kind of we kind of you know.

Rejiggering, where everybody is we have multiple locations in New York that will consolidate we've got Oh in terms of the overlap between the two banks and then it's really just reduction in square footage and a lot of our markets in terms of taking less space in an existing building or moving to a more efficient building because of the future of work because we have a high.

The bride model going forward.

Because we're using a kind of a campus model where people are going into different offices and we also a lot of our call center activities, Matt We can where we're in the process one of the things we're trying to do it from an efficiency perspective, we have basically working through an HSA back a call center a legacy Sterling call Center.

Unlike legacy Webster call Center, and even before the merger all of those call centers have started to move significantly remote which is an industry trend. So we're also able to reduce sort of big footprint office space housing call centers over time.

Great well I appreciate it. Thank you that's all I had.

Yes.

As a reminder, star one on your telephone keypad, if he would like to ask a question. Our next question is from Laurie Hunsicker with Compass.

Compass point. Please proceed.

Yeah, Hey, good morning.

I Wonder if I wanted to go back to <unk> question on E. S. P I.

Yep Yep.

What what is the actual dollar.

Oh, Yeah, I realize you're 8.177 billion of equity.

So it was to our after tax loss of 245 million unrealized loss.

And the way I would look at it Laurie, but I would just reiterate I mean, because there's a lot of talk about this and I'm not sure that word is concerned as maybe some of you are where we're coming from a tangible common equity spot of $8 two 6% for every for every hundred basis point immediate shock to the curb 100 basis point you can expect it would.

The impact of tangible common equity ratio by 40 basis points. So if you put that in perspective, you've got a 300 basis point rate shock 300 basis points shot. Your you would still be above 7% on your tangible common equity ratio. So I think you know I understand the concerns and I understand that where you know the talk about it but we're not.

We're not as concerned about it to be honest with you and from an economic perspective, obviously that you have that rate increase on the revenue side would help us significantly.

Okay, Yeah, I hear you.

No I hear you your deposits, obviously just became more valuable it's only marking one tiny piece, but obviously, we follow it because they look at tangible book.

I just wanted to get clarity on that I'm on a on net interest margin net interest income and appreciate all the slides and the clarity you have Kevin I just wanted to make sure that I got this right that your your guide on accretion income for the full year of $73 5 million of which.

36 million was in the first quarter.

Dropping to $18 3 million in the second quarter did I hear that right you did and so this is this is this is these are this is this is spread out based on scheduled based on contractual.

Or are things that you know the loan if there's prepayments and stuff like that so there will be lumpiness. In this you can expect that that's for sure.

Yeah, absolutely I appreciate the guide okay.

Putting that together and again it was 29 basis points on your headline margin this quarter next quarter.

Dropped to 11 basis points on your margin.

Is that right, okay, no that did that.

Reconciled.

Extrapolating menu or $9 million to $10 million or you're falling to nine to 10 million or so.

A corner you know by the third and fourth quarters, but then that's going to be a six basis point or.

Right Okay.

Think about the fourth quarter. So let me just I think by the fourth quarter of my calculation is it's probably about 12 basis points and accretion.

So as I said somewhere between 10 and 12.

Somewhere between Okay. That's super helpful. Okay, and then P. P. P fees what was what was that this quarter in terms of dollar amount of net interest income.

So it was a five point plan.

Paul.

Yeah.

$5 1 million.

Okay, and you know how much you've got a meeting.

$84 million less in balances, which will run off probably just even in the second quarter. So we should be through it all by that.

Okay. So you would probably have just about a million or two left the P. P. P fees that yet right.

It's very small very small right.

Okay, and then on fee income can you talk to us a little bit about Wow here two questions first just specifically on Bali.

I was looking at that and.

Sterling, It's got a higher bully then yeah. It was there was there some sort of drop.

Pharma, where there's some sort of motto thing like that.

No no no there's no there's no mark there I don't.

If youre looking at.

Should not see a change I mean, we there's no adjustments okay.

Okay. Okay, great and then on fee income do you need to come in a little bit about N. S. F. O D C. How much that was in the corner how you're approaching.

I'm more customer friendly changes to that when we could see timing and when we could see that maybe impact the noninterest income line.

Sure lore, I mean like the rest of the industry. Obviously, we're working as we combine the two bags and integration on harmonizing product set so we're actually working on creating a product that obviously consumer friendly meets consumer needs and is consistent with everyone else in the industry I would say it will not have an impact in 2022.

The other important thing to recognize is that our total aggregate Oh D fees are less than 1% of revenue.

So less than $20 million across the two organizations and so I think you'll see that go down over time, as we rollout new products, but it won't have a material impact on our financial performance and it won't have really any impact on our financial performance in 2022.

Oh boy.

Let me just double back on something because I I may have mis understood. Your question on where you're looking at the income statement.

From our press release, because that would only have.

Two months at Sterling and at that could right.

So that's yeah, Okay I didn't I missed I thought you were looking at the balance sheet.

No I was looking at the income say you know what maybe I, maybe I grabbed Israeli number wrong I'll go back and look at that okay. Okay.

And then on untapped under O D. NSF fees I, just wanted to make sure I heard that right. So that's that's running on a combined basis for both of you in about $20 million annually is that right.

Aggregate.

In aggregate, Okay perfect Great and then just one last question for me.

That's a small obviously your credit is looking so great.

Your your growth commercial charge offs right, it's not that of 11.2 million when such a jump from last quarter and from what its been running you know last quarter. It was 800000 with most of that Sterling or was some of that vintage Webster anything one specific any any color around that.

Yeah Laurie.

I just don't talk specifically about that it was one credit Ah Ah Yeah, I will say it was legacy Webster and it was one commercial credit that made up the vast majority of that of that charge.

With no no no no other interesting aspects of correlation in it.

Okay, Great and then just sorry, one last question here.

Sterling multifamily book can you just give us a little bit of color around that a little repress. It gets around 4 billion if anything you've got an L. T. B's if you could remind us less rent control like your plans or just any color around that would be helpful. Thank you yeah. That's about it. Thank you Laurie it's about.

$3 9 billion. It has a weighted average LTV at origination of 54% in AR.

Debt service coverage ratio on average of about 1.56% performing very.

Very well and generating economic profit. So I don't think there are any strategic changes are obviously, where we're.

Where we actually have a nice business, there and will continue to originate where we're opportunistic.

Thank you you have.

Do you have how much is rent control there.

I don't I'll, let everyone get back to you I'd go back with you.

Okay.

And on that topic.

Yep. Thank you.

And our final question is from John Armstrong with RBC capital markets. Please proceed.

Hey, Thanks for squeezing me in.

I have a couple I only have a couple of questions.

But the growth rate, you're talking about Germany, 8% to 10% how much of that do you think is environmental.

Versus kind of a long term potential of the company.

Over the next couple of years I guess my question is can we see this kind of growth rate for a couple of years from the company.

That's a great question and I'm not.

It made me simplistic because for those of you who followed us.

I I tried to fundamentally believe that we've got enough levers enough geographic.

The opportunities are.

A bunch of interesting business niches in verticals that historically, we've been able to grow commercial loans, which now make up the predominant portion.

Portion of the balance sheet at roughly 10% CAGR and it's been about six or seven years, obviously in any one given quarter as you saw mortgage warehouse have an impact on the annualized growth rate in the first quarter that could change but.

Particularly this quarter on a bigger base this year we've.

We felt like all of those things remain true all of the levers, we can pull without having to push on risk.

And we have the benefit as I mentioned in my script in earlier, the bigger balance sheet to at least in the short term kind of accelerate some growth through single point exposures going forward, obviously as the balance sheet gets bigger market conditions dictate it may get more challenging, but I still think and you know if my head of commercial banking this year, Chris Motor right now we'd probably.

We smile is that we try and say to ourselves how are we going to get too close to double digits high single digits loan growth on an annualized basis. So my guess is with what we have with the teams. We think we can attract with the various businesses. We have been in my mind at least as the leader of the company, we're kind of targeting 10% commercial loan growth now sometimes.

You know on mortgage and some of the other consumer categories, which are less that's not a realistic expectation because the market's just won't allow it which could drag down overall loan growth, but I still think 8% to 10% shouldn't be our bogey in a normalized economic environment as we move forward.

Okay. Good.

And then the last one it's it's it's a real question kind of a soft question, but maybe a good way to end the call, but you talked about the.

Culture shaping off site.

And I'm just curious what you've learned from that you know what do you guys need to work on it and that's serious what do you need to work on and then what's gone well so far from those activities.

Yeah. It's a great question I think it's the it's the hardest thing and it's it's I'm I couldn't be more pleased and I say that I would I would be more guarded if I. If I wasn't I mentioned on a couple of non deal Road shows you you know you you're in a situation where it sucked a I know that technical term it sucks.

Wait for for four months from our originally anticipated close date, but I think if you asked any of the executives are or level, two or level three folks across the organization what the silver lining was it was the fact that we had four more months.

To work together in terms of planning a meeting in figuring out each other and building trust and so I think that actually helped we hit the ground running <unk> been really pleased there's no question about the fact that it'll take time to make sure that you get rid of the us versus them or people are still referring to things like legacy Webster and legacy Sterling, but.

I have to tell you that we've really coalesced around what it means to be a webster banker about the behaviors. We expect when we went in and I don't want to get too granular, but when we went into the the sort of culture.

Practice as a leadership team we realized that while we believe that you know all of these values were what we wanted to do we have different definitions of what those behaviors where different expectations and so we spend a lot of time, saying, we really need to be careful about making sure. We're all on the same page. We all understand what we're trying to accomplish we all understand the bank's mission and purpose and.

We've come together really really solidly half my direct reports are.

From each of the of the legacy banks and I think we're operating as well as either back was operating before from a trust and collaborative perspective, So we'll keep working at reinforcing it but I couldn't be more pleased with where we are 90 days into this project.

Okay. Thanks, a lot guys. Thank you.

This does conclude our question and answer session I would like to turn the conference back over to management for closing comments.

Yeah, I just want to thank everybody for their participation and continued interest and support of the company and hope everybody has a great day.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

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