Q1 2023 Webster Financial Corporation Earnings Call
Good morning, welcome to Webster financial corporations first quarter 2023 earnings call.
Please note this event is being recorded.
I would now like to introduce Webster's director of Investor Relations and one Harman to introduce the call. Mr. Harman. 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 1095 and are subject to the Safe Harbor rules. Please review the forward looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us.
Presentation accompanying managements remarks can be found on the company's investor relations site at investors about western <unk> Dot com.
Now I'll turn it over to Western financial CDL, John Sheila Thanks, a lot and good morning, and welcome to Webster Financial Corporation's first quarter 2023 earnings call. We appreciate you joining us today I will provide remarks on our high level results and strategic positioning before turning it over to Glenn to cover our financial results in greater detail first.
Quarter of 2023 with a memorable one for the banking industry. Unfortunately highlighted by high profile bank failures that caused dislocation across the system. The good news is that the industry remains fundamentally strong and well capitalized and the near term view is less volatile than a month ago Webster's results in the quarter are reflective of our resilient business model in <unk>.
<unk> environment for banking, we continued to deliver for our clients and in the quarter. We prudently grew loans and core deposits. We generated solid returns in our asset quality profile remained effectively unchanged from the prior quarter on an adjusted basis, we generated EPS of $1 49 in light of the market dislocation and out of an APA.
Fundings of caution, we took actions to augment our balance sheet liquidity, including increasing our cash position and utilizing higher cost funding sources. We also saw a decline in fees as a result of reduced direct investment gains and overall client financing activities among other effects.
Due to these actions and some seasonal factors our <unk> was down six 6% from the prior quarter, our adjusted ROA of 146% was up from 137% a year ago and our return on tangible common equity was a strong 21% up from 17% last year.
Loans grew 2% on a linked quarter basis with a focus on strategic categories with attractive risk profile. Our total deposits were up 2% also on a linked quarter basis with core deposits up 4%.
While it seems like ages ago. Many of you attended our Investor Day on March 2nd just days before the market disruption during that event, we provided a transparent look at our go forward strategies and differentiated businesses with a focus on our unique funding profile and credit and risk management practices, all of which are especially beneficial during <unk>.
<unk> stress and uncertainty.
I'll touch again on some of the points. We made in early March I would encourage you to revisit the investor day presentation and webcast that are posted on our website as we believe the attributes we outlined we will continue to benefit our company and drive outperformance regardless of the operating environment.
Let me spend just a minute on deposit and deposit trends and then provide you with an update on our office portfolio. Two topics that I know are of significant interest I'm on page three.
Our presentation the unique qualities of our deposit franchise remains a core strength of Webster our deposits consist of $24 billion of consumer deposits largely originated in our retail footprint to long tenured clients $8 billion of HSA bank deposits. The entirety of these deposits are individual custom.
<unk> accounts and nearly all are within FDIC insurance coverage limits and as you know HSA deposits are long duration and low cost.
$2 billion of business banking deposits within our commercial bank generally these are smaller dollar and behave similarly to those in the consumer book.
$5 billion of public fund deposits within the commercial bank the majority of which are collateralized with highly predictable behavioral characteristics.
Our remaining commercial deposits of $11 billion are diverse by industry customer type and geography. There are no sector concentrations and these deposits are relatively small balance in nature with an average balance of less than 200000 per account I'll refer you would again, Chris <unk> presentation at Investor Day, where we broke down the multiple.
Multiple deposit generating businesses and our commercial bank franchise, and finally interlink the acquisition of which we completed in the first quarter has already proven to be highly valuable provides readily available core deposit funding. It's almost all FDIC insured deposits and we have access to these funds at a very.
Low cost of acquisition.
In summary between the consumer bank HSA and Interlink, 63% of our total deposit accounts are consumer oriented small balance accounts that are long duration in nature.
The past month in deposit activity highlights the tremendous value of our deposit franchise customer activity within the consumer bank in HSA. It was business as usual throughout the entire quarter and both of these categories grew in Q1.
In mid March within the commercial bank, we saw elevated two way activity for a few days as clients look to diversify their deposit concentrations, but that activity quickly resumed its normal course I would also note that we have opened approximately 500 accounts primarily operating accounts that are in the process of being funded with new commercial depositors since.
The middle of March.
In addition to the strength of our overall deposit franchise, we maintained significant alternate sources of liquidity. This is displayed on slides four as of yesterday, we had $16 billion of immediately available liquidity between cash balances and Undrawn borrowing facility. This represents a 118% of our uninsured and uncollateralized deposits.
We expect this ratio to continue to grow over the short term.
As it relates to credit at Investor Day, Jason Soto, our Chief Credit Officer detailed the quality of our loan portfolio. We are proud of our credit risk framework and our risk selection for many quarters. Our origination efforts have been focused on existing customers and higher rated loans. Our strict underwriting standards include stress testing economic and interest rate sensitivity and.
We continue to perform robust reviews of portfolio segments that are sensitive to environmental trends, we proactively sold loans last year, where we believed it would maximize our economics and help reduce future credit risk. The net result of all of our actions is that the weighted average risk rating in our loan portfolio has improved over the past year each quarter.
<unk> and is unchanged on a linked quarter basis as you will see in our disclosures the level of classified assets in our portfolio has remained stable as well.
On slide five we have refreshed and augmented our disclosures on our office portfolio as you can see our non medical office portfolio represented just two 8% of total loans had a low at origination LTV a strong current and updated debt service coverage ratio profile had limited lease maturities.
And each of the next two years is diversified across geographies and thus far continues to perform well in fact criticized assets have fallen to four 7% of loans from six 6% of loans in the fourth quarter of 'twenty. Two I'll also remind you that the $1 4 billion in office exposure is down 260.
Or 15% from the close of our <unk> as we were proactive in managing this portfolio during 'twenty two and we've originated only a nominal amount of office exposure since the two banks came together a year ago.
With that I'll turn it over to Glenn to review the financial statements in more detail. Thanks.
Thanks, John Good morning, everyone I'll start on slide six with our GAAP and adjusted earnings we reported GAAP net income to common shareholders of $217 million with earnings per share of $1 24 on an adjusted basis. We reported net income to common shareholders of 259 million and EPS of $1 49 after excluding <unk>.
One time after tax expenses of $42 million.
Merger expenses were related to professional fees severance and other compensation related charges and a provision adjustment for acquired unfunded lending commitments. The strategic initiative expenses related to repositioning of our securities portfolio.
Next I'll review balance sheet trends beginning on slide seven.
Total assets were $74 8 billion at period end up $3 6 billion from the fourth quarter as we bolstered our balance sheet liquidity and had $1 2 billion in loan growth or securities balance increased modestly in the quarter as discussed at our Investor Day, we sold $400 million and lower yield securities in January recording a loss on sale.
Proceeds were used to purchase higher yielding securities, resulting in an earn back of less than one year.
The OCI attributed to unrealized losses against our <unk> portfolio improved to $560 million from $631 million last quarter and a steady interest rate environment, we anticipate roughly $85 million of this <unk>.
Back into capital annually.
Loan growth was $1 2 billion driven primarily by commercial banking.
Deposits were up $1 2 billion for quarter and reflective of growth and interlink HSA in our CD portfolio and match our quarterly loan growth.
From quarter end through April 19th deposits have grown another $2 8 billion.
Borrowings increased by $2 3 billion as we enhanced our liquidity position in light of recent market events. Our borrowings included $8 6 billion of <unk> advances.
While we continue to enhance our liquidity profile.
As the rate funding rate environment stabilizes, we anticipate holding more normalized levels of cash while replacing wholesale borrowings with the part deposit funding.
Our capital levels remained strong as evidenced by our common equity tier one ratio of 10, 4% and a tangible common equity ratio of seven 1% and 5% Lastly, we continue to grow tangible book value, which ended the quarter at $29 47 per share.
Loan trends are highlighted on slide eight in total we grew loans by $1 2 billion or two 3% on a linked quarter basis loan growth was diverse by category commercial grew by 540 million commercial real estate grew by $900 million in residential mortgage balances were up modestly.
Yield on our portfolio increased 55 basis points as loan yield outpaced increases in deposit costs, excluding accretion loan yields increased by 56 basis points floating and periodic rate loans remained approximately 60% at quarter end.
We provide additional detail on deposits on slide nine with total deposits up $1 2 billion from prior quarter or two 3%. In addition to growth in interlink, an HSA, we added $370 million in Cds.
Total deposit costs were up 51 basis points to 111 basis points for accumulative cycle to date beta of 24%.
Worth repeating that between consumer HSA and interlink, 63% of our deposits are consumer oriented long duration categories and to a large extent fully FDIC insured.
And our HSA business. The average account balances under 3000 in consumer banking, our average account balance is under 25 and in commercial bank. Our average account balance is under 200000.
On slide 10, you see the forward progression of our deposit beta assumptions, we anticipate our total cycle to date deposit beta will increase to 38% by the first quarter of 2024 with a more significant ramp in the second quarter, followed by fairly steady progression throughout the remainder of the year.
Moving to slide 11, you can see our reported to adjusted income statement compared to the adjusted earnings for the fourth quarter of 2022.
Net interest income was down $7 1 million or one 2% linked quarter, reflecting a shorter day count and our funding mix shift inclusive of the actions to augment our liquidity adjusted fees were down $19 million, while expenses remained effectively flat.
I'll provide additional line item detail on subsequent slides the net interest margin was 366% down eight basis points from the prior quarter and our efficiency ratio was 42%.
On slide 12, net interest income was down $7 $1 million linked quarter or one 2% day count was roughly 2% a 2% headwind to net interest income growth quarter over quarter. Excluding accretion income net interest income would have been down $4 4 million or just <unk>, 7%.
Net interest margin, excluding accretion decreased six basis points from the prior quarter.
While our yield on earning assets, excluding accretion increased 50 basis points over the prior quarter. The decline in NIM was driven by higher funding costs as we enhanced our liquidity position total cost of funds was up 60 basis points quarter over quarter.
Slide 13, we highlight our fee income for the quarter on an adjusted basis fees were down $19 million linked quarter. The primary drivers of the decline were lower direct investment.
Income lower client hedging activity and valuation marks and lower client contract fees.
I will detail.
I will detail our outlook for the year later in my remarks, but we expect to recapture a portion of the hedging and valuation mark as well as the direct investment income as we move through 2023.
Noninterest expenses are highlighted on slide 14, we reported an adjusted expense of $303 million in line with prior quarter. The results reflect lower compensation and marketing expenses, which were offset by an increase in the FDIC assessment rate intangible amortization on interlink and operating costs associated with strategic investments include.
The band and Interlink acquisitions.
Slide 15 details our components of our allowance for credit losses, which was up 19 million over prior quarter.
After recording $25 million and net charge offs, we incurred $38 million of provision expense with loan growth representing $12 million in the macro and credit factors $26 million <unk>.
Additionally, we completed the adoption of the <unk> accounting rules effective January one of this year. This resulted in a $6 million increase in reserve, which was recorded as a charge to retained earnings as a result, youll see our coverage ratio increased modestly to 121%.
Slide 16 highlights our key asset quality metrics on the upper left nonperforming assets declined 19 million from prior quarter and represent 36 basis points of loans commercial classified loans as a percent of commercial loans declined to 147% from one 5%. Despite a modest increase of $6 million on an absolute basis.
Net charge offs in the upper right totaled $25 million or 20 basis points of average loans on an annualized basis.
On slide 17, we contribute continued to exhibit strong capital levels all.
All capital levels remain in excess of regulatory and internal targets, our common equity tier one ratio was 10, 4% and our tangible common equity ratio was seven 5% our tangible book value per share increased to $29 47, a share from $29 seven.
In the last quarter.
Including both <unk> and HTM marks on our securities portfolio, our TCE ratio would be approximately six 4% and our common equity tier one ratio would be approximately eight 4% both as of March 31.
I'll wrap up my comments on slide 18, with our full year outlook for 2023.
We expect loans to grow in the range of 4% to 6% with growth focused in strategic segments. We expect full year core deposit growth of 8% to 10% with a year end loan to deposit ratio in the range of 85% to 90%.
We expect net interest income of $2 375 million to $2 $425 million on a non FTE basis, excluding accretion, we expect $25 million in accretion would be added to that interest income outlook for those modeling net interest income on an FTE basis, I would add roughly $65 million for the outlook.
Look.
Our net interest income outlook includes the growth expectations above along with a 25 basis point rate hike in may.
We assume the fed funds rate remains flat for the remainder of 2023 at 5.25%.
Fee income should be in the range of $3 $75 million to $400 million core expenses are expected to be $1 2 billion to $1 $225 million.
With an efficiency ratio of roughly 40%, we expect our effective tax rate of 22 to be in the range of 22% to 23%.
We continue to be prudent managers of capital capital actions will be dependent on market on the market environment. We continue to target common equity tier one ratio of 10, 5% over time.
With that I'll turn it back over to John for closing remarks. Thanks, Glenn on page 19, I'll briefly hit on the next steps of our merger integration as we have our soon to complete the largest aspects of bringing our company together most notably our core conversion is approaching in a few months' time, we successfully ran our first mock conversion last weekend and it says.
Oral others planned through our go live date the list of additional integration activities outstanding as short as we approach our core conversion, though we will continue to use the scale of our platform to invest in our technology people and continuing to improve the client experience. We're fortunate to operate from a position of strength our interest rate risk.
<unk> diversity of funding and growing deposit base efficient operations and ability to invest in our platform position us well for the future we maintain high levels of capital both on our stated and Mark basis, and exhibit robust internal capital generation and the ability to consistently grow tangible book value per share going forward.
While the shift in operating environment will weigh on our NIM to a degree our loan yields continue to reprice higher and we will continue to lock in the benefits of a higher interest rate environment.
The full year guidance. We provided today is based on our best thinking around our base case for the impact of macro factors and it's too early to anticipate all of the effects of the recent events, including future regulatory costs or the depth of a potential recession later in the year with that said, it's our strategic game to ensure we continue to position our bank to support our key clients.
Business segments through any operating environment will continue to prudently grow loans and add franchise enhancing full relationships all within the confines of the credit economic and funding environment. This will likely mean closer scrutiny of new and existing businesses and continued focus on funding loans with growing core deposits will continue to be good stewards of capital.
And we manage our balance sheet in an efficient and prudent manner, depending on the environmental opportunities <unk> challenges.
In summary, we expect we will continue to generate returns at the top of our peer group. Thanks to the strength I've highlighted today I want to make this important point, we believe that based on our guidance. We provided our year end performance metrics will continue to meet or exceed the targets, we set forth not only at merger announcement, but at Investor day last month.
And ROA TCE of approximately 20% and ROA and the one 5% range and an efficiency ratio of around 40%. We below those we believe those metrics will still be kind of best in class in our peer group.
Thank you to our colleagues for their exceptional work in this quarter. They made special efforts to engage and stay in front of our clients and have kept our organization operating at a high level through an unusual period and before I conclude I just want to express our support for our colleagues at old National Bank. After the events that took place earlier this month in Louisville, We know a number of individuals there.
They run an organization a very strong character and we want Jim Ryan and their entire team to know that Webster and the rest of the industry has them in our thoughts operator, I don't know I will open it up to questions.
Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Chris Mcgratty from Keefe Bruyette <unk> Woods. Please go ahead. Your line is open.
Hey, good morning good.
Good morning, Chris.
John .
I just want to make sure the 'twenty ROTC the $150 40, what was the did the time period again, just want make sure I got it.
Two years two years merger, so think fourth quarter 'twenty three.
Okay great.
Great.
In terms of the balance sheet.
Could you help us with just your expectations for interlink from here.
How much youre going to continue to pull on that and maybe the implications for borrowings and also ultimately.
Where are you on that the loan to deposit to settle yes. Thanks to Chris Let me take that it's Glenn good morning, So we think that the interlink.
Probably.
Closed the year closer to $5 billion.
Right now and so November as a.
And as of as of now we're at three and a half.
$3 5 billion as of yesterday, so we're well on the path there.
Hey, Chris we've talked about the beauty of that is it's a lever we can pull adjusting down and from an accordion perspective. So if we continue to see momentum out of the business lines with respect to deposit growth, we can throttle that down, but it's a wonderful tool to have particularly in this environment.
And then just lastly on the buyback.
Obviously that one of your peers.
That because of the macro uncertainty I guess, where do you shake out in terms of.
Thinking about this.
In terms of timing.
Yes, I think that's great obviously with the uncertainty in the market.
In the first quarter, we werent active in in the second quarter, we likely won't be but we do believe in our model now in our base case of what's going to happen in the macro environment as things settle there'll be several hundred million dollars in buybacks in the third and fourth quarter, but again I always want to caveat that with the fact that we'll be prudent given the <unk>.
Environment.
That will that will be in but certainly at this valuation, it's an attractive investment for us to return capital that way.
Alright, Thanks, a lot.
Our next.
Comes from Keith <unk> from Jefferies. Please go ahead your line is open.
Yes. Thanks, Good morning, guys, Hey, Kevin a couple.
Couple of questions on the expense front, so the strategic expenses.
Up in the quarter was any of that relating to.
The control issues around that caused the 10-K delay.
Yes. The answer is no. It has to do with what we're doing with respect to our conversion and other merger related charges. So we have not had material expense increases related to resolution of the MW and we're well on our path of remediation of all that too so it's not going to pop anywhere.
So consistent with what you guys talked about at Investor Day. This is not going to have is not going to lead to a meaningful impact on expenses.
Okay.
Just following up so the efficiency ratio.
42% in the first quarter, you guys are still shooting for that 40% level would.
Which implies.
A sub 40%.
Efficiency ratio in the remaining quarters, despite you're keeping your expense guide the same but you've you've taken down your revenues. So I'm just trying to square what what appears to be a.
A tougher outlook and you're still holding that efficiency ratio.
Yeah. So you saw our expenses for the first quarter at 303, basically flat quarter over quarter. So we think we have we have some opportunity there, but I think as you push it forward.
We still feel good about operating in the 40% range. So.
Were a little elevated this quarter.
And I think it will I think it will play out fine yes, Casey if you again look at the middle of the ranges of our guidance I think that comes out to about a 41% so kind of flat and I've set around 40% with our targets I think we do have opportunities and levers to pull once we get through conversion on expenses and so.
That's where we'll be right in that 40% low 40%, 40% range.
Very good. Thank you and then just last one.
Any commentary on HSA.
Up 6% year over year.
That's.
A little bit.
Later than what you guys talked about in Investor Day, though John I agree with you that seems like a long time ago now, but just just color on on a mid single digit growth rate in HSI year over year.
So I think we're where.
Where we are is kind of the industry growth slowed a little bit we're pretty happy with where we are with respect to year over year in the first quarter growth.
So I would say.
I don't think it's anything unusual Casey, we're still bullish as its very difficult to find deposit growth in the high single digits on low cost deposit so.
Nothing unusual and actually I think we had a pretty good quarter relative to what Devin Eric.
And year over year relative to what Devin are showed in terms of industry industry growth.
Great. Thanks, guys.
Thank you.
Our next question comes from Matthew Breese from Stephens. Please go ahead. Your line is open.
Good morning.
I wanted to touch on credit first could you just give us some sense on loan resets for commercial real estate, what does the average kind of change in loan yield for loans coming out of I would assume 2018 2019 vintages today and what kind of impact does that have on debt service coverage ratios.
And then the second question I have is.
Just just same same type of profile right 2018, or 2019 vintages to today whats kind of the average change in cap rates that you're using when you underwrite those properties and how our borrowers behavior reacting to these changes.
Yes, it's interesting.
Hard to give sort of a blanket.
Our response to that because what we're seeing is in maturities obviously.
What we're doing is we're renegotiating with borrowers they are putting in either more proceeds or rates are increasing if we're taking a little bit more risk on the LTV and debt service coverage ratios I'm trying to pull up some data I have around.
I think we're a couple of hundred basis points up from a from a cap rate perspective.
Six 2% was our kind of all in yield that's probably up and more in margin commercial real estate, that's probably up 250 basis points since the 18 and 19.
Range and.
That's kind of what we're originating now I'd say some of the research we have Matt shows that like if if.
A 10% decline.
In NOI increases I'm, sorry impacts TCR about 17 basis points I'm trying to think of my LTV number that I had here give me one second a 100 basis point increase in cap rates increases ltvs by about 10% to 12% in our portfolio as we've been going down.
And reviewing all of those dynamics, so what I would say is.
We're not seeing any issues with respect to current debt service coverage on our commercial real estate and assets coming up for renewal, we've been taking really aggressive proactive steps to either right size the proceeds or work with the borrower to get additional enhancements if we're settling for a lower debt service coverage ratio and a <unk>.
Higher LTV. So so far if you look at all of our asset classes. We gave you a lot in.
In office.
We're in pretty good shape, there and I think on one of the slides in office, we chose the maturities left this year, we've already kind of.
Resolved about $200 million in maturities in office in 2023, and we did that by either getting additional credit enhancements paying down the proceeds and working and getting additional equity from our borrowers and obviously as we're settling those at the new yields.
We're still comfortable that we've got reasonable debt service coverage and we're still within within Ltvs.
Understood. Okay. Thank you.
And then I was hoping you could just talk about the New York City market in the wake of signature.
And everything going on with some of the other players in that in that market being dislocated does it change your view of how you attack or.
Or kind of the field in regards to New York City, what kind of what kind of opportunity is there to take market share in the wake of this disruption.
Yes, I guess, we look at it two ways right. So you think about managing from a credit perspective, all of our New York City Real estate exposure and I think the critical thing is we look again at.
Having strong borrowers strong sponsors strong property and conservatively underwritten.
Alone and so while obviously, we believe that there will be stress, particularly with the loans that signature bank will be selling in that New York community Bank didn't buy.
We're not too worried about the impact on the overall market as long as we've got really good sponsor standing behind there. There are properties that we are able to work through borrowers and as we said in our commercial real estate portfolio in New York.
There is no cliff there right. We've got limited maturities strong lease flows good ltvs and so we're working with each of our individual borrowers as we move forward I think as the dust settles, Matt and we think about opportunities in the market. We do believe that there'll be potentially teams available we do bill.
Leave that there'll be high quality transactions available to us I think right now if you think about what our management team has been focused on for the last quarter. Its obviously, what you'd want us to be focused on which is making sure that we've got strong liquidity that we're looking at our own credit in that we're thinking about how we're going to be able to react in the future and how much flexibility we have.
Given our funding advantage given the fact that we think we can continue to grow deposits I think we will opportunistically take share, but we want to make sure. We're doing it in asset classes. We think are strong with the right.
<unk> ships and at the right time, so I do think there's an opportunity for us to continue to smartly grow our book there, but we're also very cognizant of the market dynamics in New York right now the potential for a recession at the end of the year. So what I'd say is yes opportunity in the future, but really prudent about how we go about disk.
Bidding where and when to take that sure.
Got it understood last one for me just on interest rate sensitivity I see in the down rate 100 basis points scenario I think NII is down now about two 8%. This is off from I think 3% at year end.
As you continue to move the ball forward on this front by the time, we do get to 2024 and potentially closer to rate cuts, where do you expect to the balance sheet sensitivity on this on this metric to be.
Yes, So let me take that Matt So you'll probably see on the same chart I think youre back on page 2028, or so that we have continues we continue to reduce our asset sensitivity.
And so we've done some things that we talked about at Investor day.
Loan swaps collars and things like that so we continue to manage that down.
I don't think we'll be at a neutral point, but I think we continue to work that down.
Okay understood. That's all I had thanks for taking my questions.
Thanks, Matt.
Our next question comes from Daniel Tamayo from Raymond James. Please go ahead. Your line is open.
Thanks, Good morning, everyone.
Dan just one question from me.
I think Glenn you had mentioned that the.
You expect to hold a higher percentage of <unk>.
Normalized excess cash kind of going forward curious if thats similar to the amount that you're holding now or if you expect that to grow in and kind of the timeframe, where you think that might have to stay on the balance sheet.
Yes.
Thanks, and good morning. So we are we are holding right now elevated cash levels and I think over the course of the next couple of quarters, we'll manage that down to a more normalized level and say say that level is about $1 billion as opposed to I think in the quarter were $2 $2 2 billion I think youll see that elevated in the second quarter, a little bit because we've only we only.
Closed out the quarter. So we continue to build some cash balances.
We will continue to manage that down for the for the remainder of the year and obviously that has implications from from a NIM standpoint right. So.
Because it's basically.
No.
Doesn't it doesn't it's not it doesn't drag.
Guitarists from NIM so.
Youll see probably a little bit more NIM compression in the third quarter, but then as we deploy that cash and draw it down.
It should come.
Come back up.
Okay and this is all contemplated in your in your guidance. The way you just leave yes, yes. It is.
Okay. Thanks, that's all I had I appreciate it.
Sure.
Our next question comes from Mark Fitzgibbon from Piper Sandler. Please go ahead. Your line is open hey.
Hey, guys good morning, Hey, Marc.
First question I had you had about $900 million of commercial real estate growth in the first quarter.
Any particular concentrations that came in.
It wasn't I can tell you again office is obviously disfavor, but if you think about kind of multifamily across our footprint industrial mixed use.
That's kind of where it is mark and pretty spread across geographies. The other interesting thing about commercial real estate and quite frankly, all loan growth in the quarter market that prepays were down significantly. So our originations were actually down materially from a year ago, but obviously market conditions are having it so that properties aren't trading.
And in the regular C&I and in the sponsor book the transaction volume is not as high so.
I just throw that in there for context that.
To get $900 million of growth in Korea in the quarter the level of originations.
Originations did not have to be nearly as high as it was a year ago, where there was a lot more prepayments as well.
And then secondly, im curious if youre seeing any pressure to boost HSA deposit rates.
Is your modeling assuming that your deposit costs. They are staying around 15 basis points going forward yes.
So we are modeling at 15 basis points, you probably saw it two quarters ago, we did increase the rate so.
Went from like a nine or 10 basis points to 15 basis points, but as far as the beta on that is at the very low end of the range. So.
It's one of those obviously you know one of those funding sources that are really important to us at a time right now.
Okay, and then lastly, I saw in some of the local papers here in Connecticut.
You expect.
You had a customer data breach I wondered if you could share with us whether that's likely to result in a large charge in coming quarters.
Yes, we actually don't think there'll be any financial impact to us.
As we said, it's a third party vendor that we use for fraud monitoring that experienced the data security incident.
And had the release of our information and we've communicated with our regulators and clients.
None of our systems were impacted and we believe that there will be no material financial impact to Webster with respect to all aspects of putting that behind us.
Thank you.
Thank you Mark.
Our next question comes from Steve Alexopoulos from Jpmorgan. Please go ahead. Your line is open.
Hey, good morning, John Good morning, Glenn Hey, Steve It's Steve.
So I wanted to start in the aftermath of Silicon Valley Bank can you walk us through what happened to your deposit base. John I thought you said, there were inflows and outflows and I'm, particularly curious on the Sterling side.
Yes.
<unk> there was no differentiation really between the two legacy banks, which I hate to say at this juncture.
Into our deal and so baby early.
Steve what we saw at <unk>.
The new Webster was the same across our footprint, which was as I mentioned business as usual in consumer in HSA, we literally grew organically our consumer deposits across our branch footprint, which was a terrific job by the team there in commercial across all of our relationships.
And across all of our business lines, we had a handful of large deposit.
<unk> customers think think $200 million $100 million.
Who either from a pressure from their board or not profit not for profit that had a board pushed on fiduciary duty and obviously I'm sure you're hearing this from everyone else in those two or three days that moved a portion of those deposits likely to where you are where.
Where you work, Steve J P M more or the like.
And the interesting points, there, Steve where no one closed accounts no one drove their balances down to the FDIC insurance limits, they took a $100 million deposit to $50 million or $200 million deposit to $100 million deposit and the more sophisticated borrowers.
The larger corporate borrowers we are the ones that kind of acted the most from that fiduciary we've seen that settle down really really quickly and you can see it in our numbers our commercial deposits were down.
Some quarter to quarter, we're seeing some of that flow back. We're also seeing a significant amount of new deposit openings and I don't like to attribute it to.
The two bank failures, but obviously activities in our footprint. There are people that are reaching out to us and so we've got opportunity as we fund those accounts to grow our commercial deposits again so.
It was it was shorter lived than we thought with respect to the unusual activity. We did see some level of outflow, which quickly stabilized and now we're on a trajectory where we think we will continue to grow core commercial deposits and no difference across geography or legacy bank.
Okay.
That's helpful.
Very helpful actually.
<unk> shipped to the loan side, so the downshift in loan growth, which is modest.
Range is down by 2% each but how much of that is tied to you guys tightening the credit box versus just assuming there'll be less demand in the market just given the economic outlook.
Question I talked about this yesterday, Steve I think there are there are three implications number one and probably most importantly to put a fine point on your question.
We probably lowered the guidance because of organic lower.
Fed H eight loan demand. So the market there is less loan demand and thats going to be a driver too.
I don't know whether its us shrinking the credit box, but as we get into a more cyclical time potential recession, a little more choppiness, obviously, we're less inclined to lend into those industries that have significant cyclicality and maybe others that are under pressure so that has the impact.
<unk> of sort of shrinking the credit box, maybe not tightening standards, but shrinking the credit box and then obviously as it relates to liquidity.
And as liquidity continues to flow out of the industry I think that will have an impact on everyone's loan growth as they get a little bit more selective and prioritize existing customers over maybe new customers or national businesses that don't have deposit relationships with them. So I think that's in the order of prioritization of three things that will have us go.
Going from a high.
High single digits to mid single digits.
Got it okay, that's great and maybe one last one for Glenn around the margin. So if the fed starts cutting rates at some point I know your outlook is rates flat for the rest of the year, but let's say they assumed pep start cutting either second half of this year or early next year. How do you think about the delay the lag in terms of either months or.
<unk> rate change, we need before you can start reducing the cost of interest bearing deposits.
On the deposit side. So I think look I think if you look at our deposit beta we've lagged like two quarters or so and rate increases, but I think on the way down as the fed begins to cut its probably.
Probably within three months you begin to see it pretty quickly. So I think the reaction on the way down would be more significant than that lag on the way up.
Yeah.
Okay.
Perfect.
Glen if we did see that play out for the second half we saw two records would that materially impact this 38% terminal beta you're calling out or would it not be material.
No.
Well it depends on what you're seeing in the second half I mean, we're thinking in the first quarter, we'd see a rate reduction but.
So it probably is in the fourth quarter, you probably won't see as much right because it would be like 30 days or something like that 60 days before you saw anything.
I think what Youre seeing here, Steve is that that that this is the deposit base catching up along with growth in our deposit base in part because.
Shoring up the balance sheet from a liquidity standpoint with things like interlink.
Brokered Cds and stuff like that so that's really what's driving it and I think if you're thinking about it from a margin standpoint.
Like I said before there'll be some pressure in Q2, because we're almost excess cash which is the prudent thing to do but then as we get more clarity on the future in the next couple of quarters, we'll manage that down.
So you'll see the margin come back up.
Got it perfect. Thanks for taking my questions. Thanks, Steve.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Our next question comes from Zach <unk> from UBS. Please go ahead. Your line is open.
Hi, Zack on for Brody.
Question is just around the 20 basis points of charge offs.
Could you provide any color on.
What loan categories drove that number.
Sure mostly commercial so if you think about our $24 $25 billion in credit charge offs in the quarter Zach just to give you some because we've been talking about this the last several quarters about $7 million of that were related to strategic loan sales about $350 million in the quarter. So obviously.
Very very small.
Discount on balance sheet optimization, and proactive credit monitoring the rest of the $18 million or so we're all in about four commercial credits with actually I think four different business lines with no kind of correlated risk in terms of or anything that we're seeing with respect.
This sector or industry, or geography, and that 19 basis points annualized charge off rate is actually at or slightly below our pre pandemic annualized charge off rate. So we felt like it was another.
Good quarter and I just wanted to give you that differentiation of the $7 million of those charge offs that were done for us through proactive loan sales by us.
Understood. Thank you and then just one other quick one for me.
On the securities growth.
Could you just divide if.
If you are able to the new purchase yields versus what's rolling off.
So I think what we purchased that was a little over six six say 613 somewhere around there and what came off was at about 311.
So there is about 200 $200 million came off at about $900 million went on.
In addition to that we had as I said in my prepared remarks about 400 million in restructuring.
The restructuring that we did so security sales effectively and those were at those who had about 60 to 70 basis points.
Awesome that's it for me thank you.
Thank you. Thank you.
Our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead. Your line is open.
Hey, guys good morning, Hey, Jack Hey.
Just looking at the quarter to date deposit growth could.
Could you give the composition of where youre seeing that I guess, especially.
The contributions from Breo and interlink.
And then to get to that higher 38% terminal beta.
Are you expecting higher contributions from.
Brio and interlinked and then I guess you were assuming before.
Yeah. So for the for the as your question about from the fourth quarter to the first quarter Jared.
Well I guess, both yes, and then the and then what you've seen what you called out as seeing so far so far in April .
Yes. So so interlinked itself was for the first quarter was $2 8 billion of the growth and so we basically thats from zero to $2 8 billion.
So that was that was a big driver the offset to that was we let some of the broker deposits run off so they went from like $1 $4 million to $672 million right and then the other areas, where we saw growth as I said in my prepared remarks, we're in like certificates of deposits that were up about a $1 billion in.
And those are long dated little over 4%.
Retail type of Cds, that's how that's how we ended the first quarter as I said in the prepared remarks, we're actually up in the second quarter by another $2 8 billion and a big piece of that and I would say about $5 million to $600 million of that is as interlink.
Again, and then the remainder is primarily brokerage Cds.
Our our idea with that.
Marshall growth as John indicated.
Retail growth, but a big chunk, that's what it is.
And so that we're using to pay down basically some <unk> borrowings and things like that so.
Cost neutral from a NIM standpoint, and things like that but it also provides us more off balance sheet liquidity. If you think of it that way and so we wanted to make sure. We preserve the optionality of that and then the other dynamic is I as I said, a few times is that we're managing down cash and so you would expect to see.
Our <unk> borrowings that come down.
The growth in Interlink as we go through the year.
Broker deposits will probably flatten out because I think we have other sources of funding that will get.
Whether it's breo or things like that.
I think thats kind of how we're thinking about it.
Thanks, and then when we just look at where these are are on the balance sheet.
As interlink money market.
Or I guess, we're breo in early in terms of internally DS and money market.
So interlink is in money market, but I would point you to our slide the slide presentation, because we broke it out there.
So if you look on page nine of our presentation.
You can see the interlink piece.
So we sort of broke it out by prototype and then by line of business and so you see in the corporate piece, which is the treasury piece John .
John actually headed in his slide as well.
The net difference between interlink and whatever else is basically.
Wholesale funding.
Okay, and then just finally on interlink the cost of that for the quarter or is that similar to <unk> I guess where are we.
Whereas the costs on that yes, it's.
At times, it looks like fed funds.
5% fed funds plus 15 side.
Okay, great. Thank you very much.
Sure. Thank you Jeff.
Our next question comes from Chris Mcgratty from Keefe Bruyette <unk> Woods. Please go ahead. Your line is open.
Thanks for the follow ups, Glenn just on the guidance.
<unk> expenses and the fees are you, losing anything announced that the charges just to make sure I got that might start point.
And my ex excluding.
I'm, sorry, I didn't hear any expense in the expenses. The one point that is yes.
Yes, those are our core operating expenses. So it doesn't include merger related expense.
Or to the extent, we have one which is we shouldnt have much many other strategic initiatives as expense.
And same with the that excludes the bottle.
Same thing same thing got it alright. Thank you.
Sure. Thanks, Chris.
We have no further questions in queue I'd like to turn the call back over to John <unk> for closing remarks.
Thank you very much I appreciate everyone. Joining this morning have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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