Q2 2022 Webster Financial Corp Earnings Call
Good morning, welcome to the Webster Financial Corporation second quarter 2022 earnings call. Please note. This event is being recorded all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question. Please press star one again comments made by Webster Financial's management team May include forward looking statements within the meaning of the private Securities litigation.
Asian Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward loss Glamour and Safe Harbor language in today's press release and presentation for more information about the 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 the Webster Bank Dot com.
I'll now turn the call over to Webster Financial's, Chief Executive Officer, John Taylor Mr. Sheila. Please go ahead.
Thank you Chantelle and good morning, and thank you for joining us for our second quarter earnings call I am excited to be speaking with you. This morning on our quarterly results as I think they are a great illustration of the potential of our company the quality of our execution. The team we've put together and our colleagues focus and dedication as we progressed through the integration.
Im going to start with a high level overview of our financial performance in the quarter review the progress of our integration and other strategic initiatives and then I'll turn it over to Glenn for a review of the quarter's results and the outlook I'll wrap it up at the end with a few additional comments, including some perspectives on the uncertain macroeconomic environment I'm on slide two.
As I mentioned, just a moment ago in the second quarter is a great reflection of Webster's potential the earnings power of our New company is materializing in the first full quarter. Following the close of our merger with Sterling, we exhibited strong and diverse loan growth the quality of our core deposit franchise led by HSA Bank and our consumer banking team with.
A rising rate environment, and we've maintained an advantageous capital position.
On an adjusted basis, eliminating onetime merger related costs, we generated EPS of $1 29, with a return on assets of 141% and a return on tangible common equity of 18, 5% our efficiency ratio was 45% as we continue to execute on the synergies.
Our merger provide and leverage the diverse competencies of our company.
Our loans and total assets grew four 8% and three 8% respectively in the quarter loan growth was generated across broad industry sectors business lines geographies and asset classes and our asset quality metrics remained favorable with expanded geography, and a growing number of industry verticals are talented.
Colleagues can continue to safely and prudently grow loans.
The rationale behind this merger of equals was and is relatively straightforward as Ive stated several times, we have created a company with an incredibly diverse funding profile, including our HSA Bank franchise, we have a proven track record of growing loans across a broad set of asset classes and geographies at or above market growth.
Rates.
With a bigger balance sheet to deepen our relationships with existing sponsors and businesses, we materially improve our ability to drive net interest income capital markets revenue and swap in cash management fees.
In <unk>, we saw early proof points validating the power of combining the two companies.
On slide three while we continue to achieve key milestones in the integration. Our colleagues also remain laser focused on our clients and maintaining the day to day operations of the bank and revenue momentum our ability to do bolt was evident in this quarter.
We remain confident in our ability to achieve or exceed the key merger financial metrics, we set forth at deal announcement over a year ago, including a 10% annual loan growth of $120 million in expense saves over the first two years and completion of our technology conversion by mid 2023.
While we continue to manage expenses and look for synergistic opportunities. We remain focused on profitable growth and we will not shy away from investments in our differentiated high return businesses that will add franchise value and economic profit over time.
We continue to see opportunities to attract key talent and launch initiatives across all of our high performing business lines.
In the second quarter, we began to consolidate several back office systems, including mortgage mortgage servicing Treasury management and payroll, we finalize the structure of our executive management team and we're making great progress on our corporate office consolidations, we outlined last quarter.
Finally, given our increased scale, we have been able to formally established an office of corporate responsibility to oversee the company's community investment.
After IP efforts and sustainability work collectively we have the ability to provide more for our communities in the quarter, We announced a $6 5 billion three year community investment program that includes investments in affordable housing and community development small business lending and other philanthropic and community engagement efforts.
With that I'm going to turn it over to Glenn to review, our financial performance for the quarter.
Thanks, John and good morning, everyone I will start with a reconciliation of core earnings on slide four.
We reported GAAP net income to common shareholders of 178 million with EPS of $1 as John noted on an adjusted basis, We reported net income to common shareholders of 229 million and EPS of $1 29, which excluded one time after tax expenses of $50 million, the one time charges or.
Related to real estate consolidation severance and other merger and integration charges.
Next I'll review the balance sheet trends before moving on to the income statements.
On slide five our total assets were $67 6 billion with total loans of $45 6 billion and total deposits of $53 1 billion.
As you see we delivered strong loan growth on a quarter over quarter basis, and commercial and consumer categories.
The linked quarter decline in deposits was primarily due to a seasonal effect of public funds, which I'll cover in more detail on a later slide.
On slide six we highlight the diversity of our loan growth, which is an illustration of the potential of Webster's post merger business mix in total we grew loans $2 1 billion or four 8% on a linked quarter basis.
By category the largest contributors to the increase were C&I with 603 million commercial real.
Real estate with $557 million and residential mortgages with $426 million.
Switching to deposits on slide seven total deposit balances declined by $1 3 billion or two 4% relative to prior quarter. The primary driver was a seasonal decline in public funds with balances down $1 2 billion, we expect to see a reversal in the third quarter as tax collections drive higher liquidity.
Public entities short term borrowings were leverage to fund growth in the quarter a portion of the borrowings will be paid down as public funds rebuild and we continue to gather new deposits Hs.
HSA deposits were effectively flat on a quarter and up six 2% year over year, Excluding third party administrative accounts deposits increased eight 4% year over year the impact of Tpa run off on an overall growth is becoming much less significant as that book mirrors, an end state additional detail for the HSA Bank.
On slide 19 in the appendix.
Beginning on slide eight I'll review the details of our income statement, we provided our reported to adjusted income statement by line item and compare to our adjusted earnings to pro forma first quarter earnings, notably on an adjusted basis each of the major line items of our income statement exhibited improvement on a quarter over quarter basis when <unk>.
Fair to the aggregated results of Sterling and Webster last quarter I'll cover the individual line items in more detail in subsequent slides our pre provision net revenue on adjusted basis was 316 million up 39 million when compared to the combined first quarter results net interest margin was $3 two 8% on a reported basis.
Our combined efficiency ratio is now 45%.
On slide nine net interest income grew by $22 8 million relative to the pro forma first quarter adjusting for accretion in both periods net interest income was up $29 9 million quarter over quarter net.
Net interest margin, excluding accretion income increased 11 basis points to three 9%.
Given the current forward curve, we expect further expansion to our core net interest margin throughout the year.
As illustrated on an earlier slide the cost of deposits increased two basis points quarter over quarter, we expect deposit pricing in certain categories will start to move more materially in the future quarters with subsequent fed actions on a year over year basis deposit costs were flat.
On slide 10, we show our fee income for the quarter and on a year over year basis fees were up $6 million linked quarter and $18 million year over year. The improvement in fee income was driven primarily by customer interest rate hedging activity in the commercial bank year over year improvement was also driven by increased deposit related fees as transaction activity.
Increased relative to pandemic impacted periods.
Slide 11 summarizes noninterest expense, we reported adjusted expense of $292 million relative to $302 million on an adjusted pro forma expense last quarter. The decline is driven by the initiatives John outlined in his integration update including the Finalization of the org structure corporate real estate consolidation.
And the elimination of duplicate systems and vendors.
Slide 12 highlights our allowance for credit losses, where we recorded a provision expense of $12 million and a $2 million increase in our allowance driven by loan growth the.
The provision expense also reflects an improvement in individual credit performance and loan mix, which was partially offset by a modestly lower outlook on macroeconomic variables. As a result, the allowance coverage ratio fell as a percent of loans to 125%.
As highlighted on slide 13, you can see the underlying credit metrics remained strong we reported linked quarter declines in both nonperforming assets and classified loans down $1 million at $41 million respectively.
I would also note our delinquencies declined to $52 million from $71 million last quarter.
Net charge offs of nine basis points declined one basis point from last quarter and remain at low levels.
Slide 14 highlights our strong capital levels, all capital ratios remain well in excess of regulatory and internal targets.
System with our previously stated capital targets, we repurchased over 2 million shares in the quarter and will continue to be opportunistic with repurchases going forward.
The net of all capital effects. This quarter resulted in a slight decline in our tangible book value per share which decreased to $28 31.
Primarily driven by OCI losses, the share repurchases, partially offset by our strong earnings.
Our common equity tier one ratio remains strong at 11, 4% is still well above our minimum term operating target of 10, 5%.
We anticipate we will prudently and Opportunistically return capital to shareholders, given the strong internal capital generation from improving profitability sound underwriting credit metrics and the ample reserve on our marked in wealth diligence loan portfolio.
I'll wrap up my comments with a refresh on our outlook for the full year 2022, we are increasing our guidance on net interest income to $1 9 billion driven by our projections for the rate environment and strong loan growth. This full year outlook excludes $90 million of realized and scheduled purchase accounting accretion the.
<unk> of which can be found on slide 28 in the appendix.
Our projections assume a fed funds rate ended the year at 325%, implying another 150 basis points of rate increases and as a reminder, our interest income outlook is on a non FTE basis.
We now expect loan growth to be near the top end of our 8% to 10% range, we should be in the range of $430 million to $450 million.
We continue to feel confident in achieving our full year adjusted expense target of one one to $1. One 2 billion that gain said, we will continue to monitor inflationary headwinds and of course continue to invest in our businesses and we are forecasting an effective tax rate of 23% to 24%.
With that I'll turn things back over to John for closing remarks, Thanks Glenn.
Five months after closing our merger we've made material progress, while we have a ton of work in front of us bringing systems products and processes. Together, we are operating as one organization and the strategic merits in bringing the two companies together is reflected in our accomplishments. So far this year, we've created a bank with growth capabilities and unique asset class.
Our commercial loan portfolio is growing 12% year to date on an annualized basis, we are a bank with a unique funding engine our deposit costs increased two basis points. This quarter at the same time. The fed is increasing short term rates at a fast pace, we've created a bank with superior capital generation capability. The adjusted return on tangible.
And equity of over 18% this quarter illustrates the potential we have to deliver outsized returns and we have repurchased over $200 million in western shares since the transaction close all while maintaining capital levels that provide us with significant flexibility as we move forward.
Finally, I do want to address the operating environment and our preparedness as many of our peers have remarked things feel good on the ground today, despite tangible macro headwinds and an increased risk of recession, we have maintained a consistent and prudent risk management framework that will serve us well in any economic environment.
Specifically as it relates to credit our loan portfolio is diverse with the merger actually serving to eliminate concentrations in asset classes businesses and geographies.
Very pleased with how quickly we've been able to consolidate and harmonized portfolio management practices across the new organization and in fact, we plan to consolidate our credit risk management Tech platform in the third quarter.
We have a robust allowance for loan losses with coverage in the top quartile of our peer proxy proxy peer group, we have benefited from internal and third party diligence on our loan portfolio associated with merger work last year, we incurred purchase accounting marks on the loan book, we have significant buffers in our capital ratios well above regulatory minimums.
And our company should continue to generate substantial excess capital moving forward. We believe that this provides us significant flexibility to adapt to the constantly changing operating environment.
In short, we believe our strengths position the company to operate through macro cycles and generate solid returns to shareholders in both the near and long term.
We believe this was a very strong quarter for Webster and it's a direct result of the hard work and great execution of our colleagues all during the challenging process of integrating an MRI.
I want to give a big thanks to all of our colleagues and their tremendous efforts operator, Glenn and I will now take questions.
At this time I would like to remind everyone in order to ask a question press Star one we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Chris Mcgratty with Keefe Bruyette <unk> Woods. Your line is open.
Hey, good morning.
Christian.
Glen maybe start with you on just the balance sheet I appreciate the comments on the public funds I guess the trend that we've noticed and then we've all noticed this quarter is just the challenge of growing deposits.
I'm interested in kind of outlook commentary about retention of deposits, what you might see in the portfolio that could be at risk and how we should be thinking about funding this improved growth yes.
Yes, Greg Good question, Chris So here's how we're thinking about it. So we're at 50 253 to a $1 billion in deposits. We mentioned the public funds, which about $1 billion to we think thats been of that seasonality. So that'll come back to us, but as we talked about in the past I mean, we have multiple levers to pull on the funding side, whether it's digital or.
Our commercial and so we think that we'll begin to attract new funds in those two channels and some of that will be partially off if you look at things like our DDA balances are presented total total deposits are elevated because of all the liquidity. So we're factoring some of that coming down but at the end of the day, we think.
If you put it all together, we're still targeting our loan to deposit ratio somewhere around 85%.
Okay.
Okay.
And in terms of the investment portfolio.
And fair to assume that kind of gradually works lower as you kind of buy more profitable way.
Yes, so at 15 at $15 billion is about 25%.
Our earning assets and so over time over the course of time primarily through.
Prepayments and cash flow.
That will probably drift down to like a 20% level, but thats probably going to take.
Some some time to get there.
Okay.
Maybe just the last one and I'll hop back.
The debate is can you just remind me what youre assuming for through the cycle betas.
On the combined company.
So look I think over the next four quarters. We would think are effective data on a full full deposit base would be closer to 30%.
And that debt.
That takes into effect. The fact that we are capturing new deposits from the various channels that we have so that's how we're thinking of it.
Youll recall last quarter, we were about 21%, we now have another quarter underneath us and so we're thinking that over a four quarter.
Process, probably closer to 30%.
Okay. Thank you.
Thanks, Chris.
Our next question comes from Mark Fitzgibbon with Piper Sandler Your line is open.
Hey, guys good morning.
Hey, Mark how are you doing.
Good. Thanks, I was wondering if you could first share with us your commercial line utilization rates, what those look like right now.
Yes, they are improving.
<unk> show up.
And in March they were up about 2% in June they were up about 8%. So we're seeing from June from last year, and they're up about 8% from the prior quarter. They are up about 3%. So we're seeing that across the board I think thats kind of consistent with industry.
And we're seeing it in ABL, where we kind of see the best sign of working capital changes.
Okay, and then secondly, John we saw a small HSA book gets sold to a competitor recently I'm curious if these kinds of deals continue to be a priority for Webster.
Hi.
Whether you think.
It's likely in the quarters ahead, we will see some more of these kinds of transactions.
Yes, Mark I think that's a great question and we've been pretty transparent about it obviously as a top five player in the top five owned 65% of the market. We obviously see all the transactions b the pricing and the value on many of these transactions are are pretty steep so I would say, yes, it's a priority to US you saw us do to bend.
Acquisition, which was a combination of our portfolio and technology that we can lever, but we're also trying to be disciplined with respect to tangible book value dilution.
And balancing that against the cost of acquiring other deposit. So the answer is yes. It is a significant priority.
<unk> seen deals go off in the market and pricing has generally been.
The reason, we haven't won some of those transactions.
Okay, and then lastly, I'm wondering if you could talk a little bit about your franchise footprint, and maybe which geographies you see as having the best growth potential.
<unk>, maybe areas, where you might look to prune.
Yes, sure market, it's always sounds like a punch answer, but the truth is I felt this quarter was really really evident of all levers kind of working at the same time and so you think about the concentrations legacy Sterling in New York City sponsor and specialty at Webster commercial real estate.
In some areas and so this was a broad quarter of loan growth and we're seeing strength in activity in all areas. So what I would say is geographically.
In our.
Core retail footprint core middle market footprint and more of our regional businesses like commercial real estate or even national businesses like public sector finance, our sponsor and specialty we see real opportunity and we don't see any geographic areas, where we're concerned we're looking to pull back I would say, it's more in the asset classes, where we're being a little bit more.
Careful cyclical businesses businesses that are potentially at risk to higher energy prices cyclicality supply chain disruption office REIT, we're obviously looking keenly as to whether or not theres, a real paradigm shift going on there with the way people work. So I would say it's more industry.
Sector more borrower specific than any geography in right now besides a couple of those areas, where we're keeping an eye on and probably reducing new origination.
In office and some of the more cyclical businesses all of our geographies are still robust and healthy.
Thank you.
Thanks Mark.
Our next question comes from Steven Alexopoulos with Jpmorgan. Your line is open.
Hey, good morning, everyone.
Morning, Steve.
I wanted to first.
A follow up on Chris's question on the deposit side. So Glenn you pointed to 85% loan to deposit ratio target you're basically there can you give more color on your ability to generate low cost deposits right Youre, saying you have a more diverse deposit base, which is fine, but which category should we expect going forward to support.
And fund loan growth.
Yes, so I think it's a mixed Steven.
So you get some of the texture, we've gone from like a loan to deposit ratio of $80 to 86% this quarter and about four 4% of that was driven by the loan growth, 2% from the decline in municipal deposits or public funds and we do expect that to come back in pretty strong.
Part of the year.
I think the key channels for us are going to be on digital and are going to be in the commercial business, whether it's treasury management or whether it's transactional type of accounts, we will have the natural over the course of the four quarters, we will have HSA coming into as we get into the enrollment season, and so I have a lot of cost is coming in from the multiple channels, but I also have an offset.
In DDA, because I think it's sort of elevated right now with the combination of all those I think is what's going to bring us to that 85% loan to deposit ratio that being said as you can see from the first quarter. I mean, we did raise or increased our what we think are forecasted deposit beta is going to be over four quarters. So now where we thought last quarter was going to be.
21%, we're starting to see things heat up a little bit more but that doesn't mean that this is an inexpensive source of funding on the deposit side, but we've moved that 'twenty one closer to 30 over a four quarter cycle. So that's how we're thinking about it right now and.
It's all to fund the loan growth, which we feel as you saw in this quarter, we feel really confident about where we are operating at the top end of our of our stated range, Steve I'll, just put context from a business perspective as well.
As Glenn mentioned, the vast majority of the reduction in deposits was seasonal outflows.
Public sector and.
In government deposits, we're adding as you can see four 8% loan growth also a lot of new new logos a lot of new companies a lot of new relationships in business banking and commercial and in our we really require our teams out there to make sure those are full relationships with deposits and cash management, so youll see more deposits roll.
And have a natural growth in commercial because of the number of relationships, maybe not because of what's going on in the macro environment from a liquidity perspective, but.
Chris models out there right now making sure that these folks are focused on deposits and we can refine our pricing a bit to make sure that we're able to continue to raise deposits and the last thing I would add Steve is that our investment portfolio. As you know is elevated right now 25%. We think there's more natural level of foreign investment portfolio, it's probably closer to 20%.
So as we get the cash flow out of the investment portfolio, which is running about $3 50 a quarter.
That's going to go into the fund the loan growth as well and so that there'll be some funding to come off but we're basically picking up 140 150 basis points on that trade is it is it flows Lawrence's global the loan book.
Okay. That's helpful.
I wanted to shift direction talk about HSA bank for a minute. So if I look at the year over year growth metrics. This basically went from one of your fastest growing segment not the fastest growing segment to one of the slowest even after I adjust for the third party administration stuff.
How much of the down shift do you see as structural versus cyclical and whats the environment, we need to transform as it again into a growth engine for the company.
I think that's a great question, Steve and you know that we're focused on it because we think it's a terrific asset. So I think if you cut through we're really pleased with the performance in terms of on the ground execution in winning Rfps and going after direct to employer relationships and the data that we show says that we do a really good job, they're kind of at market.
Some of our bigger relationships with health care providers have grown a little bit slower than market. So the net result of all of that is the whole.
Market. The HSA industry has slowed obviously from kind of that 20% growth rate more towards high single digits low low teens, and we're been trailing that by a couple of percentage points given the mix of our business. So.
It has slowed I think the drivers are much more industry wide and we obviously growing deposits at eight 8% year over year, it's still a wonderful thing, particularly with the characteristics of long duration and low cost nature of those deposits. So what are the things we're doing Steve the <unk> acquisition.
We are right now integrating that technology with our own customer portal and we're rolling that out to clients as we speak over the next six months and in beta testing our customers and our employees have really liked that we think that will increase participation and increased funding amounts, it's providing a great digital experience and education.
Through our existing 3 million plus account holders about why we should be savers, and not vendors and we think that there'll be a material uplift in average deposit. So we're kind of working everything we're working transparency tools products, we're working better technology experience, we're focused on sales and so our goal is.
To be able to come into market and say, we are growing at at at market rates and as it relates to the market. We do think coming out of the pandemic that will see a strengthening of that kind of market industry growth rate as well. So we want to make sure when that happens that we can be a strong participant.
Okay.
That's helpful and if I can ask one final one John Big Picture question talk to us about how the integration of the two two cultures is going what's gone well what needs more attention and I know you haven't done the system conversion, yet, but how is the customer experience spend thus far thanks.
Sure I'll start with your last question the customer experience has been really really good because we haven't disrupted anything really from an operational perspective. So.
This deal was so complementary all of our frontline folks are here all of our customers are dealing with the same people that we're dealing with and I think thats. One of the reasons, we were able to kind of beat market growth on loans, so customer experience. So far good one of the reasons why we are having our technology conversion and mid two.
'twenty three is because we are determined not to disrupt our customers and I think thats why were taking a slower and more deliberate approach as it relates to culture. If I sat here right now five months after closing of the transaction.
Give us kind of in a a minus and I'm really happy I can't believe we would be better off with respect to alignment at the top with the management team. The way were cascading messaging down all that being said in his heart and so the idea of making sure that every last one of our 4000 cars.
<unk> feels as if they are part of one singular team takes a lot of hard work a lot of purposeful training, but it also takes time and so I'd be lying to you. If I told you that if you walked around our entire organization everyone would feel like this was the place they worked into the last 20 years. So we're working really hard at that and so.
<unk> worked really well we've got great alignment people are executing our risk framework has great relationships with our regulators are great.
We have not seen attrition in key areas. So.
I couldnt be more pleased but I'm also I don't have my head in the sand and I know that it's a long road to get to the perfect spot.
Great. Thanks for all taking all my questions.
Thanks, Steve.
Yes.
Our next question comes from Matthew Breese with Stephens. Your line is open.
Good morning.
Hey, Matt.
Just thinking about the loan growth guide versus what you've already accomplished year to date.
Is the 8% to 10% growth range is that a safe annualized rate from here or should we incorporate the D D.
This amount of growth you've already seen.
I mean, we're looking at is incorporating the growth I am not sure. We can put up another four 8% organic growth rate. So look Glenn Glenn guided to the high end of that range. There is a chance we could outperform it if the environment stays.
Our strong the reason, we always talk about that 8% to 10% and we go back and forth on people, telling us will never make it and then telling us its too much and then figuring out whether or not we're going to go above that is I think we've been able to sustainably sustainably grow our loans, particularly on the commercial side and how we're getting good traction on the consumer.
<unk> side as well in that 8% to 10% range. So I think what you can do.
Matt as is.
Push that out into 'twenty, three as well so I think.
We're looking every quarter to try and posted 8% to 10% annualized growth rate, some quarters will be higher and lower depending on prepayments and certain origination characteristics, but.
We're not we're not we're.
We're not saying, we're going to grow loans another 10% in the next six months.
Saying that we're sticking to our intent to 10% loan growth range for the year, but obviously, we have an opportunity to be at the high end of the range Youre outperform understood and then is your the way the pipeline looks does it seem like growth can be as diverse as it was this quarter.
It does right now and I tried to say that with a smile.
I'm thrilled because it appears that the teams across this franchise in the different asset classes have a lot of energy and their pipelines are healthy and I think we're being really disciplined Matt on on.
Risk selection as well I think we're understanding pockets of asset classes that could be vulnerable to a downturn and I think we're being disciplined and making sure we're not reaching too far stronger volume in any one area. So we still see broad broad growth, we had broad growth in commercial real.
A middle market sponsor and specialty public sector finance, ABL and all of our mortgage and consumer lending all really kind of in that.
4% plus area. So it was really nice to see the granular growth.
Great.
I was hoping you could talk a little bit about the banking as a service effort at Webster and what was brought over from legacy Sterling what that entails curious your amount of deposits. It's important to the overall funding effort and the outlook for growth I guess I didn't fully appreciate how important that was towards the end days or Sterling and I'm curious if that's going to be one of the primary drivers of deposit growth as we head deeper into this.
Rate hiking cycle.
Yes, that's a great question and as you can tell probably from Glenn earlier response on deposits, we are not sort of factoring that in as a major driver in the next couple of quarters, Although we do see a clear path to $1 billion pipeline in that area of relatively low cost deposits with existing relationships that we're working.
So what I'd say is that's kind of gravy on our play is what we believe to be a another strategic lever that hopefully will kind of have operational for a period of time and so I think that.
What we're saying is.
It's not a major driver of deposit growth over the next quarter or two.
But it could be significant.
Okay, and then my last one I noticed that ABL npa's increased a bit quarter over quarter. It looks like some of the transition from 30 to 89 day, obviously, not a huge number but I am focused on equipment lending near term is an area that could see some stress across the industry. So I was just curious could you give us some background on the combined equipment booked your exposures the types of.
Equipment underwrite historical losses.
And then just just an overall sense for how that book is shaping up from.
From a stress perspective in this environment.
Yes, I think we're not too concerned right now because we've got pretty good collateral coverage.
It's an interesting bringing these two equipment finance businesses together there is.
Almost everything there Matt <unk>.
Theres granular low ticket stuff Thats volume base, there's also participations in larger banks larger transactions an equipment finance. So I think some more cyclical businesses as you can imagine there is nothing in there from a from a kind of a systemic perspective that scares us with respect to kind of credit <unk>.
<unk> right now and as you can see we really havent grown the business, we're kind of putting over a new framework.
On how we're going to attack the market and we've kind of been slowly trying to build back up originations in profitable and granular areas. So all I can say right now it hasn't been a big driver of growth, we're not particularly concerned given the collateralized nature of the business and kind of outsized loss in the portfolio.
More and more to come on kind of strategically how we move forward with that combined business.
Great I appreciate you taking my questions. Thank you.
Great. Thank you.
Again, if he would like to ask a question press Star One. Our next question comes from Laurie Hunsicker with Compass point. Your line is open.
Hey, Hi, Thanks, Glenn and John Good morning question.
And then sort of a bigger question is if we could stay on credit here can you give us a refresh on your leverage loan book and then how much of that is isn't that uncertainty sponsor and specialty areas just with respect to balance credit charge offs and more importantly, with the warning signals starting to flat how youre thinking about that.
And just remind us how it's different breakfast, where you sat during the GSA.
How much time do we have no I'm only kidding good good question.
So I'll give you the kind of the fun facts. So our leveraged loans end of period balances were around $3 billion, representing six 5% of total loans and about 8% of commercial loans as of June 30, which is roughly in line from a percentage.
Aspect is with what it has historically been and as you know and we talked about the merger one of the wonderful things as it reduced the overall cost.
Centralia in the numbers with a bigger balance sheet and bigger months I will tell you that the portfolio of leveraged loans is about 85% to 90% in the sponsor and specialty world, which is good news because it's in industries and sectors that have repeatable protector, both sustainable cash flows those are.
And infrastructure health care services.
Stuff that we've been doing for a long time with sponsors we've known for 15 or 20 years the portfolio continues to perform.
At or around the overall performance level of the rest of the commercial bank, which has been the case through both the great recession and the pandemic there is a little bit more volatility in the risk ratings in the leverage book, because obviously those risk ratings start a little bit lower and with leverage there can be a little more.
Variability in risk ratings, however, the strength of the financial sponsors behind the deals have continued to have that not result in higher levels of non accruals or losses. The other thing I'll say about the bookings it's more granular. So if you think about the leverage loans, making up 8% of the commercial loan book.
They only make up about three 5% of our aggregate exposure in top 100 exposures and names. So if you think about that our leveraged loans tend not to be the highest commitments and single point exposures in the organization and Thats, obviously intentionally so we will keep you posted but so far.
Our premise has worked really well and we've also been disciplined about where we do that activity about the people, who we allow us to do that activity and how much of that activity.
As in the organization as a percentage of tier one capital plus reserves for the overall portfolio.
Great. Thanks, and then do you have what your balance and non performers is relative to that $3 billion backend and.
And what starts off bar and then I just have one more quick follow up.
I don't have those numbers offhand, but little to no loss in that book I know over the last five years, but we can reach back out to worry about that.
Great. Thanks, and then just one last question office can you remind us what is the balance that you have in Opex and how much of that is in New York City.
Sure My question.
Sure we have about $2 $2 billion in office exposure all around if you take five.
555 hundred 50000, 600000 of office medical related office, which has a completely different characteristic you are about down to $1 6 billion or so split half between class a class B and C.
Underwritten at 50% Ltvs, obviously those are at underwriting. So those ltvs is probably moved up a bit depending on what your view of value was there with a one seven times average debt service coverage about $522 million of that exposure is in New York City in the five boroughs.
If you take out medical office again.
<unk> $400 million in traditional office in the five boroughs.
And it is performing from a classified watch and worse than nonperformer similar to the office exposure.
Across the rest of our footprint, which I would say is slightly worse than the overall commercial weighted average risk rating in levels of classified and criticized so that's where we are it's a relatively small portion and we spend a lot of time on it as you can imagine the other good news there is we have less than 10% of <unk>.
Rolls rolling off in each of the next two years, which means that there is probably some time before wheel issues. If there really is a permanent paradigm shifts arise and it gives us some time to work on work with the borrowers on those properties.
Great. Thank you.
Thank you.
Sure.
Our next question comes from Brennan Hawken with Polaris Capital Management. Your line is open.
Hi, Good morning, I had a quick question on <unk>.
Just general tone of the portfolio or the behavior borrowers we've heard from some.
Sectors companies that we're speaking to and even some borrowers in the PE space that.
Some of their borrowers are getting very cautious about.
The future of the economy.
To the point, where they're actually trying to sell off some assets to pay down debt.
So I guess the question is are you seeing it seems like Youre going.
Kind of very heavy into the growth mode.
Potentially before a big.
Economic.
Prices I'm, not saying, it's not huge but.
The point is that some borrowers they're out there getting more conservative are you seeing any of that kind of behavior.
Youre borrowing voting item.
Firstly I think in some sectors, we are absolutely and as portfolio managers. We're doing the same thing if we have opportunities because theres still a lot of private liquidity out there to lower areas in our loan book that we think might be vulnerable in the long term, we're taking actions as well. So I don't want you to get the sense that we're not in full preparedness mode.
The potential number of outcomes here is wide our base cases still if there is a recession, it's relatively mild in terms of impact on broad credit, but we obviously know that there could be a worst downturn. So as I said earlier all of our origination we're not we're not pedal down meaning.
That its loan growth at all costs, we're taking care of our borrowers in the geographies and sectors and our existing relationships and opportunities we should but we are trying to avoid.
Like in real estate, where we're cautious in hotel were cautious and really not doing anything in an office right now and so there are property types, we're focused on where our growth is multifamily industrial distribution, which which is still pretty healthy.
In C&I and I'd say, we're really careful about cyclical contractors. We're careful about folks that are exposed to energy costs transportation costs have been significantly impacted by supply chain disruption, so who have been impacted actually by labor shortages and the tight labor market. So what we do is we don't put a blanket on.
Everything and put up the red line or the yellow light, but our credit folks who are just terrific, Jason Soto, our chief credit risk officer, and his team, they're well aware of where there is more vulnerability and it's coming through I think in our in our risk selection, which is why a little bit we're not projecting the same level of loan growth for the balance of the year.
Still think there will be decent loan demand, but we think as we move closer to whatever the cycle is that there'll be less demand because our borrowers will be more cautious until a week.
Terrific detail thanks for that additional commentary because thats, obviously anticipated my follow up as to where the where you're being cautious but thanks. So much I appreciate it thanks, Brian .
Okay.
We have reached the end of the question and answer session I will turn the call back over to John CEO for closing remarks.
Thanks, Sean Tom I really appreciate it thank.
Thank you everyone for joining us this morning, and thank you for your interest in Webster have a great day.
This concludes today's conference call you may now disconnect.
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